Most people are familiar with the term “sales tax”, because we’re required to pay it almost every time we make a purchase at a local store. (Unless you’re lucky enough to live in a state with no sales tax.) A sales tax is typically a required percentage of the sale price of a good or service, that is paid by the purchaser at the time of the sale, and collected and remitted by the retailer. Sales taxes only apply to retail transactions – not wholesale ones – because they are a type of “consumption” tax.
A “use tax” is not discussed as often, but states that have a sales tax generally also have a use tax. It’s a tax that is required to be paid and remitted by the purchaser on goods bought out-of-state, such as over the Internet or via mail order, when the seller doesn’t collect sales tax. Many people simply think that those purchases are tax-free, but they’re not!
You may encounter this if you purchase a car in one state and bring it into your home state. Another possibility is that you purchase a vehicle and then move your residence to a new state within a certain time frame. When you attempt to register for a tag in your (new) home state, you may be required to pay them the difference in sales tax between the two states.
Additional examples are provided by the Florida Department of Revenue, quoted below. Of course, the laws vary in each state, but Florida’s is fairly representative:
- If you buy a taxable item in Florida and did not pay sales tax, you owe use tax.
- If you buy an item tax exempt intending to resell it, and then use the item in your business or for personal use, you owe use tax.
- If you buy a taxable item outside Florida and bring it into (or have it delivered into) Florida, and you did not pay sales tax on the item, you owe use tax.
Historically, states have not enforced use taxes to the same extent they do sales tax. There are many more individuals than businesses in a given state, which makes enforcement harder. And since retailers generally cannot do business without registering to collect and remit sales taxes, the infrastructure for sales tax collection is much easier.
Use tax is less of an issue for most states since the Wayfair decision passed, and more sales tax is collected by out-of-state sellers. Before that, a much higher number of internet sales did not have sales tax applied because the seller didn’t have nexus in the buyer’s state. Since the decision, however, almost every state has implemented economic nexus laws that require many out-of-state retailers to collect sales tax, where they didn’t have to do so before.