What Is Use Tax And How It Differs From Sales Tax

Use Tax is a tax generally imposed on taxable purchases used in a state when the corresponding sales tax was not collected. This tax fills the gap when a buyer acquires goods or taxable services from an out-of-state seller, online marketplace, or other vendor that did not collect the home state's sales tax at the point of sale.

Use tax and sales tax are complementary: sales tax is collected by the seller at the point of sale and remitted to the seller's state, while use tax is typically self-assessed by the buyer or remitted by the seller when sales tax was not collected. The practical difference matters for retailers, marketplaces, and buyers because it determines who has the legal obligation to remit tax and when.

What It Covers

Use tax generally applies to tangible personal property and certain taxable services when the property is used, stored, or otherwise consumed in the taxing state. Common situations include:

• Out-of-State Purchases: Goods bought from an out-of-state seller who did not collect the destination state's sales tax.
• Remote Sales and E-Commerce: Items purchased online where the seller lacks nexus and therefore did not collect tax.
• Interstate Transfers: Inventory or equipment brought into a state for use by a business without paying sales tax at the original purchase.

Why It Matters To Retailers And Buyers

For retailers, the distinction affects collection responsibilities and compliance costs. If a seller has nexus in the buyer's state (physical presence or economic nexus under state law), the seller must collect sales tax at checkout. If not, the buyer may owe use tax directly to the state. For buyers—especially businesses—failing to self-assess use tax can trigger audits, interest, and penalties.

How States Enforce Use Tax

States enforce use tax through a combination of reporting requirements, audits, and information-sharing agreements. Many states require businesses to report and pay use tax on their sales and use tax returns. Additionally, states obtain purchase data from third parties (marketplaces, banks, and large online sellers) and increasingly require marketplace facilitators to collect and remit tax on behalf of sellers.

How Liability Is Determined

Liability depends on nexus, marketplace facilitator laws, and exemption status. Key factors include:

• Nexus: Physical presence (warehouse, employees, inventory) or economic thresholds (sales dollars or transaction counts) create an obligation for sellers to collect sales tax.
• Marketplace Obligations: Many states now require marketplace facilitators (Amazon, eBay, Etsy) to collect tax for sales made through their platforms, shifting collection away from individual third-party sellers.
• Buyer Responsibility: When sellers do not collect sales tax, buyers—particularly businesses—are usually required to self-assess use tax and keep supporting documentation for audits.

Common Exemptions And Documentation

States provide exemptions that remove use tax from specific transactions; common exemptions include purchases for resale, certain manufacturing inputs, and some nonprofit purchases (when properly documented). Proper exemption certificates and resale certificates must be collected and retained by sellers; buyers should maintain invoices and records showing tax was paid or an exemption applies.

Practical Example

A small retail shop in Ohio buys display fixtures from a manufacturer in Florida. The Florida seller does not have nexus in Ohio and therefore does not collect Ohio sales tax. When the fixtures arrive and are used in Ohio, the retailer must self-assess Ohio use tax on the purchase price and report it on the state return. If the retailer instead bought the fixtures through a nationwide marketplace that remitted Ohio tax at sale, the marketplace would have collected and remitted the tax and the retailer would have no further use tax liability for that purchase.

Tips For Retailers And Buyers

• Register Where You Have Nexus: Monitor physical and economic connections to states and register to collect sales tax where required.
• Track Purchases: Maintain a centralized record of out-of-state purchases and statements showing tax collected or paid.
• Use Exemption Certificates Properly: Collect and store valid resale or exemption certificates when applicable; verify state-specific requirements.
• Leverage Marketplace Rules: Understand which marketplaces collect tax and ensure your listings reflect tax collection practices.

In short, the Use Tax exists to capture tax on taxable purchases used in a state when sales tax was not collected at the time of sale. Retailers, marketplaces, and buyers must understand nexus, collection rules, and exemption documentation to stay compliant and avoid liabilities.