Use tax is usually levied on goods that are normally taxed in the state in which the purchaser resides. Use tax is the same as the sales tax that a consumer is charged by their local and state governments. The only difference between use tax and sales tax is that use tax is calculated and remitted to the government by the end user, while the sales tax is calculated, collected and forwarded to the local and state authorities by the seller.
The consumer is not required to pay use tax on tangible goods bought in another state that does not levy sales tax on the item, if the item is also not taxed by the authorities in the state in which the consumer lives. Therefore, use tax only applies to those items that are charged sales tax in the purchaser’s home state.
How Online Retailers Apply Sales Tax
Most states exempt retailers from applying sales tax to tangible goods purchased by consumers who reside in states where the retailer has no physical presence (nexus). A physical presence or nexus is traditionally described as having either a warehouse, a sales office, or a sales representative in the affected state. However, the term nexus has recently expanded to include having even a single employee in the state, or an affiliate relationship with a business located in the state, such as websites that send traffic to your ecommerce store in exchange for a commission.
Online retailers have taken a strong position against the expanded definition of the term nexus, which has forced them to apply sales tax to items that they did not use to in the past. Such retailers contend that the added sales tax makes their products less competitive, which could lead to them losing customers. Most online retailers had tried to avoid collecting sales tax by limiting their physical presence to states that do not charge sales tax. However, telemarketers who solicit for customers in a state on behalf of online and out-of-state retailers are also included in the expanded definition of a nexus.
How States Apply the Use Tax
Most states apply a use tax of between 6% and 6.5% on tangible goods and taxed services bought outside the state by residents of the state. The main objective of charging use tax on goods and services bought outside the state is to protect local retailers and businesses who may be at a disadvantage to sellers in states that do not charge sales tax. This is largely because consumers in a state that requires sales tax could simply buy goods and services from vendors in other states that do not apply sales tax and they would immediately get a 6% discount on the sales price, which they would have spent on sales tax. Most states also apply use tax on products that are bought from sellers in foreign countries.
Use tax is not only applied to individual consumers, but is also applied to businesses. In reality, it is quite likely that businesses pay more use tax than consumers given the large scale of their operations. Many businesses have to source their products from various states as they may not be readily available in their home state.
Although use tax is supposed to be paid on all purchases from outside the consumers’ resident state, it is very hard for the state and local authorities to track all the small purchases made by consumers that qualify for use tax. Therefore, most states focus on collecting use tax on large out-of-state purchases such as vehicles, aircraft, mobile homes and watercraft among many others.
Remember, use tax is mutually exclusive to sales tax, which means that if you pay sales tax on a purchase you are automatically exempted from paying use tax on the item, and vice versa.
