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Do You Know the Difference Between Sales Tax and Use Tax?

Nick needed a dependable car, one that didn’t require an Act of Congress for the ignition to catch and the engine to fire. After scouring the inventory at local dealerships, he hit the jackpot: a low-mileage, well-maintained used car at an affordable price. Within a few hours, Nick was able to drive his new purchase off the lot, pleased by the cash deal he’d negotiated. The total price, including sales tax, had been well within his budget.

Paying sales tax is usually part of the mix, regardless of whether the purchase is a car or a cup of coffee. The sales tax is a percentage of the sale price of tangible goods and certain services. It is collected from buyers at the point of sale and paid by retailers to the state (and sometimes the county or city) in which a purchase is made. Sales tax primarily applies to tangible goods and certain services that will be used, consumed or stored in the same place that a purchase is made.

Most people are familiar with sales tax. After all, we encounter it almost every time we make a purchase at a retail location. Use tax, on the other hand, is a far more complicated notion.

What is Use Tax?

In general, use tax is imposed on transactions that are subject to sales tax, but for which sales tax is not charged. The intent is to capture tax on tangible items and certain services that are sold or purchased by a company or person located out-of-state, particularly if that person or company plans to use, donate, store or consume those items out of state.

Unlike sales tax, which is normally paid by the consumer, use tax can be levied against a seller or consumer. To better understand use tax, let’s take a closer look at its variants, consumer use tax and seller use tax.

What’s the Difference Between Consumer and Seller Use Tax?

When you purchase out-of-state items by Internet, mail, telephone or in-person and the seller does not collect a sales tax on the transaction, then you — the buyer — are responsible for reporting and paying a use tax on the transaction.

Let’s say you collect baseball memorabilia. You order the crowning jewel of your collection — an autographed Mickey Mantle baseball — from the website of a company headquartered outside the state in which you reside. The company is not required to collect sales tax on the website transaction, in large part because it has not established a presence in your state.

To establish a presence in your state, the company would need to have a physical location, company-owned delivery vehicles or employees in your state. If the company met any of these criteria, it would establish a presence in your state, known as nexus, and would need to collect tax on the transaction.

In the absence of nexus, a retailer can often forgo the collection of sales tax when online purchases are made by out-of-state consumers. In your case, this means you won’t be paying tax on the baseball you just bought.

Except that you will.

Consumer use tax (sometimes called compensating use tax) applies to your purchase, even if sales tax does not. You’ll need to pay and report the use tax when you file state income tax returns.

Similar requirements apply to companies selling tangible items and certain services, and not collecting sales or use tax on the transactions. These companies will pay a use tax based on the transaction that is calculated as a percentage of the sales price of goods and certain services.

In general, seller use tax applies to sales made to consumers and businesses located outside the state in which the company has established a presence.

In addition, a use tax needs to be paid on inventory purchased sans sales tax if that inventory is later used or bartered by the company that bought it. For example, ACME computer sales purchased a lot of keyboards and did not pay sales tax on the purchase. ACME will, however, collect sales tax when the keyboards are sold to customers. If ACME takes a keyboard intended for retail sale off its shelves and either uses it during the course of daily operations or uses the keyboard to barter with the company next door, ACME will need to self-assess a use tax.

Then, like any other company assessing a use tax, ACME will file a sales and use tax return with the state tax authority. In general, the use tax percentage will be the same as that particular state’s sales tax rate.

And Then It Gets Complicated…

Sales tax is collected from the buyer at the point of sale and paid by the retailer to the state government that has authority over the area in the transaction is located.

Use tax is collected from end users, whether individuals or businesses, on items that are purchased out of state and that will be used, stored or consumed in the state in which the end user lives or does business.

This seems pretty straightforward, right?

Except that it isn’t.

The simplicity — or complexity — of sales and use tax often comes down to the state in which the law originates. Take Oklahoma, for example. Oklahoma manages consumer use tax, seller use tax, and sales tax in different ways, with different rates and different filing forms.

For example, in 2015, the state sales tax rate in Oklahoma was 4.5 percent. However, each county and city in Oklahoma levies additional sales and use taxes, and these amounts vary throughout the state. In fact, Oklahoma has 762 special sales tax jurisdictions that levy local sales taxes in addition to the state sales tax.

Some Oklahoma counties and cities specify a sales and a use tax, while others specify only a use tax. In Tulsa, for example, the sales and use tax ranges from 3 to 3.167 percent, while in Arcadia, for instance, there’s a use tax of 4 percent.

Oregon, in contrast, has no statewide sales tax at all, although local municipalities may impose sales taxes. What’s more, some states allow deductions for sales taxes paid to other states on the items purchased, while certain items like food or prescription medications may be exempt altogether.

Navigating the choppy waters of use and sales tax isn’t easy. You can spend your free time studying the latest tax codes — or worrying that you didn’t — or you can make taxes less taxing by integrating Avalara AvaTax sales tax calculation, which instantly applies the correct sales tax based on precise geolocation and taxability rules.

Sales tax rates, rules, and regulations change frequently. Although we hope you'll find this information helpful, this blog is for informational purposes only and does not provide legal or tax advice.
Avalara Author
Ryan O'Donnell
Avalara Author Ryan O'Donnell