For example, an internet retailer might not collect sales tax from a purchase you made online. But that doesn’t mean you’re off the hook for paying taxes. You could still be subject to use tax for that purchase, subject to your state and local tax laws. Use tax can also potentially apply to in-state purchases where the seller does not collect sales tax on something that you’ll be using or storing in that state. For example, suppose you’re buying a house from an artist. When purchasing the real estate, perhaps you also agree to buy a few paintings from that artist so you can decorate the walls in your new home. However, if that artist doesn’t charge you sales tax, your purchase could still be subject to use tax.
How a Use Tax Works
A use tax can apply to purchases made by either individuals or businesses, with the obligation to report and pay this tax generally falling on the purchaser. If you buy something online from an e-commerce retailer in another state, where they charge you a local sales tax rate that’s less than your local sales tax rate, or if they charge you no sales tax at all, you could end up owing use tax. In many cases, this would be reported and paid with your annual state tax filing, or you could make the payment at the time of purchase. However, with some big-ticket items that carry their own regulations, such as vehicles, you may have to pay use tax closer to when you bring the item into the state. Registering a car with your state’s department of motor vehicles (DMV), for example, may require you to pay use tax at that time.
Sales Tax vs. Use Tax
Sales tax and use tax are essentially two sides of the same coin. They are both state or local taxes on goods or services, and they are generally applied at the same rate. The main difference, however, is that sales taxes are collected by sellers, whereas use taxes are provided to authorities by buyers in situations in which sales tax rules would ordinarily apply, but the sales tax was not collected for whatever reason.
What a Use Tax Means for Individuals
Understanding use taxes is important so you may accurately meet your tax liabilities and budget for various purchases. For example, if you’re looking to buy generally expensive items like furniture or vehicles online and the seller doesn’t charge sales tax, you might think you’re getting a good deal. However, you could still be liable for use tax in your jurisdiction. You’ll want to make sure that you budget enough money to cover this tax liability. Or, once you account for use tax, you might find that you’re better off purchasing those items from an in-state retailer where you pay sales tax at the time of purchase.
