Sales Tax vs Use Tax: What’s the Difference?

Updated – Originally published Feb 5, 2025

There’s a tax you probably owe right now and don’t even know it.

Use tax is one of the most commonly overlooked tax obligations in the United States. It works alongside sales tax, filling the gap when sales tax isn’t collected at the point of purchase. Most businesses and individuals don’t realize they owe it until an auditor comes knocking or an unexpected liability shows up during due diligence.

Missing use tax on a single major equipment purchase can create thousands of dollars in hidden liabilities. With an average US sales tax rate of 7.53%, even small oversights add up quickly when you’re making purchases across state lines. And with over 12,000 sales and use tax jurisdictions in the US, tracking the correct rate for every out-of-state purchase requires precise location data.

If you’ve ever purchased equipment from an out-of-state vendor, bought supplies online from a seller that didn’t charge tax or pulled inventory off your shelves for internal use, you may have triggered a use tax obligation. Most businesses do this without realizing it. Understanding the difference between sales tax vs. use tax is the first step toward protecting your business.

This guide explains use tax. You’ll learn what triggers it, who owes it, how to calculate it and the practical steps to stay compliant across all 50 states. Whether you’re a growing business expanding into new markets or an individual making online purchases, you will learn the exact steps to protect your business. 

What Is Use Tax?

Use tax is a tax on the use, storage or consumption of tangible personal property (physical goods) (and in some states, services) when the seller didn’t collect sales tax at the time of purchase.

Use tax is the mirror image of sales tax. It’s not a separate or additional tax. The rate is typically the same as the sales tax rate that would have applied if you had made the purchase locally.

Why does use tax exist? It levels the playing field. Without it, in-state retailers who collect sales tax would be at a competitive disadvantage compared to out-of-state sellers who don’t. Use tax closes that gap by ensuring the tax gets paid regardless of where the purchase originated.

Use tax applies to both businesses and individuals, though the terminology differs slightly depending on who owes it.

Consumer Use Tax vs. Business Use Tax

Consumer use tax is what individuals owe when they purchase taxable goods from out-of-state sellers without paying sales tax. Think about buying furniture from an online retailer that doesn’t collect your state’s tax, or ordering electronics from a seller in a state with no sales tax. If you use that item in a state that does impose sales tax, you owe use tax on it.

Business use tax (sometimes called vendor use tax) is what businesses owe when they purchase taxable goods or services for their own use without paying sales tax. This is common with out-of-state vendors, office supplies, equipment, and cloud-based software in some states.

Both types require you to pay the tax. The difference is in who owes it and how enforcement typically works. Businesses face more scrutiny because their purchases are larger, more frequent, and easier to audit. But the obligation is equally real for individuals.

Who Is Responsible for Paying Use Tax?

The purchaser is responsible for use tax.

Unlike sales tax, where the seller collects and remits the tax to the state, use tax is a self-assessed obligation, meaning you must calculate and pay it yourself. That means if you buy something and the seller doesn’t charge you sales tax, you’re expected to track that purchase and report the use tax yourself.

For businesses, this means maintaining a system to identify every purchase where sales tax was not charged. You then self-report that use tax on your regular sales and use tax returns.

For individuals, most states expect you to report use tax on your annual income tax return. There’s usually a line item for it. Compliance rates among individuals are historically very low, but the obligation exists nonetheless.

Since the 2018 South Dakota v. Wayfair decision, more remote sellers now collect sales tax because they’ve crossed economic sales tax nexus thresholds in various states. But use tax obligations haven’t disappeared. There are still plenty of scenarios where sellers do not collect sales tax:

• Purchases from smaller vendors who haven’t crossed nexus thresholds
• Transactions on newer platforms like [social media marketplaces](https://sales.tax/expert-articles/sales-tax-for-social-media-marketplaces/) that may not have the same collection obligations as major retailers
• Purchases from vendors who incorrectly believe they don’t have nexus
• Items withdrawn from inventory for internal business use

The responsibility shifts to you.

When Use Tax Applies

Here are real-world scenarios businesses encounter regularly.

Out-of-State Purchases Without Sales Tax Collected

Your business is based in Texas. You order $15,000 worth of office equipment from a vendor in Montana. Montana has no sales tax, and the vendor doesn’t collect Texas sales tax because they have no nexus there.

You now owe use tax on that $15,000 at your local Texas rate. If you’re in Dallas, that’s 8.25%. You owe $1,237.50.

This scenario plays out constantly with raw materials, supplies, machinery and professional services purchased from out-of-state vendors.

