Sales Tax Bite #2: What is Use Tax? And Why I Don’t Like The Name

Use tax is a frequent term in the indirect tax space. And it can have two different meanings. First, let's define the two main uses of the term "use tax" (and see how many times I will use the word "use" in a single sentence):

Consumer Use Tax is a tax imposed on the use, consumption, or storage of goods and services within a state where no sales tax was collected at the time of purchase. In other words, if you buy items from out-of-state vendors or through online platforms that do not charge you sales tax, you are generally required to pay use tax to your home state.

Retailer's Use Tax or Vendor's Use Tax is a complementary tax to sales tax used in several states (like Colorado, Alabama and Missouri - problem children states) for the tax out-of-state retailers should collect when making a sales in the state. This tax can be at the same rate as sales tax or at a slightly different rate. It will be reported differently on the sales tax return. 

So what's the big deal with use tax for a taxpayer? If you buy something you use (as a business or as an individual) and don't pay tax on the purchase - and you first use it in your state - you need to pay consumer use tax. As a business selling taxable products, you need to be aware of your registration requirements in the state for making sales into it. 

Use tax is confusing and has too many nuances and layers behind the term. But it's key for business!