Use Tax | What Is it, and What Are Your Business Owner Responsibilities?

What Small Business Owners Need to Know About Use Tax

Use Tax

You might be familiar with the process of collecting sales tax from consumers. But, how much do you know about use tax?

Understand the difference between sales tax and use tax, as well as your use tax responsibilities.

What is use tax?

Use tax is a sales tax imposed on consumers who do not pay tax at the time of purchase. You do not collect use tax from customers. Instead, they pay it to their state.

When you collect sales tax, customers do not need to pay use tax. But if customers are responsible for paying use tax, their rate is left up to the state they use, store, or consume the product in. Each state’s sales and use taxes are generally the same rates.

Generally, use tax applies when you sell a taxable item to someone in another state where you do not have sales tax nexus, or a business presence (e.g., a warehouse, employee working in another state, etc.). As a result, you are not responsible for remitting sales tax on the purchase to your state.

However, many consumers do not report and pay use tax.

To combat this issue, the Supreme Court recently ruled in South Dakota v. Wayfair, Inc to change the current sales and use tax law. Now, states can require that business owners collect sales tax on all products sold online, even if the business doesn’t have a physical business presence in the state.

If you do business in a state that has updated its laws, you may need to begin collecting sales tax, eliminating the consumer’s responsibility of paying use tax. Keep in mind that you will still not collect use tax.

Use tax examples

Let’s say you run an online business out of Ohio. You have nexus in Pennsylvania, New York, and Florida. You sell to a customer in Texas. Because you don’t have nexus in Texas, you do not need to collect sales tax from the customer. The customer must remit use tax to their state.

Now, let’s say that you sell to a customer in Pennsylvania. Because you have nexus in Pennsylvania, you will need to collect sales tax. Because the customer is paying sales tax, they do not need to remit use tax to their state.

Use tax vs. sales tax

Sales tax is a pass-through tax that businesses charge customers on purchases. As a business owner, you must know how to calculate sales tax and charge your customers. Then, you must track and remit sales tax to the proper state government.

Use tax, on the other hand, is not a pass-through tax. Again, you do not need to collect this type of sales tax on purchases made to customers in states you do not have a presence in.

use tax

Why use tax matters to businesses

How exactly does use tax apply to businesses? Understanding the difference between sales and use tax helps you avoid collecting tax when you shouldn’t. If you shouldn’t collect sales tax, don’t.

If you sell to consumers and don’t collect sales tax, you might consider letting them know that they owe use tax on the product. Many consumers don’t know about use tax or their responsibilities. Be clear that you are not charging sales tax and that they are responsible for remitting use tax to their state’s government.

Because many consumers do not pay use tax, states are changing their laws and widening the use of sales tax. Stay updated on your state’s laws to know whether you need to start charging sales tax in states you do not have a business presence.

Do businesses ever pay use tax?

Now that we’ve covered the importance of understanding use tax as it applies to your consumers, let’s target another aspect of use tax: you need to pay it for your business.

If your business purchases products and does not pay sales tax on those goods, you are responsible for calculating and remitting use tax to your state government. You will remit it to the state in which you use the goods. You can report and remit your business’s use tax liability on your tax return form. Or, you can file your state’s use tax form.

Make sure you know which products you must pay use tax on. For example, if you buy something online that your state does not charge sales tax on, you do not need to pay use tax.

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