Sales Tax and Use Tax – What’s the Difference?

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. The use tax 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.

I came across this for the first time when we moved out of state just after purchasing a new vehicle. When we went to register for a tag in our new state, we had to pay them the difference in sales tax between the two states – which was 1 1/2% of the sale price of the vehicle (our new state’s rate being 1 1/2% higher than our previous home).

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.

This is where Internet tax comes in. You may have heard a lot about this lately, as states are trying to figure out how to recoup losses as more sales tax place online, from smaller retailers who don’t have a presence (or nexus) in the state. Because states have use taxes, most of these sales have always been taxable – but it was up to the purchaser to pay the tax, since it was a use tax. State governments now want to require Internet retailers to collect the sales tax up front, and to remit it to the various states, so they can continue to meet their revenue requirements without spending more money starting to enforce payment of use taxes.