What's the difference between sales tax and use tax

Before diving into sales tax, consumer use tax, and seller use tax, we need to define the concept of nexus. Whether sales or use tax applies to a transaction depends primarily on sales tax nexus, the connection between a seller and a state that permits the state to impose a tax collection obligation on the seller.

When a business has sales tax nexus in a state, it’s required to collect and remit sales tax in that state. In certain situations, it may also have to remit consumer use tax.

When a business doesn’t have sales tax nexus in a state, it generally can’t be required to collect sales tax or pay consumer use tax. However, it may be required to collect seller use tax. More on that below.

Sales tax (or retail sales tax) is a transaction tax imposed by states and thousands of local jurisdictions on a sale — the transfer of a product or service from a seller to a consumer.

But someone needs to collect the tax, and it would be costly and awkward to station a tax collector in every shop to collect sales tax from each individual consumer. So, the task falls on the businesses that make sales. Approximately half of all states with a general sales tax are “vendor states,” meaning sales tax is legally imposed on the seller who may — but isn’t required to — pass it on the customer. (Most, if not all, businesses do pass it on to consumers because they’d have to pay it themselves if they didn’t.) The remaining states are “vendee states” in which the seller is legally obligated to collect sales tax from the buyer — they’re not allowed to pay the tax themselves (also called “absorbing the tax”).

Once a seller collects sales tax, it must hold it in trust until it can file a return and remit the collected tax to the proper tax authorities. If it doesn’t, it’ll be penalized for not collecting, filing, and/or remitting the sales tax. It’s a crime for a seller to keep collected sales tax revenue as one’s own: Sellers that fail to remit sales tax as required by law may face criminal charges in addition to financial penalties and interest charges.