Sales and use taxes are both taxes imposed by states on the sale of goods and services. However, sales tax is collected by sellers at the point of sale, while use tax is sometimes collected by sellers and sometimes paid directly by buyers to the state.
While most sellers understand they must register with states to collect sales tax, charge customers, file returns, and remit payments, buyers are often unaware of use tax requirements. This can result in compliance gaps.
This guide explains how sales and use tax work, when each is owed, and the implications of sales and use tax requirements for businesses selling across state lines.
Use tax vs. sales tax overview
Sales tax is a tax on the sale of many goods and services. Use tax is a tax on the storage, use, or consumption of goods and services if sales tax wasn't collected.
The two are complementary. Use tax is owed when sales tax isn't collected. The key difference is who must pay the tax.
Sellers collect sales tax from buyers at the time of purchase and remit it to the state. A few states call the tax a "seller's use tax" if it's collected by out-of-state sellers.
However, it's fundamentally the same as sales tax. Consumer use tax differs. Buyers owe use tax if sellers don't collect tax.
What is sales tax?
Sales tax is a consumption tax applied to many goods and some services. Most states require buyers to pay sales tax on physical items, with exceptions for things like food and medicine. A growing number of locations also impose tax on SaaS subscriptions and other digital products.
Sellers with enough connections to a state establish nexus and become obligated to follow the state's sales tax rules. They must collect tax from buyers in the state, file tax returns, and remit payments to the revenue department.
Traditionally, states could only require companies to collect sales tax if the business had enough physical connections to the state (physical nexus). A physical connection could include a building, a warehouse to store goods, or local employees, among other things.
South Dakota v. Wayfair allowed states to require sales tax collection based on economic nexus. This is often defined as a specific volume or number of local sales, such as $100,000 or more in sales to in-state customers or 200 or more transactions with local buyers.
Nexus requirements, tax rates, and the definition of taxable products vary by location, making compliance with sales tax rules very complicated for multi-state sellers.
What is use tax?
Use tax is closely related to sales tax. It is typically charged at the same rate and for the same types of transactions. However, there are different types of use tax.
Seller's use tax
Seller's use tax is functionally identical to sales tax. It just has a different name.
In a small number of states, when remote sellers establish nexus, the state calls the tax they must collect a seller's use tax. It's charged at the same rate and on the same transactions as sales tax.
There is no difference at all for buyers between paying the seller's use tax or paying sales tax at checkout. For sellers, the only difference is that some states require they use a different form when filing and remitting use tax payments instead of sales tax payments.
Consumer use tax
Consumer use tax is fundamentally different. Buyers must pay consumer use tax to their state if they purchase taxable items and don't pay sales or seller's use tax on them.
Usually, consumers owe use tax if:
- They buy items that are taxable in their state from an out-of-state seller
- The seller does not have nexus in their state, is not registered, and does not collect sales tax
- The purchase is not made on a marketplace that collects sales or sellers use tax on all transactions on its platform
Buyers may owe consumer use tax on products purchased from a small seller in another state if the seller isn't registered in their state and didn't charge them tax when they bought the items.
Buyers may also owe use tax if they purchase an item, pay out-of-state sales tax, and import it for local use. For example, if a company buys a bulldozer in one state, is taxed on it, and then brings it back to its home state, it may owe use tax but get a credit for the sales tax paid.
Individuals are supposed to self-report and pay use tax, but this is rarely enforced except when purchases must be declared locally, such as when a buyer registers a car purchased out of state. However, businesses are more likely to be audited to ensure they pay use tax.
Sellers are usually not responsible for making sure their buyers pay use tax. If you don't have nexus and aren't registered where your buyers are, you're generally not obligated to collect sales tax or ensure use tax is paid on the untaxed transaction.
What use tax vs. sales tax mean in practice for your business
Companies must comply with state sales and use tax requirements in any location where they have established nexus. Here's what this means in practice.
