Sales tax and use tax are two halves of one system. Sales tax applies when you sell; use tax applies when you buy and the seller did not charge sales tax. Most compliance failures come from treating them as unrelated.
This guide covers the fundamentals of both: how nexus is established, what is taxable, who collects what, and the records you need. Links to deeper guides on specific situations appear throughout.
Sales tax and use tax defined
Sales tax is imposed by a state when a business sells a product or service to a customer. The seller collects it at the point of sale and remits it to the state.
Use tax is imposed when a business buys a product or service and the vendor was not required to collect sales tax. The buyer assesses the taxability and pays the state directly.
Use tax exists to level the field. Without it, an out-of-state seller charging no sales tax would undercut every in-state business, and the state would lose the revenue that funds local services.
How the tax is levied
Sales and use tax is a state-level tax in the US, not a federal one. Each state sets its own rate, and local governments can add their own on top.
Once nexus is established with a state, you register with that state, collect sales tax on your invoices, and deposit the collected amount periodically. County and city rates are collected alongside the state rate, which our local business compliance guide covers in more detail.
Nexus: the trigger for everything
Generating revenue in a state does not by itself create an obligation. Registration is required only once you have nexus with that state, and nexus comes in two forms.
- Physical nexus: a physical presence such as an office, employees, or a sales agent in the state
- Economic nexus: crossing a revenue or transaction threshold set by that state, commonly $100,000 in revenue or 200 transactions, though the figures vary
Economic nexus exists because of the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require collection from remote and online sellers regardless of physical presence. Thresholds differ by state, so check each one rather than assuming a single number.
What is taxable and what is not
Sales tax applies to taxable sales of goods and services, most commonly tangible personal property. Many states exempt essentials such as groceries, prescription drugs, and clothing.
Once nexus is established, your next task is determining whether what you actually sell is taxable in that state. Services and digital products are where states diverge most, so a product taxable in one state may be exempt next door.
For specific categories, see our guides to sales tax for SaaS companies and digital goods and streaming.
Resale certificates
Resale means buying products in order to sell them on without modification. In that situation you do not charge sales tax, provided the buyer gives you a valid resale certificate.
The certificate is your evidence for not collecting. Keep it on file, because in an audit the absence of a certificate makes the uncollected tax your liability.
When use tax applies
You may owe use tax when you purchase goods or services online or from an out-of-state vendor, the item is used, stored, or consumed in your state, and the seller charged no sales tax at checkout.
It commonly arises on online orders, mail-order purchases, and goods bought while traveling. The obligation sits with the buyer, which is exactly why it gets missed.
How use tax is reported
- Businesses: either as a line item on the sales tax return, or on a separate use tax form the state provides
- Individuals: generally reported and paid through the income tax return
Rates match the sales tax rate in the same jurisdiction, and local add-ons can apply. Some states also require use tax to be reported on the income tax return, so check both filings.
Marketplace facilitators and remote sellers
Following Wayfair, states can require marketplace facilitators and remote sellers to collect sales tax once they meet economic thresholds, which shifted much of the collection burden away from individual sellers.
If you sell through a marketplace, confirm which party is collecting before you register anywhere. Our guide to marketplace facilitator rules sets out how the responsibility splits.
Staying compliant
- Register with the state tax authority once nexus is established
- Collect the correct combined state and local rate
- Keep receipts and purchase records to support use tax reporting
- Check whether sales tax was already paid, so you do not tax the same purchase twice
- File returns on time, since interest and penalties accrue from the due date
Accurate records of out-of-state and online purchases are what make use tax reporting possible at all. Reconstructing a year of purchases during an audit is not a realistic plan.
Audits
State Departments of Revenue audit businesses to verify sales and use tax compliance. Audits of individuals happen but are far less frequent.
Use tax is a frequent audit finding precisely because it depends on the buyer volunteering it. Our note on sales and use tax mistakes covers what draws attention.
Multi-state obligations
Every state where you have nexus brings its own registration, rate, taxability rules, and filing calendar. Remote selling means many businesses now have obligations in states where they have no premises.
Our guide to multistate tax filing covers how these obligations stack up as you grow.
How FinStackk helps
FinStackk handles nexus reviews, state registrations, rate determination, and periodic sales and use tax returns as part of a wider accounting and tax compliance service, so the filings match your books.
Get in touch if you want your nexus footprint and filing obligations reviewed.
*The information provided on this article does not, and is not intended to, constitute legal advice; instead, all information and content provided here is for general informational purposes only. State rates, thresholds and exemptions change, so confirm current figures with the relevant state before filing.