What is Use Tax?

Use tax is a term used to refer to a tax imposed on the use, consumption or storage of products that were purchased from out-of-state sellers. These goods or materials were not subject to sales tax at the time of purchase. They are typically levied by states in order to ensure that their residents pay a similar amount of tax on goods purchased from out-of-state sellers as they would have paid if the goods were purchased in-state and subject to sales tax. In most cases, the use tax rate is the same as the sales tax rate in the state in which the taxpayer lives.

Key Takeaways

• Use tax is a term that describes a tax applied to goods or materials that were purchased from out-of-state sellers and were not subject to sales tax at the time of purchase. 
• This tax is imposed on the usage, consumption, or storage of such items.
• Use tax rates can vary across jurisdictions, but typically they are set at the same rate as the corresponding sales tax in the state where the taxpayer resides.
• Currently, every state with a general sales tax also imposes a use tax.

More on Use Tax

Use tax and sales tax are two related but distinct concepts that can sometimes be confused. Nonetheless, in order to better understand the US tax system, it is essential to differentiate between these two terms. On one hand, sales tax is imposed on the sale of goods or services by a retailer. On the other hand, use tax is levied on the use, consumption, or storage of goods or materials purchased from out-of-state sellers where sales tax was not collected at the time of purchase. It should be noted, however, that use taxes are usually the same rate as the local or state sales tax. 

Use tax helps prevent tax avoidance and ensures that the state receives tax revenue that would have otherwise been lost when residents make out-of-state purchases. In other words, use tax maintains fairness and equality in the tax system by preventing residents from circumventing sales taxes.

To further clarify the concept of use tax, let’s take a look at a simple example. Consider a situation in which a resident from California purchases a computer from an out-of-state seller based in Oregon, where no sales tax is collected. In California, the current statewide sales tax is set at 7.25%. Since the California resident does not have to pay sales tax on the computer in Oregon, he or she will be forced to pay a 7.25% use tax on the item in California. In conclusion, if the computer costs $1000 and the use tax is 7.25%, the resident will pay $72.50 in use tax. 

Bottom Line

Although it is not uncommon to get confused between sales tax and use tax, understanding each type and how they are applied is critical to ensure proper tax obligations are met. Use taxes are an important mechanism in our tax system that helps maintain fairness and generate valuable tax revenue. For further inquiries and personalized legal advice on taxes, please schedule a consultation with one of our qualified tax lawyers today. Our team is dedicated to providing guidance when it comes to navigating the complicated world of taxes.