When you're collecting sales tax vs. use tax
If you sell taxable items in a state where you have physical nexus, you'll almost always collect sales tax when customers buy taxable goods or services. Some outlier states do charge tax differently, like Gross Receipt Tax in New Mexico, and some don't charge sales tax at all.
If you're selling in a state where you have no physical presence but are registered due to economic nexus, the tax you're obligated to collect may be called seller's use tax. States that use this term include:
- Alabama (Sellers can choose to opt into the Simplified Seller's Use Tax Program)
- California
- Louisiana (Remote sellers may be obligated to collect sales and use tax)
- Missouri
Some outlier states also apply entirely different rules for remote sellers. For example, Arizona requires foreign sellers to pay a transaction privilege tax instead of a sales or seller's use tax, Illinois has a Retailer's Occupation Tax, and Hawaii requires a General Excise Tax.
When consumer use tax becomes your customers' problem
If you haven't established nexus or registered in a state, you have no obligation to collect any taxes required by that state, even if you sell taxable goods or services to its residents. Those residents should (but probably won't) pay use tax, and it's not your problem if they don't.
As soon as you establish either an economic nexus or a physical nexus, the burden of ensuring the state gets its tax money shifts to you. You become obligated to collect sales or seller's use tax and remit payment. If you don't collect from customers, you still owe the state the tax revenue.
The compliance risk most businesses miss
If companies don't understand nexus rules, they may not realize when they become obligated to collect sales tax or seller's use tax. If the state discovers they didn't register and begin collecting tax once they established nexus, the company will owe back taxes.
States often audit companies to see when they established nexus and what they should've paid. Your company will owe back taxes with interest and penalties, which could be as high as 10% to 25%. You'll likely be unable to collect the taxes from past customers you should have charged.
You do not want to owe back taxes. Proactive nexus monitoring is critical so you can register and begin collecting sales or seller's use tax as soon as you're obligated to do so.
How Numeral handles sales tax and use tax compliance
This is all very complicated, but it doesn't have to be. Numeral can manage every aspect of sales and use tax compliance. Numeral:
- Monitors nexus for free across all states and alerts you when you become obligated to comply with state sales and seller's use tax rules.
- Registers you automatically with states when you cross a threshold and establish nexus.
- Provides real-time tax calculations for every transaction at the point of sale, regardless of whether it's called sales tax, seller's use tax, or goes by any other name.
- Files tax forms automatically for you and remits required payments, so you don't have to track your obligations manually across multiple states
While Numeral automates these processes, every return is fully reviewed by a US-based tax expert before it's submitted. And if our error results in a late filing or penalties and fees from an audit, we cover those penalties and interest under the Numeral Guarantee.
Book a demo with Numeral to see how we can help your business stay tax compliant.
Use tax vs. sales tax FAQs
Need to know more? Here are the answers to frequently asked questions about sales and use tax.
Is use tax the same as sales tax?
Sales tax and sellers' use tax are both taxes that sellers charge at the point of purchase on the sale of goods or services. Consumer use tax is owed by buyers when a seller didn't charge tax on a taxable sale. Sales and use tax are charged at the same rates, but rules differ in who pays.
Do I need to collect use tax as a seller?
Sellers are typically required to collect sales tax from customers at the time of purchase if the customer lives in a state where the seller has economic nexus or physical nexus. In some states, the term "seller's use tax" is used to describe this type of tax, instead of the term "sales tax."
What states have use tax instead of sales tax?
Alabama, California, Missouri, and Louisiana all use the term "use tax" to describe at least some of the taxes that sellers collect from customers at the time of purchase. Many more states use the term "use tax" to describe taxes a buyer must pay when a seller doesn't collect sales tax.
What happens if I don't collect use tax when I should?
If you're a business obligated to collect a seller's use tax and you don't, you could be audited and required to pay back taxes, interest, and penalties. When you are audited, it will usually be too late to go back and collect the unpaid tax you should have collected from customers.
