Quick overview
State use tax exists so residents and businesses pay the same tax on goods whether they buy locally or from sellers located elsewhere. If an item should have had sales tax collected at the point of sale but wasn’t — for example because the seller had no obligation to collect your state’s tax — you may owe use tax when you bring that item into your state.
(Author credentials: I’m a CPA and financial educator with 15+ years helping individuals and small businesses navigate state tax compliance. In my practice I’ve helped clients avoid penalties by identifying missed use-tax liabilities before state notices arrived.)
How state use tax works (step-by-step)
- Determine where the purchase is taxed. If you buy something in your state, the seller usually collects sales tax. If you buy it out-of-state or from an out-of-state seller who didn’t collect your state’s tax, a use tax may apply.
- Check whether the seller collected tax. If the sales tax was charged at purchase, you generally don’t owe additional use tax. Many marketplace platforms now collect and remit tax for you under marketplace facilitator rules (see below).
- Figure out the tax base. Use tax is typically the purchase price plus shipping and handling (states vary). If you paid sales tax to another state, many states allow a credit for taxes paid to that state so you don’t pay twice.
- Report and pay. If your state requires self-reporting, you’ll use the state’s use tax form or report the tax on your state income- or sales-tax return. Rules and filing channels vary by state.
(Authoritative context: The legal underpinning for modern out-of-state sales tax rules is the U.S. Supreme Court decision South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), which allowed states to require remote sellers to collect sales tax based on economic activity rather than physical presence.)
Real-world example
If you live in California and buy a laptop from an online retailer located in a no-sales-tax state, California’s use tax generally applies if the laptop is brought into California for use. If the retailer did not collect California tax, you may need to self-report that purchase on California’s use-tax reporting mechanism (California Department of Tax and Fee Administration rules apply). In my experience representing taxpayers, timely self-reporting often removes penalties or interest when states first question unpaid use tax.
Who owes use tax?
- Consumers: Individuals who buy tangible personal property outside their home state but use, store, or consume it inside that state.
- Businesses: Companies that purchase equipment, supplies, or inventory from out-of-state vendors and use them in the state where they operate. Businesses also must consider use tax when claiming exemptions that don’t apply.
- Remote sellers and marketplaces: After Wayfair, many states require remote sellers or marketplace facilitators to collect sales tax at the point of sale. When they don’t, the end consumer or purchasing business remains responsible for use tax.
Tip: Businesses should track purchases by state and keep supplier invoices that show whether tax was collected and the tax amount charged.
How to calculate and report use tax (practical checklist)
- Gather receipts and invoices for out-of-state purchases.
- Confirm whether the seller collected your state’s tax or whether a marketplace facilitator collected and remitted tax on your behalf.
- If no tax was collected, determine your state’s use-tax base (purchase price, shipping, and handling may be included). See your state Department of Revenue for definitions and forms.
- Apply any credits for tax paid to another state if allowed.
- File on the correct form or portal. Many states let individuals report use tax on their state income tax return; others have separate use tax returns or quarterly sales-and-use tax filings for businesses.
(For state-specific guidance, check your state’s Department of Revenue website — for example: California CDTFA, New York Department of Taxation and Finance, Texas Comptroller — each explains how to report unpaid use tax.)
Marketplace facilitators and Wayfair: what changed
The 2018 Supreme Court ruling in South Dakota v. Wayfair allowed states to require remote sellers to collect sales tax based on economic presence (sales volume or transaction count), not just physical presence. Since then:
- Many states adopted economic nexus thresholds (commonly $100,000 in sales or 200 transactions per year, though the exact threshold varies by state).
- Marketplace facilitator laws require platforms like Amazon, eBay, and Etsy to collect and remit sales tax for third-party sellers in many states.
Result: Fewer transactions are left uncollected at point of sale, but taxpayers should still verify whether the platform or seller collected and remitted tax. If they didn’t, the buyer may be liable for use tax.
