Sales tax and use tax both apply to the sale or use of taxable goods and services in the US, but they work differently. Sales tax is collected by the seller at the point of sale (POS). Use tax is paid directly by the buyer if sales tax isn’t collected, typically because the purchase came from an out-of-state or online seller that didn't charge it. Understanding when each applies helps businesses avoid compliance gaps and unexpected liabilities.

Below, we’ll explain the differences between sales tax and use tax, when use tax applies, and how to calculate it.

What's in this article?

• Sales tax vs use tax
  
• When does use tax apply?
  
• An example of sales tax vs use tax
  
• How to calculate and report use tax
  
• How Stripe Tax can help
  

Sales tax vs use tax

Sales tax is a type of indirect tax levied on sales of certain goods and services in the US at the POS. Forty-five states and the District of Columbia implement a statewide sales tax. (The five exceptions are Delaware, Montana, Alaska, Oregon, and New Hampshire.) Some cities and municipalities can also apply their own sales taxes.

Use tax, also referred to as consumer use tax, is a tax levied on the storage, use, or consumption of a taxable item or service if sales tax isn’t charged. The customer pays it directly to the appropriate state revenue department by completing a use tax return. In some states, they can also pay it by including the tax amount on an income tax return. Since the customer must calculate and remit the tax themselves, it’s challenging for states to manage and often isn’t enforced as strictly as sales tax. Use tax was created to prevent certain states from having a competitive advantage over other states that would have to collect sales tax.

In summary, sales tax and use tax are two sides of the same compliance obligation: a tax on the sale price that’s paid for by a customer but collected and remitted to the government by the seller. When sales tax isn't collected at the point of sale, use tax fills the gap. The biggest difference between sales tax and use tax is how it’s accounted for and who’s responsible for remitting the amount to the government.

For businesses, understanding which applies, and tracking purchases where no sales tax was charged, is the core of use tax compliance.

When does use tax apply?

Use tax typically applies in a few common scenarios. Here's when businesses and customers should expect to owe it:

• Out-of-state online purchases: If you buy a taxable item online from a retailer that doesn't collect sales tax in your state, you generally owe use tax instead. Because of the Supreme Court's 2018 ruling in South Dakota v. Wayfair, online retailers with economic nexus (usually US$100,000 in sales or 200 transactions in a state) must collect sales tax. When a retailer falls below that threshold and doesn't collect, the responsibility can shift to the buyer.

• Business purchases from out-of-state suppliers: When a business buys taxable equipment, supplies, or materials from an out-of-state vendor that doesn't charge sales tax, the business is typically responsible for self-assessing and remitting use tax to its home state.

• Items purchased for resale then used internally: Goods bought tax-free under a resale certificate are meant to be resold, not used by the business itself. If a business pulls inventory out of stock for its own use (e.g., giving a product to an employee or using it as office equipment), use tax is usually owed on that item.

• Digital goods and software: Purchases of software licenses, software-as-a-service (SaaS) subscriptions, or other digital products from an out-of-state seller can trigger use tax if the seller didn't collect sales tax and the item is taxable in the buyer's state.

• Vehicles purchased out of state: Buying a vehicle in one state and registering or using it in another is one of the most common and closely tracked use tax scenarios, since registration typically requires proof that use tax has been paid.

In general, use tax applies any time a taxable item is purchased tax-free—often because it came from a state without sales tax or the seller didn't have nexus—but is used or stored in a state where the item would normally be taxed. The use tax rate is usually the same as the local sales tax rate would’ve been.

Tax obligations vary by state, and the details of when use tax applies can be complex. Businesses should consult a tax professional to ensure compliance with their specific state and local requirements.

Use tax obligations for businesses

Businesses generally face greater use tax exposure than individual customers simply because they make more out-of-state purchases—for example, office supplies, equipment, software, and raw materials sourced from vendors who might not collect sales tax.

This exposure also draws scrutiny: use tax compliance is a regular focus of state audits, particularly in industries such as construction, manufacturing, and SaaS, where large equipment purchases, materials, and software licenses are frequent and often cross state lines.

To stay ahead of potential liabilities, businesses should maintain use tax accrual accounts and consistently record all out-of-state purchases where sales tax wasn't charged. This creates a clear audit trail and makes it easier to calculate and remit what's owed.

An example of sales tax vs use tax

Your business is based in New York and you sell a taxable item to a customer in New York. You would charge sales tax on that transaction.

Your business is based in Oregon (a state with no statewide sales tax) and you make a sale to a customer who intends to use the item in North Dakota, where it would be subject to sales tax. In this scenario, the customer should pay use tax in North Dakota. However, if the item isn’t subject to sales tax in North Dakota, no use tax would be owed.

Sales tax and use tax are two sides of the same compliance obligation. When sales tax isn't collected at the POS, use tax fulfills the obligation. For businesses, understanding which applies, and tracking purchases where no sales tax was charged, is at the core of use tax compliance.

How to calculate and report use tax

Calculating use tax is generally straightforward once you know your rate and purchase amount:

• Determine the applicable rate: Use tax is typically assessed at the same rate as the sales tax that would apply in the jurisdiction where the item is used or stored—not the jurisdiction where it was purchased.

• Calculate the amount owed: Multiply the purchase price of the taxable item by the applicable use tax rate. For example, if a business buys US$10,000 worth of equipment from an out-of-state supplier that didn't charge sales tax and the local use tax rate is 7%, the business would owe US$700 in use tax.

• Report through the appropriate channel: Reporting methods vary by state. Some require a stand-alone use tax return, while others allow use tax to be reported on a sales tax return or even an income tax return. Check with your state's department of revenue for the correct method and filing frequency.

• Track purchases on a rolling basis: Rather than try to reconstruct a year's worth of purchases at tax time, businesses should log out-of-state and untaxed purchases as they happen and calculate use tax liability throughout the year. This helps reduce errors, make audits easier to work through, and avoid surprise liabilities.

Since the exact filing requirements and thresholds differ from state to state, a business should consult its state's department of revenue or a tax professional for guidance specific to its situation.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard or using our powerful API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and GST on:

• Digital goods and services in all US states and over 100 countries
  
• Physical goods in all US states and 42 countries
  

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration, or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You'll benefit from a simplified process that prefills application details – saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax automates US filings in the Dashboard, powered by TaxJar. For global filings, Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business. US tax filings can be automated in the Stripe Dashboard, powered by TaxJar.

Learn more about Stripe Tax or get started today.