Quick overview

Use tax applies when you buy tangible goods (and, in many states, certain digital products and services) from out‑of‑state sellers who didn’t collect your state’s sales tax at the time of purchase. The tax is usually measured at the same rate as your state and local sales tax combined and is intended to level the playing field between in‑state and out‑of‑state sellers.

Key authorities: see the IRS overview on use tax (IRS: “What is Use Tax”) and the U.S. Supreme Court decision that reshaped remote sales rules (South Dakota v. Wayfair, 138 S. Ct. 2080 (2018)).

Why this matters for online shoppers

Online shopping makes it easy to buy from out‑of‑state vendors or marketplaces that may not collect your state’s sales tax. When sellers don’t collect sales tax, the legal responsibility usually shifts to you, the consumer. States enforce use tax through voluntary reporting on state income tax returns, separate use tax forms, and, increasingly, marketplace facilitator rules that require platforms (like Amazon, eBay, etc.) to collect and remit tax for many transactions.

In my practice working with consumers and small businesses, I regularly see surprises when people don’t track which purchases lacked sales tax—especially high‑value items (electronics, furniture) and frequent purchases of digital goods or subscriptions. These can add up and trigger notices, interest, and penalties if not handled.

How use tax normally works (step‑by‑step)

  1. Identify purchases without sales tax: Check receipts and order confirmations for whether state and local sales tax were collected. If not, that purchase may be subject to use tax.
  2. Determine where tax is owed: Use tax is owed to the state where the item is used, stored, or consumed. That is usually your home state, regardless of where the seller is located.
  3. Calculate the tax: Apply your state’s combined state + local sales tax rate to the taxable purchase price. (Rates and local add‑ons vary by jurisdiction; see your state revenue department.)
  4. Report and pay: Many states give consumers a place to report use tax on the annual income tax return; others have separate forms or voluntary use tax remittance systems.

Authoritative source on consumer reporting: IRS guidance and many state revenue department pages outline filing procedures; consult your state’s department of revenue for exact methods (example listing: https://www.taxadmin.org/state-tax-agencies).

Important legal context

  • The Wayfair decision (2018) removed the physical presence requirement for sales tax nexus and led to broad adoption of economic nexus thresholds and marketplace facilitator laws. That means more remote sellers and marketplaces must collect sales tax for buyers in states where they meet thresholds. But gaps still exist, especially for small sellers and some subscriptions or services (South Dakota v. Wayfair, 138 S. Ct. 2080 (2018)).
  • States treat digital goods, software-as-a-service (SaaS), and downloads differently: some tax them as tangible personal property, others exempt them. Always confirm how your state treats a particular product.

Primary sources: SCOTUS decision text and state revenue department guidance. For a practical consumer guide on when use tax applies vs. sales tax, see FinHelp’s guide “Sales Tax vs Use Tax: When Consumers Owe Use Tax and How to Report It” (internal link: https://finhelp.io/glossary/sales-tax-vs-use-tax-when-consumers-owe-use-tax-and-how-to-report-it/).

Real‑world examples (short)

  • Example 1: You order a $1,500 laptop from an out‑of‑state seller that did not charge sales tax. If your combined state + local rate is 7%, you owe $105 in use tax. If you don’t report and your state finds it later, penalties and interest may be assessed.
  • Example 2: You buy multiple digital subscriptions from an out‑of‑state vendor that doesn’t collect tax. Over a year, these add up and create a sizeable unreported use tax liability. States sometimes audit taxpayers or cross‑match data from marketplaces.

Note: Marketplace facilitators now collect and remit tax for many marketplace orders. If your purchase is through a marketplace that collected tax, you likely don’t owe additional use tax.

If you want details about tax collection on digital products and subscriptions, see FinHelp’s article “Sales Tax Compliance for Digital Goods and Subscriptions” (internal link: https://finhelp.io/glossary/sales-tax-compliance-for-digital-goods-and-subscriptions/).

How to calculate your use tax accurately

  1. Keep a running list of purchases without tax during the year (date, vendor, amount, description).
  2. Find your combined tax rate: use your state revenue site or an official lookup for combined state + local rates. Don’t rely on a single national table—local add‑ons matter.
  3. Multiply the taxable purchase price by the combined rate. For partial exemptions, subtract exempt amounts first (e.g., if a state exempts certain clothing or groceries).
  4. Track and reconcile: Add the totals and, if required, report them on your state return or a standalone use tax form.

Practical tip from my work: When you buy large items, take a minute to verify whether sales tax was charged at checkout. For recurring purchases (software subscriptions, cloud services), review your vendor invoices quarterly.

Common mistakes and how to avoid them

  • Mistake: Assuming internet purchases are tax‑free. Fix: Check receipts; many sellers now collect tax.
  • Mistake: Forgetting to include shipping charges when taxable. Fix: Check state rules—some states tax delivery charges if the item is taxable.
  • Mistake: Overlooking digital goods and SaaS. Fix: Confirm your state’s taxability rules for digital products.

Reporting and payment options

  • On state income tax returns: Many states include a line to report use tax for consumers.
  • Separate use tax form or website: Some states provide an online portal or form to voluntarily remit use tax throughout the year.
  • Voluntary reporting: If a state expects you to report but you don’t, they may estimate and assess tax later—voluntary reporting reduces penalty risk.

If you receive a notice from your state, respond promptly and provide records. If you disagree, states usually have appeal and administrative review processes.

Penalties and audits

Penalties and interest vary by state. Common consequences include assessed tax, interest on unpaid amounts, and late‑filing penalties. Audit risk increases when the state can match purchase data from retailers or marketplaces to taxpayer records.

Practical recordkeeping checklist

  • Retain receipts and order confirmations (PDFs/screenshots) showing whether tax was charged.
  • Keep invoices for subscriptions and digital services.
  • Maintain a yearly spreadsheet summarizing untaxed purchases and computed use tax.
  • Save correspondence from marketplaces showing when they collected and remitted tax on your behalf.

In practice, well‑organized records make voluntary reporting straightforward and shorten any state review.

When to consult a professional

  • You have large or repeated out‑of‑state purchases.
  • You run a small business or side gig buying supplies from multiple states.
  • You received a use tax notice or audit letter.

A tax professional can: (1) review purchases and exemptions, (2) advise on bulk reporting vs itemized reporting, and (3) represent you in state discussions.

Quick FAQ

  • How will I know if a marketplace collected tax? Check the order receipt—marketplaces usually show tax charged and the collecting entity.
  • Are digital subscriptions taxable? Depends on your state; verify on your state revenue website.
  • Can I deduct use tax on my federal return? No — federal deductions for state and local taxes follow other rules; consult your tax advisor.

Authoritative resources (select)

Professional disclaimer
This article is for educational purposes and does not constitute personal tax advice. State rules differ and change; consult a certified tax professional or your state revenue department for guidance specific to your situation.

Internal resources

If you’d like, a tax pro can review your purchases and help you set up a simple recordkeeping system to avoid surprises at tax time.