Quick summary

Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax is the consumer’s responsibility when a purchase of taxable goods or services wasn’t charged the correct sales tax. States use use tax to protect local businesses and tax bases, and to capture revenue from out-of-state or remote sellers (including some online purchases). The rules vary by state; always check your state revenue department for specific filing steps.

How sales tax and use tax interact

  • Sales tax: A retailer collects the tax from you when you buy a taxable item and remits it to the state.
  • Use tax: If no sales tax (or not enough sales tax) was collected — for example, from an out-of-state seller that didn’t charge tax — you owe the use tax to your home state.

This connection means use tax is not a separate tax on different activity; it’s a backstop to ensure taxable consumption is taxed once.

Sources and context: federal guidance explains sales- and use-tax concepts, but administration is at the state level (see IRS on sales and use taxes) (https://www.irs.gov/businesses/small-businesses-self-employed/sales-and-use-tax). The 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc. expanded states’ ability to require remote sellers and marketplaces to collect sales tax, but consumer responsibilities remain where collection does not occur (SCOTUS opinion: https://www.supremecourt.gov/opinions/17pdf/17-494_k4el.pdf).

When you typically owe use tax (common scenarios)

  1. Purchases from out-of-state retailers that didn’t charge sales tax. This is the classic case: you bring the item into your home state and the state expects you to self-assess use tax.
  2. Purchases from out-of-country sellers where import or customs duties were paid, but state sales/use tax was not.
  3. Purchases made through a small out-of-state vendor who isn’t required to collect sales tax under that vendor’s state law or below economic thresholds.
  4. Items purchased for business use where sales tax wasn’t collected and the business has to self-assess. Businesses often report these on a use tax line on the state sales tax return or an income tax return.
  5. When you paid sales tax in another state that is lower than your home-state combined state and local rate: some states require you to remit the difference.

Note: Marketplace facilitator laws have shifted collection onto marketplaces like Amazon, Etsy, and eBay in many states. If the marketplace collected and remitted tax, you usually do not owe use tax for that purchase. See FinHelp’s guide on Marketplace Facilitator Rules for details: Marketplace Facilitator Rules: Who Collects and Remits Sales Tax?.

How to determine whether a purchase is taxable

  • Check whether your state taxes the item or service. States differ on taxable categories (for example, most states tax tangible goods; many tax certain digital goods or services).
  • Check whether the seller charged sales tax. If yes, verify it matches your state and local combined rate. If no, the purchase is a candidate for use tax.
  • If you paid sales tax in another state, collect your receipts and compare rates.

For state-by-state differences on online purchases and taxing digital goods, see FinHelp’s overview: How do states handle sales tax on online purchases?.

How to calculate use tax (step-by-step)

  1. Identify the purchase price subject to tax. Use the full purchase price, excluding separately stated shipping if your state exempts it.
  2. Determine the correct tax rate. Use the combined state + local rate for the location where the item will be used. Your state’s revenue website usually provides lookup tools.
  3. Multiply the taxable purchase price by the use tax rate.
  4. If you paid partial sales tax to another state, you may owe only the difference between your home rate and the tax paid elsewhere (rules vary).

Example: You buy a $2,000 bicycle from an out-of-state online retailer that didn’t charge tax. If your local combined rate is 7.5%, your use tax is $2,000 × 0.075 = $150.

How and where to report use tax

States provide several collection points:

  • A dedicated use-tax return or payment portal on your state’s department of revenue website.
  • A line on your state personal income tax return to report and pay use tax for the year.
  • Business sales/use tax returns for companies that owe on input purchases or for resales where tax wasn’t collected.

Most individual filers report small amounts of use tax on their state income tax forms to keep compliance simple. Larger or business-related liabilities will usually require registration and filing as a seller (or a separate use tax return).

If you’re unsure which form to file, contact your state or check its revenue site. The Federation of Tax Administrators maintains a list of state tax agencies: https://www.taxadmin.org/state-tax-agencies.

Recordkeeping: what to keep and for how long

  • Keep invoices and receipts that show what you paid and whether sales tax was charged.
  • Document where the item is used (if relevant for local rate determination).
  • Keep records for at least three to seven years depending on your state’s audit period.

In my practice I’ve seen audits triggered by incomplete records rather than unpaid amounts. A complete paper trail reduces audit risk and simplifies any honest corrections.

Common mistakes and how to avoid them

  • Assuming online purchases are tax-free. After Wayfair (2018), many remote sellers and marketplaces collect tax, but not all do.
  • Forgetting to include shipping or handling when your state taxes those charges.
  • Paying sales tax in another state and not reconciling the difference with your home state’s rate.

Practical fixes: use accounting software or a purchase log, check marketplace receipts for ‘tax collected’ lines, and consult your state’s guidance each year.

Penalties and enforcement

States assess interest and penalties on unpaid use tax. Penalties vary widely — from small fixed penalties to percentage-based assessments. States conduct audits and can assess back taxes plus interest. Voluntary disclosure and self-reporting through a state income tax return is usually the lowest-friction way for consumers to pay a modest use-tax balance.

Professional tips

  • Track remote purchases: set a recurring calendar reminder to review major online purchases before filing taxes.
  • Use automation: many accounting packages now track location-based tax rates and flag purchases where sales tax wasn’t collected.
  • Account for business purchases: if you use items in a business, classify purchases correctly (resale vs. taxable use) to avoid charging mistakes and unexpected liabilities.

For sellers and marketplace participants, FinHelp’s guides on Sales Tax Compliance for Online Sellers: Registration, Filing, and Reporting and on nexus rules are practical next reads.

Frequently asked questions (brief)

Q: If a marketplace collected sales tax, do I still owe use tax?
A: Generally no — when a marketplace facilitator collects and remits, the tax obligation is satisfied for that sale. Confirm on your receipt.

Q: Is use tax refundable if I paid sales tax elsewhere?
A: Not typically. If you paid tax to another state, you usually get a credit up to the amount of tax you paid; some states require paying the difference if your home rate is higher.

Q: How often should businesses report use tax?
A: Businesses typically report monthly or quarterly, depending on the state and volume of tax liability; individuals often report annually.

Authoritative resources and further reading

Professional disclaimer: This article is educational and not individualized tax advice. State rules differ; consult a CPA or state revenue department for guidance specific to your situation.

If you want, I can add a state-specific checklist (e.g., California, Texas, New York) showing where individuals typically report use tax and the usual forms to expect.