What is use tax?

Overview

When you make a purchase online or from an out-of-state retailer, you may not always be charged sales tax. However, that doesn't mean you are entirely off the hook for paying taxes on that purchase. Most states have what's called a "use tax" that requires consumers to pay tax on goods they purchase from retailers who don't collect the state's sales tax.

Use tax is a form of tax that is complementary to a state's sales tax. It is designed to protect a state's revenue from sales taxes by taxing goods purchased outside the state for use inside the state. The use tax rate is generally the same as the sales tax rate for the state.

In practice, it is rare for individual purchasers to comply with their use tax obligation; it is more common in commercial space.

When do I owe use tax?

Use tax applies when you make any purchase from a seller who does not collect sales tax in your state. Common examples include:

  • Purchases from online retailers who have not yet triggered a nexus obligation to collect sales tax in your state.
  • Items purchased from another state or country and brought back into your state.

Since use tax serves the same purpose as sales tax, nonpayment can lead to penalties and interest charges, just like unpaid sales taxes. States consider use tax a form of tax evasion if unreported taxable purchases are discovered during an audit.

How does use tax impact my rollout of sales tax?

As you consider rolling out sales tax to customers, use tax should also be considered, especially if you sell to large business customers who may be remitting use tax on purchases from you.

  • Because of use tax rules, rolling out sales tax should not be viewed as a price increase to your customers. Your customers had a use tax obligation, whether they were complying or not, on every purchase they made from you tax-free.
  • As you examine your exposure, you may want to contact customers to ask whether they paid use tax on their purchases from you. This can reduce your exposure number and help you decide how to remediate it. See Approach your historic exposure.

Some states, like Washington, provide an easy form to send to your customers to document where they have collected and remitted use tax. Anrok has also drafted a letter (click here to open the e-mail template) that you can send to your customers to collect this information as well.

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