Sales Tax Vs. Use Tax

What Are Sales Taxes?

Most state and local governments in the United States collect sales tax on consumer purchases. Most commonly, local retailers charge customers at the time of sale. In turn, the retailer will remit the funds to the government when it files taxes.

The state, county, or city will use the funds for various activities. Thus, state and local sales tax may make purchases more expensive, yet the money generally funds critical infrastructure and services, such as roads and fire departments. 

Even though most states and municipalities impose sales taxes, they can administer them differently. Variations could include what purchases and which customers are taxed (and which are exempt) or tax-filing dates. Both consumers and businesses should understand sales and use tax rules to pay their fair share, remit payments on time, and avoid audits and penalties.

Sales Tax Vs. Use Tax

Typical sales taxes work similarly throughout the country, except each state and locality will set its rate. For instance, a state might charge 6% of the price for non-exempt purchases, and the city may add an additional 2%, adding 8% total to the bill.

Buyers generally will see a line item for sales tax on their invoice or receipt. The purchaser usually pays the tax along with the rest of the bill. Still, the government expects the retailer to file taxes and send the money.

Since consumers have a similar experience in most places, they might need to learn that various states run their programs differently. For instance:

• Seller Privilege: According to the Sales Tax Institute, most states fall into the category of Seller Privilege. This term means that businesses can choose to collect sales tax from customers or not, but the state still requires the merchants to pay the bill. If an audit determines that a business did not collect and send enough money, the state can only pursue the retailer for funds, not the consumer.
• Consumer Tax: A few Consumer Tax states divide the responsibility between businesses and consumers for paying sales taxes. Typically, retailers add a line item to bills, charge purchasers and file taxes. However, the government can legally pursue either the business or the consumer for the correct sales tax amount.

How Does a Use Tax Compare to a Sales Tax?

Merchants may not need to charge sales tax when selling to customers outside the company's home state or country. For instance, retail websites may only need to charge sales tax in any state where the business has established a presence.

Nexus refers to the connection between the locality and the business determining whether it must charge tax. Even if the company doesn't own any property in a state, states may require payment if the merchant exceeds a threshold for revenue or the number of transactions.

If the buyer did not need to pay a sales tax, his or her home jurisdiction might impose a use tax on anything consumed, used or distributed locally. This tax will equal the state and local sales taxes the purchaser would have paid if the transaction was made locally. The state puts the burden of reporting and payment entirely on the buyer.

Consumers should look for forms and deadlines on their home state's comptroller's website. For instance, the Texas comptroller's website explains that the state requires payment of use tax of less than $1,000 by January 20th of the following year. However, it requires payment for sums of $1,000 or more by the 20th of the following month after the total owed meets the threshold.

Why Do States Impose a Use Tax?

As online shopping grew, local retailers complained about competition from out-of-state and international merchants. If these merchants could avoid charging sales taxes, customers could buy for less outside of their home state. Governments also noticed declining revenues as people started using e-commerce more often. These states and municipalities wanted to collect their share of commerce linked to their jurisdiction.

Thus, proponents of use taxes believe they offer a way to improve revenues and level the playing field. At the same time, the burden falls on consumers to report them. Thus, they're often not enforced well, particularly on smaller purchases. Still, officials may discover unreported transactions and send a bill for the amount due and a penalty for paying too late.

In the future, states may find ways to strengthen enforcement. Also, sales and use tax rules may change at any time. This can impose a reporting and collection burden on retailers that do business in various cities, counties, states, and countries. Many companies need to rely on sales and use tax software to ensure they comply with the rules and avoid penalties.

In conclusion, sales and use taxes are essential components of state and local government revenue in the United States, funding critical infrastructure and services. Despite their similar outward appearance, the administration of these taxes can vary significantly across jurisdictions.

Consumers and businesses must navigate these differences to ensure compliance and avoid penalties. Sales taxes are typically collected by retailers at the point of sale, while use taxes are the responsibility of the consumer, particularly for out-of-state purchases.

The concept of nexus determines whether a business must charge sales tax based on its connection to the state.

As online shopping has surged, the importance of use taxes has increased to address revenue losses and ensure fair competition between local and out-of-state businesses.

However, the enforcement of use taxes remains challenging, especially for smaller transactions.

Future changes in tax rules and enforcement strategies are likely, to potentially increase the compliance burden on businesses operating across multiple jurisdictions. Therefore, many companies are turning to specialized software to manage sales and use tax obligations effectively.

Understanding these tax systems is crucial for both consumers and businesses to fulfill their tax responsibilities accurately and timely.

Sources

https://www.salestaxinstitute.com/sales_tax_faqs/the_difference_between_sales_tax_and_use_tax

https://www.investopedia.com/terms/u/use-tax.asp https://www.patriotsoftware.com/blog/accounting/sales-tax-vs-use-tax

https://www.salestaxinstitute.com/sales_tax_faqs/the_difference_between_sales_tax_and_use_tax