You owe use tax when you buy something and no one collects sales tax on it, shifting the tax obligation from seller to buyer. It often happens with out-of-state purchases, private-party sales, and business inventory that gets pulled for internal use instead of resale. The rate matches your local sales tax rate. What changes is who calculates it, who reports it, and when it gets paid.

Below, we'll cover how use tax differs from sales tax, who owes it, and how a US Supreme Court decision reshaped how much of it gets self-reported versus collected at checkout.

Key takeaways

• Use tax applies when sales tax wasn't collected on a purchase. The responsibility to calculate and pay it shifts from the seller to the buyer.

• The 2018 Wayfair Supreme Court decision established economic nexus for out-of-state sellers, which broadened sales tax obligations and reduced use tax obligations.

• Businesses face much of their use tax exposure through inventory pulled for internal use, out-of-state equipment purchases, and software bought from vendors who don't tax consistently across states.

What is use tax?

Use tax is a state-level tax in the US applied to the use, storage, or consumption of items bought without sales tax. States with a general sales tax run a matching use tax alongside it.

How does use tax differ from sales tax?

The seller collects sales tax at checkout. Use tax works in reverse. No one collects tax at the time of sale, so the job falls to the buyer. The buyer then has to determine that tax is owed, calculate the right amount, and report and pay it directly, usually through a state income tax return, dedicated consumer use tax form, or business's sales and use tax return.

Here's what separates use tax from sales tax:

• Trigger conditions: Sales tax applies whenever a taxable transaction falls under a seller's collection obligation. Use tax kicks in when that obligation didn't exist or wasn't met, such as an out-of-state purchase or a resale item that was used internally.

• Filing responsibility: With sales tax, the seller answers to the state. With use tax, the buyer answers to the state. That means individuals and businesses need their own system for tracking what they owe.

• Enforcement visibility: States can audit seller records to catch missed sales tax collection, but use tax depends more on people reporting it themselves. That's part of why consumer use tax compliance has historically stayed relatively low.

Who owes use tax: Consumers or businesses?

Individual consumers owe use tax on personal purchases where sales tax wasn't charged. This usually occurs when you buy from an out-of-state seller with no nexus in your state, buy something while travelling and bring it home, or buy from a private seller who isn't registered to collect tax. Many states include a use-tax line on the individual income tax return, which lets you report an estimated amount or list specific purchases.

Businesses carry a heavier load because they buy across more categories. Any out-of-state equipment or supply purchases from a vendor without a collection obligation in the buyer's state leaves that tax up to the buyer. Categories can also shift between taxable and exempt depending on how the item gets used: a business might purchase equipment tax-free for resale, then use a unit for its own office, triggering the use tax.

How did the Wayfair decision change economic nexus for use tax?

South Dakota v. Wayfair established economic nexus. States could now require out-of-state sellers to collect and remit sales tax once their business activity hit a certain threshold. That narrowed the gap that use tax was designed to fill: as online retailers began collecting sales tax after reaching economic nexus thresholds, fewer transactions remained for buyers to self-report.

The threshold for economic nexus varies by state. South Dakota's own law, upheld in the case, set the threshold at US$100,000 in annual sales or 200 separate transactions into the state. Many states adopted similar thresholds, but the exact numbers vary. Although many have since dropped the transaction-count test and rely on the dollar threshold alone.

How do you calculate and report use tax?

To calculate use tax, you take the purchase price and apply the combined state and local tax rate for wherever the item gets used or stored.

There are two methods for individuals to report use tax:

• Table-based estimate: Many state income tax returns include a use tax line tied to your income bracket. That's meant to cover small purchases that are hard to track individually.

• Itemised reporting: The specific amount is reported for big purchases such as a boat, vehicle, or out-of-state furniture rather than relying on the table. Vehicles and boats often get taxed directly when you register them with the state, which bypasses the income tax return process entirely.

Businesses report use tax through the regular sales and use tax return. That process looks more like an internal audit.

Here's what it requires:

• Reviewing accounts payable records: Finance teams check for purchases where a vendor charged no tax or charged too little.

• Flagging inventory withdrawals: Any item bought tax-exempt for resale that gets pulled for internal use needs to be caught and taxed at that point.

• Applying the correct local rate: The rate depends on where the item is used, not where the business is headquartered. A company with a single location can still owe different rates on different equipment.

• Remitting on schedule: Businesses file the calculated amount on their periodic sales and use tax return, typically monthly, quarterly, or annually, depending on sales volume.

What common mistakes trigger a use tax audit?

Businesses often miss use tax on fixed asset purchases, equipment, machinery, and furniture bought from out-of-state vendors that didn't charge tax. These purchases sit on the balance sheet as capital expenditures, and finance teams reviewing depreciation schedules don't always cross-check them against sales tax exposure.

Common sources of exposure include:

• Fixed asset purchases: Equipment and furniture bought from out-of-state vendors often slip through because they're tracked for depreciation, not tax exposure.

• Inventory withdrawals: When a business pulls a resale item for internal use, that shift is easy to lose track of without a formal process for flagging it.

• Software and software-as-a-service (SaaS) purchases: Software and SaaS taxability varies widely by state. Some states tax downloaded software but not cloud subscriptions; others tax both or neither. Assuming a vendor handled it correctly everywhere is a common error.

• Exemption certificate errors: A business might buy something tax-exempt for resale, then use it internally without recognising the exemption no longer applies or hold a certificate that's expired or improperly documented.

Auditors typically pull three to four years of accounts payable and general ledger records, and they look for capital purchases, recurring vendor payments with no tax line item, and exemption certificates on file.

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 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.

Learn more about Stripe Tax or get started today.