Sometimes people mix up different types of taxes due to complexities of various state laws. State sales tax and use tax, for example, are two different types of state taxes, but are similar. While a sales tax is placed on various consumer goods and services, the use tax is applied to tangible personal property that is used in the state, but not subjected to a sales tax.
How Sales and Use Taxes as Similar
Essentially, a sales and use tax both serve the same function: to collect money for the state. Both taxes vary from state to state. A use tax applies to purchases in which no sales tax is levied, such as when you buy a product from a vendor licensed to a state with no sales tax. States impose use taxes to discourage their residents from buying outside the state. Many times but not always, the use tax is the same rate as the sales tax that was avoided. Use taxes are applied to purchases on tangible property that is used, consumed or stored within the resident's state, often when the transaction is made in another state.
Differences Between Sales and Use Taxes
The biggest differences between sales tax and use tax is that sales taxes are collected by sellers and paid to the state on behalf of the consumer. A use tax, however, must be assessed and filed by the consumer or business on their state return. Many states include spaces on tax forms for taxpayers to calculate their use tax. While sales tax is listed on receipts when consumers make purchases, use tax is not so obvious. Several states are now members of the Streamlined Sales Tax Project (SSTP), which registers vendors who deal in interstate trade and helps states collect use taxes. Direct pay permits are issued by the state to manufacturers.
Use Tax Exemptions
The following use tax exemptions may apply to some states but not others. A reseller is not considered the end user of a product, which is why resellers are usually exempt.
- products purchased with the intent of reselling and not consuming
- manufacturers of tangible personal property for sale at retail
- sale of agricultural property used for farming
- government spending
- purchases made by 501 (c) nonprofit organizations
- construction contacts or capital improvements
- aircraft parts and labor
It all comes down to the state that applies a use tax on how the transaction will be handled. In some states, such as Oklahoma, counties and cities issue their own sales and use taxes, which vary throughout the state. While the state's sales tax is 4.5%, certain jurisdictions within the state range from 3 to 4% for use taxes. To complicate matters further, some states allow deductions for taxes paid on products to other states. In some states food or prescription drugs are exempt from use taxes.
People who should be concerned about use taxes are those who purchase items in states with no sales taxes and use those products in states that do charge sales taxes. Businesses that take items from inventory for personal use instead of a sale may have to pay a use tax. Additionally, consumers who order products from online catalogues in which the seller is based in another state, may have to pay a use tax.
When sales taxes were first adopted by states during the Great Depression, use taxes did not yet exist, but came later after consumers began taking advantage of making big purchases in the no sales tax states of Montana, Alaska, Oregon, Delaware and New Hampshire. If an online retailer such as Amazon does not have an office in your state, it does not necessarily have to charge a sales tax, although states such as California and New York require such tax on online purchases. Some states such as Colorado and Ohio do not require this tax for online purchases.
Although Montana does not collect sales taxes, it does levy use taxes on certain items meant for use in the state in jurisdictions where lesser or no tax was collected for the transaction. It's possible to see a use tax in the state on vehicle rentals, lodging and other aspects of tourism.
Sales and use taxes can be confusing, especially to people who have never heard of use taxes. For the most part, a use tax is designed to cover the same amount of tax that is avoided in states that don't issue taxes on consumer purchases. The best way to simplify the concept is that use taxes replace sales taxes when applicable. Contact your local registered agent to learn more about how you can save money on purchases and whether or not use taxes apply.