Sales tax vs. use tax: How they differ and what you need to know to stay compliant

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  1. Introduktion
  2. Sales tax vs. use tax
  3. An example of sales tax vs. use tax

While certain states have different forms of sales tax, they generally all refer to the same thing: an indirect tax on a sale that a seller collects and remits to the government. For example, Arizona has a transaction privilege tax. While this is similar to sales tax, it’s defined as a tax on a vendor for the privilege of doing business in Arizona. Similarly, Hawaii has a general excise tax in place.

Use tax is another form of a sales tax. Sales tax and use tax are often used interchangeably; you might see the term “sales and use tax” when filing a sales tax return or completing your application for a sales tax permit. However, how these taxes are collected and remitted differs.

What’s in this article?

  • Sales tax vs. use tax
  • An example of sales tax vs. use tax

Sales tax vs. use tax

Sales tax is a type of indirect tax levied on the sales of certain goods and services in the US at the point of sale. Almost every state in the US has a state sales tax, and cities and municipalities can also create sales taxes specific for their region.

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 on which no sales tax has been paid. A common example of use tax is when a consumer makes a purchase in a state with no sales tax or in a state where the item isn’t taxable but uses the purchased good or service in a state where sales tax would apply. The amount of use tax charged is usually the same rate as sales tax.

Use tax is paid by the consumer directly to the appropriate state revenue department by completing a use tax return. In some states, it can also be paid by including the tax amount on an income tax return. Since the consumer must calculate and remit the tax themselves, it’s challenging for states to manage and is often not 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.

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 state-wide sales tax), and you make a sale to a customer that 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 is not subject to sales tax in North Dakota, no use tax would be owed.

In summary, sales and use tax refer to the same thing: a tax on the price of a sale that is paid for by a customer but collected and remitted to the government by the seller. The biggest difference between sales tax and use tax is how it is accounted for and who is responsible for remitting to the government.

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