What it is

Use tax is a tax on the storage, use, or consumption of a taxable item or service in a state when no sales tax was paid on that item. <!– src: https://www.salestaxinstitute.com/sales_tax_faqs/sales-tax-vs-use-tax-guide –> It is a complementary (or “compensating”) tax: it exists so that a purchase doesn’t escape tax simply because the seller didn’t collect it. If sales tax was correctly charged, no use tax is due — the two are never stacked on the same transaction.

The classic trigger is an out-of-state or online purchase. You buy taxable goods from a vendor who isn’t registered to collect tax in your state, so nothing appears on the invoice. The state still wants its tax, so the obligation shifts to use tax.

There are two forms:

• Consumer use tax — owed and self-assessed by the purchaser, who remits it directly to the state when a vendor collected neither sales nor seller use tax. <!– src: https://www.salestaxinstitute.com/sales_tax_faqs/sales-tax-vs-use-tax-guide –>
• Seller use tax (also called vendor or retailer use tax) — collected and remitted by an out-of-state seller that is registered to collect tax in the buyer’s delivery state. It functions much like sales tax, but applies to interstate sales. <!– src: https://www.salestaxinstitute.com/sales_tax_faqs/sales-tax-vs-use-tax-guide –>

The use tax rate generally matches the sales tax rate in the same jurisdiction — a state rate plus any applicable local and county rates — though it is “generally (but not always) collected at the same rate as sales tax.” <!– src: https://www.taxjar.com/blog/use-tax-vs-sales-tax –>

Why it matters to a multi-state seller

If you sell across state lines, use tax cuts two ways. First, on the buying side: when you purchase inventory, equipment, software, or supplies from out-of-state vendors who don’t charge tax, your business may owe consumer use tax on items it consumes itself (think office furniture or non-resale supplies). Auditors look hard at this, because nearly every business owes some use tax and many never self-report it.

Second, on the selling side: once you have nexus in a state but ship from outside it, the tax you collect is often technically seller use tax rather than sales tax — reported on the same return but sometimes on a different line. Getting the classification wrong can mean filing the right total under the wrong heading.

Worked example

Say your business is based in Oregon (no sales tax) and you buy $20,000 of warehouse shelving from an Oregon supplier, then ship and install it at your distribution center in Vermont, where such property is taxable and the combined rate is 6%. Because no sales tax was collected at purchase, Vermont can assess consumer use tax on the $20,000 you now use in-state.

• Taxable purchase: $20,000
• Vermont use tax rate: 6%
• Use tax owed: $1,200, self-assessed and remitted by your business

Had you bought the same shelving from a Vermont vendor, you’d have paid $1,200 in sales tax at the register. Use tax simply equalizes the two outcomes so out-of-state buying carries no tax advantage. <!– src: https://www.taxjar.com/blog/use-tax-vs-sales-tax –>

How this connects to staying compliant

Use tax is the half of the system most businesses underreport, because no one hands you an invoice line to copy. Compliance means building a process: review purchases where no tax was charged, identify the taxable ones consumed in-state, and self-assess use tax on your periodic sales and use tax return — the same return where you report tax collected from customers. On the sell side, it means correctly distinguishing the tax you collect as sales tax versus seller use tax for each state.

The states that lose the most revenue to uncollected use tax audit for it the hardest, and assessments come with penalties and interest on top of the tax itself.

Sources: Sales Tax Institute — Sales Tax vs. Use Tax Guide: https://www.salestaxinstitute.com/sales_tax_faqs/sales-tax-vs-use-tax-guide TaxJar — Use tax vs. sales tax: what’s the difference?: https://www.taxjar.com/blog/use-tax-vs-sales-tax Avalara — Use tax vs sales tax: https://www.avalara.com/blog/en/north-america/2023/05/use-tax-sales-tax-everything-you-need-to-know.html