What is Use Tax?
Use Tax is a companion to Sales Tax, specifically for out-of-state purchases where no sales tax was collected at the time of purchase.
Think of it as:
Use Tax = Sales Tax, For Purchases Without Sales Tax Charged
It's designed to:
- Level the playing field for local, in-state businesses
- Support public services like schools, roads, and safety infrastructure
- Ensure sales tax compliance across state lines
When does Use Tax apply?
You may owe use tax if:
- You purchase goods or services online or from an out-of-state vendor
- The product is used, stored, or consumed in your home state
- The seller didn’t charge sales tax at checkout
Example rates:
- Texas Use Tax: 6.25%
- Missouri Use Tax: 4.225%
Who pays Use Tax?
Businesses and out-of-state sellers, take note:
- Businesses must track, report, and file use tax on qualifying purchase
- Remote sellers must collect and remit use tax if they cross economic nexus thresholds (per the Wayfair ruling 2018)
How to pay Use Tax: Compliance tips
To stay compliant with use tax laws, businesses should:
- Keep receipts and purchase records for tax reporting
- Ensure no double taxation (check if sales tax was paid first)
- Use state-specific tools for rate accuracy
- File use tax returns on time to avoid interest and penalties
Why Use Tax compliance matters
- Creates fair competition for in-state businesses
- Helps fund public infrastructure and services
- Aligns with existing sales tax rules, easy to integrate into accounting systems
Special considerations in Use Tax
- Digital Goods Tax: Taxable in some states (e.g., North Carolina)
- Sales Tax Exemptions: Vary (e.g., groceries are exempt in California)
- Local Add-ons: Watch for local use tax rates (e.g., Philadelphia, El Paso County)
- Income Tax Tie-ins: Some states require use tax reported on income tax returns
Use Tax = Fair, Local, Necessary
If your business makes out-of-state purchases, don’t overlook use tax reporting. It's essential for maintaining full sales and use tax compliance and avoiding costly penalties.
At FinStackk, we help businesses like yours simplify tax compliance.
Connect with us to ensure your business is use-tax compliant and stays ahead of all state-level obligations.