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Understanding the Use Tax

Understanding the Use Tax

When you purchase goods on the Internet from out-of-state vendors or buy big-ticket items in a state with a lower sales tax rate, you may be responsible for paying a use tax. A use tax is a tax that is levied on the use, storage, or consumption of tangible personal property in a state, even if the property was not purchased within the state. The use tax is designed to prevent individuals and businesses from avoiding paying taxes by purchasing goods in a state with no or a lower sales tax rate and not reporting it to their home state. This article aims to help readers understand what use tax is, when and how to pay it, and what are its implications.

The Concept of Use Tax

In the United States, state governments levy a sales tax on the sale or lease of tangible personal property such as clothing, toys, electronics, furniture, and vehicles, among others. The rate of the sales tax varies from state to state and can range from 4% to 10% or higher. The sales tax is collected by the seller and then remitted to the state government. However, if you live in a state that has a sales tax and purchase an item from an out-of-state retailer that has no physical presence, such as a brick-and-mortar store, warehouse, or office, you may owe use tax on the purchase.

The use tax applies to individuals, businesses, and organizations that use, store, or consume tangible personal property in the state and did not pay sales tax on the purchase to the retailer. The use tax is calculated at the same rate as the sales tax and is typically due on the total value of the property, including shipping and handling fees. The uses of tangible personal property that are subject to use tax include:

– purchases made online, by phone, or by mail from out-of-state retailers that have no physical presence in the state;
– purchases made in another state with a lower sales tax rate than the home state;
– items shipped or delivered from out-of-state to the home state for use, storage, or consumption;
– gifts, prizes, or awards received from out-of-state sources that have no sales tax applied.

However, some purchases are exempt from use tax, such as:

– items purchased for resale or as raw materials for manufacturing;
– goods purchased outside the state and used in another state that has a higher sales tax rate;
– purchases made by the federal government, state governments, or their agencies;
– services, such as repairs, maintenance, or installation, that do not involve the transfer of tangible personal property.

The use tax is often confused with the sales tax, but they differ in how they are collected and enforced. Unlike the sales tax, which is collected by the seller and paid to the state government, the use tax is self-assessed by the buyer and remitted directly to the state tax agency. The use tax is enforced in the same manner as the sales tax, through audits, information sharing, and penalties for noncompliance.

How to Pay Use Tax

If you owe use tax to your state government, you may have to report and remit it on your state income tax return, either as a separate line item or as an adjustment to your tax liability. Some states have specific forms or instructions for paying use tax, while others may require you to estimate the amount owed and pay it separately. It is essential to keep accurate records of your out-of-state purchases, including receipts, invoices, and delivery confirmations, to determine whether you owe use tax and how much.

To calculate your use tax liability, you can use the same tax rate that applies to your state’s sales tax. For example, if your home state has a 6% sales tax rate and you purchased a laptop from an out-of-state vendor for $1000, you would owe $60 in use tax (6% of $1000). However, if the vendor charged you a sales tax of 3%, you would only owe $30 in use tax (the difference between the sales tax and the state rate).

Most state tax agencies provide online tools or calculators to help taxpayers estimate their use tax liability and file their returns. Some states also offer amnesty or voluntary disclosure programs for taxpayers who have not paid use tax in the past or underreported it. These programs allow taxpayers to pay their overdue taxes without penalty or interest and avoid audits and other enforcement actions.

Implications of Use Tax

The use tax is an important source of revenue for state governments, especially as more and more commerce is conducted online and across state borders. Failure to pay use tax can result in penalties, interest, and even criminal charges, depending on the amount owed and the level of noncompliance. In addition, noncompliance with use tax laws can lead to unintended consequences, such as:

damage to local businesses: When consumers choose to buy from out-of-state vendors to avoid paying sales tax, they may hurt local businesses that have to charge sales tax and compete on price. Local businesses also have to pay property taxes, payroll taxes, and other fees that out-of-state vendors do not, putting them at a disadvantage and reducing the tax revenue for the state.

loss of public services: The revenue from use tax, like sales tax, goes to fund essential public services such as roads, schools, public safety, and healthcare. When individuals or businesses evade use tax, they are depriving themselves and others of these services and contributing to the weakening of the state’s infrastructure and economy.

exposure to audits and fines: The state tax agencies have the authority to audit and investigate taxpayers who do not report and pay use tax properly. Audits can be time-consuming, stressful, and expensive, particularly for small businesses or individuals who lack the resources to hire professional help. Fines, interest, and other penalties can also add up quickly, making noncompliance with use tax laws a costly mistake.


Use tax is an important concept that all individuals, businesses, and organizations should understand and comply with. By paying use tax, taxpayers can contribute to the stability and growth of the state’s economy and infrastructure, support local businesses, and avoid the risks of noncompliance. State tax agencies have the obligation to enforce use tax laws and ensure that all taxpayers pay their fair share of taxes. By following the rules, keeping accurate records, and reporting use tax honestly, taxpayers can create a level playing field and promote a healthy and prosperous society.

The use tax is one type of excise tax. The use tax is based on items purchased from another state, that are used by a resident in their state of residence. If the product was purchased within the state of residence, it would have incurred a sales tax. Since the product was purchased in another state, the state where the product is used, or the state of residence of the purchaser, would expect the buyer to pay use taxes on that item.

Generally, the use tax can be assessed on any items purchased out of state, or on the Internet. However, items that are to be resold, would not be subject to use taxes.  The use tax is a sale tax imposed on items that would have incurred a sales tax had the item been purchased in the state of residence. In other words, taxpayers are not responsible for use tax if the items does not incur as sales tax in their state.

Use taxes are often imposed on items used, stored or consumed in the taxpayers state of residence, when they were purchased outside of the jurisdiction. Currently, almost a third of the states include a voluntary use tax line on their tax forms. Use taxes are expected to be paid in certain circumstance  on specific items. When voluntarily paying use taxes, tax payers must disclose all items purchased outside of their tax jurisdiction.

In contrast, some states assume that each taxpayer shoulders certain use taxes, based on their salary. In those states, taxpayers simply locate their salary on the use taxes table and add that amount to their tax liability. However, taxpayers that purchase an item or items above a certain threshold, must list all items and calculate the use tax on those items.  The Streamlined Sales Tax Project was an effort in which merchants register and disclose all purchases made by out of state residents.

Use taxes have been the subject of many lawsuits. Many Internet retailers have been forced to turn over their records so that the government can begin to enforce the use tax on a more equal level. Most taxpayers have not been willing to volunteer their use tax responsibility amount. Many taxpayers view the use tax as unfair taxation because it often involves paying double tax on an item when an individual purchase that item in a state other than the one in which they reside. However, many taxes are imposed on more than one level, but the consumer simply does not realize it.

Certain taxes, like excise taxes on gasoline, are already included in the price. Most taxpayers are not even aware that they are paying taxes on certain items. The use tax is likely to be increasingly enforced as states struggle to decrease large deficits in their budgets. Taxpayers may find that they are responsible for past use taxes as well as late fees and interest on those taxes.