Online and Marketplace Purchases

Major marketplaces like Amazon now collect sales tax in most states. But smaller or niche sellers may not. If you’re buying specialized equipment, industry-specific supplies or products from smaller online retailers, there’s a good chance sales tax isn’t being collected.

Every one of those purchases creates a potential use tax obligation.

Items Withdrawn from Inventory for Business Use

This one catches a lot of businesses off guard. If you’re a retailer and you take inventory off the shelf for internal use, you may owe use tax on those items.

Example: A hardware store uses its own supplies to renovate its break room. Those supplies were purchased for resale (and therefore weren’t taxed at the time of purchase). When they’re used internally instead of sold, use tax applies.

Purchases Made in States with Lower or No Sales Tax

Five states have no statewide sales tax: Oregon, New Hampshire, Montana, Delaware and Alaska (though Alaska allows local jurisdictions to impose sales tax).

If you buy goods in one of these states and bring them back to your home state for use, you owe use tax at your home state’s rate.

This applies to everything from equipment purchased at a trade show in Oregon to furniture bought during a business trip to New Hampshire.

Drop Shipments and Complex Supply Chains

Transactions with multiple parties create use tax gaps that are easy to miss. When the seller, shipper and buyer are all in different states, determining who should collect tax (and at what rate) gets complicated.

Add in the impact of tariffs and sales tax on imported goods, and the amount you are taxed on can shift depending on trade policy. These complexities make use tax exposure a real concern for businesses with distributed supply chains.

How Is Use Tax Calculated?

You calculate use tax at the same rate as the sales tax that would have applied had the purchase been made in-state.

That means you need to know your local combined rate. This isn’t just your state rate. It’s state plus county plus city plus any special district taxes. And those rates vary dramatically.

According to Vertex, there were 12,120 jurisdictions with distinct sales and use tax rates in 2024. This includes 7,024 cities, 1,966 counties, 3,084 districts and 46 states. You can’t simply look up “one rate” and call it a day.

Here’s a simple example:

A business in Dallas, Texas buys $10,000 of equipment from a vendor in Oregon (no sales tax collected). Dallas’s combined sales tax rate is 8.25%.

Use tax owed = $10,000 × 8.25% = $825

What if a vendor collected partial sales tax? Say you bought goods from a vendor in a state with a 4% sales tax, and they charged you that 4%. Your home state rate is 7%. You typically owe the difference.

Use tax owed = Purchase price × (7% – 4%) = Purchase price × 3%

Getting the rate wrong, even by a fraction of a percent, compounds across hundreds of transactions. A 0.5% error on $500,000 in annual purchases is $2,500 in underpaid tax. Over five years, that’s $12,500 before penalties and interest.

What Happens If You Don’t Pay Use Tax?

Use tax is one of the most common findings in state sales tax audits. Auditors specifically look for purchases where no tax was charged and no use tax was remitted. If you’re not tracking and paying use tax, you’re creating audit exposure.

Penalties and Interest

States don’t just want the back taxes. They want penalties and interest too. Penalty structures vary by state, but they typically include:

• A percentage-based penalty on the unpaid tax (often 10-25%)
• Interest that compounds from the original due date
• Additional fines for negligence or fraud in severe cases

Compounding Liability

The longer you go without paying, the larger the liability grows. What starts as a manageable obligation can turn into a significant financial liability over time.

Consider a business that’s been operating for 10 years without tracking use tax. If they’ve averaged $200,000 in untaxed purchases annually at an 8% rate, that’s $16,000 per year in use tax. Over 10 years, that’s $160,000 in principal alone, before penalties and interest.

Audit Exposure

If you’re uncertain about your use tax compliance, understanding how to prepare for a sales tax audit is essential. Auditors have access to sophisticated data analytics tools, and states are increasingly using artificial intelligence (AI) to identify compliance gaps.

Real-World Stakes

The consequences aren’t theoretical. By proactively addressing the issue, Coburn’s Supply Company reduced an initial assessed sales tax liability of over $1,000,000 to just over $100,000. They saved $850,000 through proper audit defense.

That’s the difference between a manageable expense and a major financial setback. And it illustrates why getting ahead of use tax obligations matters.

Beyond financial penalties, non-compliance can lead to:

• Revocation of business licenses and permits
• Liens against business assets
• Complications during mergers and acquisitions (M&A) due diligence
• Reputational damage with partners and investors

How to Stay Compliant with Use Tax

Proper systems simplify use tax compliance. Here’s how to build a process that protects your business.

