While most business owners generally understand their sales tax responsibilities, use tax obligations are often overlooked or misunderstood. Use tax is a separate requirement from sales tax, with its own set of challenges and compliance considerations. Even further, use tax compliance is a standard component of a state audit, so it’s important to get it right. 

Use Tax vs. Sales Tax

First, every business owner should understand how a use tax differs from a sales tax. Sales tax is “a tax on the sale, transfer, or exchange of a taxable item or service” that usually applies to the end consumer.1 Sales tax is collected by the seller and remitted to the state. 

Use tax, on the other hand, is “a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid.”2 Although sales and use taxes are imposed differently, they are viewed as complementary to each other. When no sales tax has been paid on a taxable item or service, the complementing use tax is due. Use tax applies, among a few other circumstances, when purchases are made out-of-state and brought into the taxing state for use there. Since use tax is paid by the purchaser, it is the purchaser’s responsibility to self-assess use tax when no sales tax has been paid, as well as to pay and report the use tax to their home state. 

Use Tax Triggers 

There are many different types of transactions that can trigger a use tax obligation. The most common example is when a company makes a purchase out-of-state, then brings the item into their home state to use or store there.3 Another common example is when a seller does not collect sales tax on a taxable item at the time of purchase. In this scenario, the purchaser has an obligation to calculate and remit use tax themselves.

Businesses may also owe use tax if they transfer inventory from one state to another, or if they take items out of their own inventory to use. Finally, if a company purchases an item from a state in which that item is not taxable, but brings it for use in a state that does tax the item, the company must self-assess use tax. 

State-Specific Examples

Discussing use tax in the abstract can quickly become confusing, so let’s look at some state-specific examples that companies often encounter in everyday business. 

Company A purchases furniture from a furniture store in Oregon to use in the Company’s California offices. Oregon does not have a state sales tax, but California imposes a state sales tax of 7.25%. Because Company A did not pay sales tax on the furniture in Oregon, it must self-assess use tax in its home state of California, where it will be using the furniture.  

Company B, located in Texas, purchases office supplies from a vendor in Georgia, intending to give the supplies to employees working in its Texas offices. Company B notices that the vendor did not charge sales tax on the invoice. Company B must self-assess Texas use tax and pay it to the state. 

Company C is a construction company located in Virginia. Company C wants to build a new office building on its property. Being a construction company, Company C already has all of the materials it needs to construct the building, and it takes supplies such as wood, nails, and paint out of its existing inventory to do so. Company C is now required  to self-assess a use tax on the items taken out of inventory. 

Company D is a Florida-based company purchasing digital goods from an out-of-state vendor. The vendor doesn’t collect sales tax on the invoice, but Company D knows that digital goods are taxable in Florida. Company D must pay Florida use tax on the digital goods. 

Compliance Checks 

As illustrated in Company D’s scenario, one element of use tax that makes compliance particularly challenging is taxability across different states. An item that is not taxable in another state, like digital goods or software, may be taxable in your home state. Some items may be considered taxable but have an applicable exemption, such as an exemption for manufacturing equipment. It is your responsibility to determine taxability in your home state and ensure that either sales or use tax has been paid. 

Hand-in-hand with taxability determinations is the requirement to track all purchases made for your business, whether made in-state or out-of-state. Some companies believe that keeping detailed records of in-state purchases is enough. However, use tax demonstrates how important it is to track out-of-state purchases, especially when those purchases are brought back into your home state. Businesses should be regularly reviewing their accounts payable and conducting internal audits to make sure that nothing is missed. 

Final Considerations

Many companies view use tax as a secondary administrative task with less importance than sales tax. In reality, use tax has significant implications for businesses of all sizes, and overlooking it can lead to substantial penalties and interest. 

Avoid costly surprises, and prioritize your tax compliance with our team’s help.

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1. https://www.salestaxinstitute.com/sales_tax_faqs/the_difference_between_sales_tax_and_use_tax.

2. Id.

3. https://www.avalara.com/blog/en/north-america/2023/05/use-tax-sales-tax-everything-you-need-to-
know.html.