As a business owner or being a consumer, you may have heard the term Sales Tax. As we all know the majority of states have some type of sales tax. But many people may be unfamiliar or less familiar with the term Use Tax and how it is related and compared to sales tax.
Many people ask what is the difference between Sales Tax and Use Tax, who is responsible for paying the tax, and when the Sales Tax and Use Tax are applied. In this article, I will explain sales tax and use tax and will focus on the main differences between them. So read the full article to know the topic in detail.
What is Sales Tax?
Sales tax is a tax on the sale, transfer, or exchange of a taxable item or service and is generally applied on the sale to the end-user or ultimate user. It is usually added to the sales price and is charged to the buyer. It applies only to intrastate sales which means where the seller and the consumer are located in the same state.
Sales taxes are regarded as trust taxes where the seller collects the tax from the buyer and remits the collected tax to the appropriate taxing jurisdiction. There are different types of sales tax imposed by the states in which some states are Seller Privilege Tax States while others are the Consumer Tax States. This decides who is mainly liable for the payment of the tax.
In Seller Privilege Tax States, the seller is mainly liable for the tax and he must pay the tax whether or not the tax is collected from the buyer. This tax is usually imposed on the privilege of doing business in the state and since the tax is not required to be passed on to the buyer so it is not necessary to be separately stated on the invoice. Though, many sellers do show the tax on the invoice.
In the Consumer Tax States, the tax is imposed on the buyer and it is the responsibility of the seller to collect it. If it is not collected from the buyer then the seller is still required to remit the tax but it is usually easier to recover the tax from the buyer. This tax is usually imposed on the privilege of consuming the products and services which buyers purchase.
What is Use Tax?
Use tax is a tax on the storage, use, consumption of a taxable item or service on which no sales tax has been paid before. It is regarded as compensating tax to the sales tax but it doesn’t apply if the sales tax was charged. It applies to the purchases which are made outside the taxing jurisdiction but used within the state and also applies to items purchased exempt from tax which is subsequently used in a taxable manner.
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Use Taxes are of two types – Consumption Use Tax and Vendor or Retailer Use Tax. In Consumer Use Tax, the tax is applied on the buyer and is self-assessed by the buyer on taxable items purchased where the vendor did not collect either a sales or vendor use tax. This tax is directly remitted to the taxing jurisdiction by the purchaser. In Vendor or Retailer Use Tax, the tax applies to sales made by a vendor to a customer located outside of the state of the vendor or sales in interstate commerce if the vendor is registered in the state of delivery.
Main Differences between Sales Tax and Use Tax.
Tax authorities generally impose a sale and use tax on any goods sold. The following are some differences between sales and use tax –
- Sales Tax is imposed on any goods sold within the state or to state residents while the Use Tax is also imposed on goods but it only applies to out-of-state purchases where no sales tax was collected.
- Sale Tax is paid by customers in most states on certain transactions and the seller collects this tax and remits it to the proper government agency. On the other hand, Use Tax is applied to customers who don’t pay sales tax at the time of purchase.
- Another difference between Sales Tax and Use Tax is when it is applied. The Sales Tax is applied at the time of purchase of taxable goods and services while Use Tax is applied after a taxable purchase is made but the sales tax was not paid or was underpaid.
- The seller of the item is responsible for collecting and remitting Sales Tax while the purchaser of the goods and services is responsible for paying Use Tax.
- So overall Sales Tax is collected by the seller who is acting as an agent of the state and thus he collects the tax and remits it to the state on behalf of the end consumer on the other hand the Use Tax is self-assessed by the consumer and also remitted to the end consumer.
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The Final Words
Although Sales Tax and Use Tax have some similarities they also have key differences. Sale Tax is paid by customers in most states on certain transactions and the seller collects this tax and remits it to the proper government agency. On the other hand, Use Tax is applied to customers who don’t pay sales tax at the time of purchase. The customer pays use tax on a taxable purchase if the seller is out of state or doesn’t have collected sales tax. It is generally paid by customers in another state and customers are responsible for paying and remitting it to the state.
I hope this article was helpful and you have got the differences between Sales Tax and Use Tax.