Consumer use tax is a critical tax mechanism that helps states collect revenue from purchases made outside their standard sales tax system. Specifically, this tax applies when a buyer purchases goods or services without paying the applicable state sales tax—often the case for online or out-of-state retail transactions. The use tax obligates the consumer to remit tax directly to their state for items they use, consume, or store within that state.
Purpose and Importance of Consumer Use Tax
The consumer use tax exists primarily to balance tax responsibilities between local businesses that charge sales tax and out-of-state sellers who may not. This tax helps prevent local businesses from being undercut by tax-free competition and ensures states have the funding necessary for public services such as infrastructure, education, and emergency services.
When and Who Must Pay Consumer Use Tax
The tax is payable by the buyer when a seller does not collect sales tax at the point of sale. Common scenarios include:
- Direct purchases from out-of-state online retailers who lack a sales tax collection obligation in the buyer’s state
- Purchases at exempt sales events or marketplaces where sales tax is not charged
- Mail order, telephone, or remote sales that do not collect the buyer’s state sales tax
Individuals who buy goods for personal use and businesses purchasing products for operational use or inventory are both subject to use tax, though businesses often have more stringent reporting requirements.
How to Report and Pay Use Tax
Most states allow consumers to report and pay use tax via their annual state income tax returns, sometimes through a designated section for use tax reporting. Alternatively, some states provide separate use tax forms on their tax websites. It’s important to keep detailed records of purchases to accurately report the tax.
Example Scenario
Suppose you purchase a $1,000 computer from an online retailer based in another state that doesn’t charge your state’s sales tax. If your state’s use tax rate is 6%, you owe $60 in use tax, which should be reported to your state tax authority.
Common Misconceptions About Use Tax
- “Online purchases are exempt from tax.” Not true. If no sales tax was collected, use tax likely applies.
- “My state doesn’t enforce use tax.” Enforcement has increased as many states have partnered with online platforms to improve sales tax collection.
- “Use tax only covers physical goods.” Digital products and certain services may also be subject to use tax depending on state laws.
Tips for Managing Consumer Use Tax
- Retain receipts from out-of-state and online purchases.
- Understand your state’s use tax rate and reporting procedures.
- Use your state tax return to report use tax if available.
- Comply voluntarily to avoid penalties, interest, or audits.
Consumer Use Tax Compared to Sales Tax
See our detailed Sales and Use Tax glossary entry for in-depth comparison and related terms.
Additional Resources
- IRS on State and Local Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/state-and-local-taxes
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/ask-cfpb/what-is-use-tax-en-1081/
- Streamlined Sales Tax Governing Board: https://www.streamlinedsalestax.org
- Tax Foundation explanation: https://taxfoundation.org/sales-use-taxes-explained/
Understanding and complying with consumer use tax helps ensure you’re meeting your tax responsibilities whether shopping locally or beyond state lines.