Track All Untaxed Purchases

Implement a system to flag every purchase where sales tax was not charged. This includes:

• Out-of-state vendor invoices
• Online orders from sellers who didn’t collect tax
• Internal inventory transfers for business use
• Purchases made during travel in no-sales-tax states

Your accounting software can help. Program it to identify transactions where the tax field is zero or blank. Create a monthly review process to catch these before they pile up.

Know Your Nexus Footprint

Understanding where you have nexus is the starting point for all compliance. If you’re registered in a state, you’re expected to report and remit use tax there.

The six key data points for managing sales and use tax effectively are: nexus, registration, taxability, compliance, reporting and staffing. Use tax fits into this framework. You can’t manage what you haven’t mapped.

Use Technology Wisely

Sales tax software can help automate rate lookups and flag untaxed transactions. Good software will:

• Identify purchases where no tax was charged
• Calculate the correct use tax rate based on your location
• Generate reports for filing

But software alone can’t interpret nuanced multi-state rules or handle the judgment calls that use tax scenarios often require. Technology is one piece of the puzzle, not the whole solution.

File Accurately and On Time

Use tax is typically reported on the same return as sales tax. Missing deadlines or underreporting triggers penalties.

Set calendar reminders for filing deadlines in every state where you have obligations. Build use tax review into your month-end close process so you’re not scrambling at filing time.

Consider Professional Support

For businesses operating in multiple states, use tax compliance is one of the areas where outsourced compliance pays for itself.

Real accountants and consultants who understand the intricacies of sales tax laws can identify obligations you’ve missed, correct historical issues before auditors find them and build systems that keep you compliant going forward.

Use Tax and Your Growing Business

As businesses scale, use tax exposure grows proportionally. Every growth milestone creates new obligations:

• Entering new markets means new nexus footprints and new use tax rates to track
• Expanding your vendor base increases the likelihood of purchases where sales tax isn’t collected
• Acquiring companies can bring inherited use tax liabilities you didn’t know existed
• Building out supply chains creates transactions with multiple parties, creating use tax gaps

On a recent episode of the Sales Tax Made Simple Podcast, host Jason Parr and guest Paul Johnson discussed how quickly use tax obligations compound as businesses expand into new states:

“When it comes to return filing, you got to have a good system and process in place. You’ve really got to have everything in order because it can quickly get out of hand as you register in more states, you start filing different types of returns. We’re talking about sales tax, talking about use tax, talking about consumers use.”

Proactive use tax management goes beyond avoiding penalties. It’s about building a solid financial foundation that supports your business goals.

Acima achieved registration and compliance across 240+ state and local jurisdictions, saving hundreds of thousands of dollars in reduced liabilities and supporting a $1.65 billion acquisition by Rent-A-Center. Properly managing these obligations prevents compliance hurdles from derailing major business transactions.

The businesses that treat use tax as a growth enabler rather than a cost center are the ones that grow more efficiently. 

What to Do Next

You understand that use tax isn’t optional. It’s a legal obligation that applies to nearly every business making purchases across state lines. The question now is what you’re going to do about it.

Step 1: Audit your recent purchases. Pull your accounts payable records from the last 12 months. Identify every purchase where sales tax was not charged. That’s your starting point for understanding your use tax exposure. Look for out-of-state vendor invoices, online orders without tax collected, and any inventory you’ve used internally rather than sold.

Step 2: Determine your nexus footprint. If you’re unsure where you have obligations, a nexus study is the foundational first step. You can’t manage use tax in states where you don’t know you’re registered or should be registered. Understanding your nexus footprint tells you exactly where your use tax responsibilities live.

Step 3: Talk to an expert. Use tax is one of the most commonly missed compliance areas. It’s also one of the easiest to fix with the right support. Real accountants and consultants who understand the intricacies of sales tax laws can identify obligations you’ve missed, quantify your exposure and build systems that keep you compliant going forward.

The businesses that get this right don’t just avoid penalties. They build clean financial foundations that support growth, attract investors and sail through due diligence. The ones that ignore it? They discover six-figure liabilities during routine audits.

Thousands of businesses across 240+ jurisdictions have taken control of their use tax obligations. A solid approach starts with nexus, moves to taxability and builds a roadmap that fits your business.

True compliance is about building a foundation that lets you focus on running your business, rather than worrying about the taxes you might owe. Simplify your sales taxes. Schedule a free “What’s Next” consultation to understand your use tax obligations and build a plan that protects your business. No fees. No pressure. Just a real conversation with a real expert who can help you figure out exactly where you stand.

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Frequently Asked Questions About Sales Tax vs. Use Tax

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