(Useful FinHelp links: Read more about how sales tax nexus affects remote sellers in our guide on State Sales Tax Nexus for Remote Sellers: Practical Steps to Register and Comply (https://finhelp.io/glossary/state-sales-tax-nexus-for-remote-sellers-practical-steps-to-register-and-comply/). Also see our consumer-focused comparison Sales Tax vs Use Tax: When Consumers Owe Use Tax and How to Report It (https://finhelp.io/glossary/sales-tax-vs-use-tax-when-consumers-owe-use-tax-and-how-to-report-it/).)
Common mistakes and audit triggers
- Assuming small purchases are safe. Use tax applies regardless of purchase size in many states; cumulative small items can add up.
- Ignoring marketplace receipts. Marketplaces often show when tax was collected; keep those records.
- Misapplying exemptions. Purchases for resale, manufacturing, or certain nonprofit uses may be exempt, but exemptions usually require documented proof, such as a resale certificate.
- Poor recordkeeping. In an audit, states expect invoices showing vendor name, purchase date, price, and any tax collected.
States commonly trigger audits when businesses fail to register for sales-and-use tax after crossing nexus thresholds or when use-tax liabilities accumulate without filing.
Practical tips to reduce risk
- Keep a running spreadsheet or accounting tag for out-of-state purchases including date, vendor, amount, and whether tax was charged.
- Where appropriate, obtain and retain resale or exemption certificates from customers and vendors.
- Reconcile credit-card and bank statements quarterly to identify missed taxable purchases.
- Consult a tax advisor if you regularly buy from multiple states or operate an online business; the interplay of use tax and nexus rules can be complex.
In my practice, a simple quarterly review of vendor invoices catches most missed use-tax items before they become audits.
How consumers typically pay use tax
- Many states allow individuals to report use tax on their state income tax return using a worksheet or an optional line for use tax.
- If your state doesn’t provide that option, check the Department of Revenue portal for a standalone use-tax form or guidance on voluntary disclosure.
- For businesses, unpaid use tax is usually reported on the business’s sales-and-use tax return filed monthly or quarterly.
(Authoritative source: Consumer Financial Protection Bureau — “Understanding use tax” — explains why self-reporting matters and how states approach the obligation: https://www.consumerfinance.gov/.)
When to get professional help
- You cross economic nexus thresholds in multiple states.
- You receive a state notice about unpaid sales or use tax.
- Your business has complex multi-state purchases, manufacturing in more than one state, or significant marketplace transactions.
A tax professional can review invoices, help register for required tax accounts, and negotiate voluntary disclosure agreements if a backlog of unpaid tax exists.
Where to find state-specific information
For precise rules, forms, and filing channels, consult your state’s Department of Revenue or Taxation website. Examples:
- California Department of Tax and Fee Administration (CDTFA)
- New York Department of Taxation and Finance
- Texas Comptroller of Public Accounts
Each state provides instructions on who must pay use tax, how to calculate it, and the forms or portals to use.
Short FAQ
Q: Does sales tax I paid in another state offset use tax?
A: Often yes — most states allow a credit for sales tax paid to another state so you aren’t double-taxed. Confirm the rules with your state’s tax authority.
Q: Do services trigger use tax?
A: Use tax generally applies to tangible personal property; however, some states tax certain services and digital goods. Check local law.
Q: What if I don’t report use tax?
A: States can assess the unpaid tax plus interest and penalties. If you discover a past error, consider voluntary disclosure programs offered by many states to reduce penalties.
Final notes and disclaimer
State use tax is primarily a state-administered obligation; rules and thresholds vary materially by jurisdiction. This article explains common principles and practical steps but is educational only and not personal tax advice. For advice about your situation, consult a qualified tax professional or your state Department of Revenue.
(Selected sources: South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018); Consumer Financial Protection Bureau, “Understanding Use Tax”; state Department of Revenue guidance.)
