Use tax is a state tax on taxable goods and services that are used, stored or consumed in a state when sales tax wasn't collected at the time of purchase. It complements sales tax, is usually charged at the same rate, and makes sure buying from a seller that didn't charge tax doesn't avoid the tax.
Every US state with a statewide sales tax also has a use tax. Businesses and individuals owe it, and for businesses unpaid use tax is a frequent sales tax audit finding. This article is educational information, not tax advice. Rules and rates vary by state, so confirm the details with the state's department of revenue.
How does use tax work?
The Texas Comptroller describes use tax as "complementary to sales tax," imposed on "the storage, use, or other consumption of tangible personal property or a taxable service in Texas." Other states use similar language. In practice:
- When the seller charges the correct sales tax, the buyer owes nothing more.
- When the seller doesn't charge tax, or charges less than the buyer's state requires, the buyer owes use tax on the difference.
- The rate is generally the same combined state and local rate that sales tax would have been. In Washington, for example, the rate is set by the location "where the consumer (purchaser) first uses the items."
Because sales tax and use tax share a rate, a buyer ends up paying the same total either way. Use tax only changes who reports it. You can look up the combined rate for an address with the calculator.
Consumer use tax vs. seller's use tax
"Use tax" describes two different obligations, and it helps to keep them apart.
| Consumer use tax | Seller's use tax | |
|---|---|---|
| Who pays the state | The buyer | The seller, which collects it from the buyer |
| When it applies | The seller didn't collect tax on a taxable purchase | A seller registered in a state collects use tax instead of sales tax, often on remote or out-of-state sales |
| Where it's reported | The buyer's sales and use tax return, a separate consumer use tax return, or in some states the income tax return | The seller's sales and use tax return |
| Example | A business buys equipment from an out-of-state vendor that charges no tax | A remote seller over Texas's $500,000 threshold collects Texas state and local use tax from its customers |
Consumer use tax is what most people mean by use tax: a buyer self-assessing tax that the seller didn't collect.
Seller's use tax is a label some states give the tax a remote seller collects. The Texas Comptroller, for example, tells remote sellers that pass the $500,000 safe harbour to "begin collecting and remitting state and local use tax on sales to customers in Texas." For the customer, it looks the same as sales tax on an invoice, and once it's collected the customer owes nothing more.
Use tax examples
Use tax most often comes from four situations.
1. Buying from a vendor that doesn't collect tax
A company buys software, equipment or supplies from an out-of-state vendor that isn't registered in the company's state, perhaps because the vendor is below the state's economic nexus threshold. No tax appears on the invoice, so the company owes use tax on the purchase.
2. Using inventory bought for resale
A retailer buys products tax-free with a resale certificate, then pulls some of them for its own use, such as display fixtures, giveaways or office supplies. The Washington Department of Revenue says a business that uses a reseller permit for purchases and then consumes those items itself "must pay use tax on those purchases."
3. Buying in a state with a lower rate or no sales tax
A business buys equipment in a state with no sales tax, or a lower rate, and brings it back for use in its home state. It owes use tax to its home state. States generally give credit for sales tax paid to another state, so the buyer owes only the difference. Texas, for example, "allows a credit for sales or use tax paid to other states."
4. Buying from abroad
Items bought from sellers in other countries can be subject to use tax when they're used in the state. The Texas Comptroller notes that use tax applies to taxable items bought outside the state, including in other countries, when the seller didn't charge Texas tax.
How states collect use tax
Each state sets its own reporting rules. Two examples from official sources:
| State | Businesses with a sales tax permit | Buyers without a permit |
|---|---|---|
| Texas | Report use tax on the regular Texas Sales and Use Tax Return | File Form 01-156, Texas Use Tax Return: once a year by January 20 when the total owed is under $1,000, or by the 20th of the following month once it reaches $1,000 |
| Washington | Report use tax for business purchases on the excise tax return | File a Consumer Use Tax Return online through My DOR or on paper |
Some states let individuals report use tax on their state income tax return instead of a separate form. Check the rules in your state's sales tax guide or with its department of revenue.
Why use tax matters for businesses
Use tax is easy to miss because nothing on an untaxed invoice flags it. That makes it a frequent audit finding. Auditors routinely sample fixed-asset and expense purchases, and unpaid use tax can come with penalties and interest going back several years. See sales tax audit triggers for what auditors look at.
Businesses reduce that risk by:
- Reviewing purchase invoices for missing or under-charged tax.
- Tracking items taken out of resale inventory for internal use.
- Accruing use tax each period rather than reconstructing it at year-end.
- Keeping records of tax paid to other states so they can claim credit.
Software is a growing source of use tax. More states tax SaaS and digital products, and not every vendor collects correctly. See sales tax on SaaS for the state-by-state picture.
Use tax vs. sales tax
Sales tax and use tax are two sides of the same tax. The seller collects sales tax at the time of sale; the buyer owes use tax when the seller didn't. The rate is usually the same, and a buyer who paid the correct sales tax doesn't also owe use tax. See the sales tax vs. use tax glossary entry for a short definition.
Outside the US, VAT countries handle the same problem differently, through the reverse charge. See What is VAT? for how that works.
Let Kintsugi handle your use tax
Kintsugi calculates, monitors and files use tax alongside your sales tax, and credits any tax your vendor already charged so you pay only the difference. See how use tax works in Kintsugi. Start free to see where you may owe, or book a demo to walk through use tax with our team.
Frequently asked questions
Who has to pay use tax?
The buyer owes use tax when it uses, stores or consumes a taxable item in a state and the seller didn't collect that state's sales tax. That applies to businesses and individuals, although businesses are far more likely to be audited for it.
Is use tax the same rate as sales tax?
Usually, yes. Use tax is generally charged at the same combined state and local rate that sales tax would have been at the place where the item is first used. A few states set local use tax rules that differ slightly.
Do I owe use tax if I paid sales tax in another state?
Usually only the difference. Most states give credit for sales tax legally paid to another state. If the other state's rate was lower, you owe use tax on the difference; if it was the same or higher, you typically owe nothing more.
What is seller's use tax?
Seller's use tax is use tax that a registered seller collects from its customers and remits to the state, often on remote sales. Texas, for example, requires remote sellers above its $500,000 safe harbour to collect state and local use tax.
How do businesses report use tax?
Businesses with a sales tax permit usually report use tax on their regular sales and use tax return. Businesses without one may file a separate consumer use tax return, as in Texas and Washington.
What happens if you don't pay use tax?
Unpaid use tax can be assessed in an audit, along with penalties and interest. Many states offer voluntary disclosure agreements that reduce penalties for businesses that come forward before being contacted.
