"Sales Tax vs. Use Tax: What Use Tax Is and When a Business Owes It"

10/10/2026

Sales tax gets the attention because it is visible: it appears on the receipt, the seller collects it, and the seller files the return. Use tax is its quieter twin, and it is the one that produces surprise assessments for businesses that never sell a taxable product at all. A professional services firm that buys a server from an out-of-state vendor that did not charge tax, a contractor that pulls materials from its own inventory for a job, a manufacturer that buys equipment online: each may owe use tax, and each usually learns about it from an auditor.

This post explains what use tax is, how it fits with sales tax, which purchases trigger it, how a business reports it, and why it is consistently one of the largest findings in a sales and use tax audit. Rates, exemptions and filing rules are set by each state (and in many states by local jurisdictions too), so the post describes how the system works rather than any state's numbers. Check the specific state's revenue department for those.

One exclusion up front: this post is about the general sales and use tax that states levy on goods and certain services. The federal heavy highway vehicle use tax and state motor vehicle taxes are different taxes with their own rules.

Sales Tax and Use Tax Are Two Halves of One System

Sales tax is imposed on the retail sale of taxable goods and services within a state. The seller collects it from the buyer at the time of sale and remits it to the state.

Use tax is imposed on the storage, use or consumption of taxable goods and services in the state when sales tax was not paid on the purchase. It is the backstop that stops buyers avoiding sales tax by purchasing from sellers that do not collect it, typically out-of-state sellers.

The two are designed to be complementary. In a state that levies both, a taxable item should bear one or the other, not both and not neither. If the seller charged the state's sales tax, the buyer owes no use tax. If the seller did not, the buyer generally owes use tax at the same rate that would have applied.

That is why the phrase is almost always "sales and use tax": they share a rate structure, the same taxability rules, the same exemptions and usually the same return. Many states describe them in a single statute.

Seller's use tax vs. consumer use tax

The term "use tax" is used in two ways, and confusing them causes errors.

• Seller's use tax (sometimes called retailer's use tax) is use tax that an out-of-state seller collects from the buyer and remits to the buyer's state. Before economic nexus rules, this was how remote sellers registered to collect; some states still label remote-seller collection as use tax rather than sales tax. For the buyer, the effect is the same as sales tax: tax was charged, so nothing more is due.
• Consumer use tax is use tax the buyer self-assesses and pays directly to the state because the seller did not collect any. This is the obligation that catches businesses.

The rest of this post is mostly about consumer use tax.

When a Business Owes Use Tax

A business generally owes use tax when all of these are true:

1. It acquired tangible personal property or a taxable service;
2. The item is stored, used or consumed in a state that taxes it;
3. The item is taxable in that state, and no exemption applies; and
4. The seller did not charge that state's sales or use tax (or charged less than the applicable rate).

Common situations

Purchases from out-of-state vendors that did not charge tax. Since South Dakota v. Wayfair (2018), every state with a statewide sales tax has adopted economic nexus rules, and marketplace facilitator laws mean large platforms now collect on third-party sales. Far more remote sellers charge tax than before 2018. But a seller below a state's threshold has no duty to collect, small specialty vendors often do not, and a seller may wrongly treat a sale as exempt. Wherever the seller did not collect, the buyer's use tax obligation remains.

Items bought tax-free for resale and then used. A business that buys inventory with a resale certificate and then takes some of it for its own use (a hardware store using shelving stock in the shop, a computer reseller giving a laptop to an employee, a contractor using inventory on a job where it is the consumer) owes use tax on the items withdrawn.

Items bought under an exemption that did not apply. If a business gave an exemption certificate for, say, manufacturing equipment, and the item is actually used in an administrative office, the exemption fails and use tax is due.

Property brought into the state. Equipment purchased and first used in one state and then moved to another may trigger use tax in the second state. States generally allow a credit for sales tax legitimately paid to another state, typically limited to the amount of their own tax, so the second state's use tax may be only the difference, or nothing.

Rate differences. If a seller charged a lower rate than the rate where the item is used (for instance, a lower local rate), the buyer may owe the difference.

Taxable services and digital products. In states that tax certain services, software or digital goods, purchases from vendors that did not charge tax create the same exposure. This is where taxability varies most between states.

Purchases commonly subject to use tax

For a typical business, the categories auditors focus on are:

• Computer hardware, peripherals and furniture
• Software (particularly prewritten software, depending on the state and delivery method)
• Office supplies and promotional items
• Machinery and equipment, including parts and repairs
• Building materials consumed by contractors
• Samples, giveaways and items removed from inventory
• Leased equipment, where the lessor did not charge tax
• Subscriptions and digital products in states that tax them

How a Business Reports and Pays Use Tax

Registered sellers

A business already registered to collect sales tax in a state usually reports its consumer use tax on the same sales and use tax return, on a separate line for purchases subject to use tax. It is paid with the return.

Businesses that are not registered sellers

A business that does not make taxable sales in a state (many service firms, for example) may still need to register for a consumer use tax account, or report use tax on another return, depending on the state. Some states allow small or occasional amounts to be reported annually; others expect regular filing once purchases pass a level. Check the state's rules, which are usually published as guidance on business use tax.

Individuals

Many states include a use tax line on the individual income tax return for personal purchases on which no tax was paid. This is outside the scope of most business engagements, but it is a common client question.

Building it into accounts payable

The practical answer for any business with regular purchases is a use tax accrual process in accounts payable:

5. At invoice entry, AP checks whether tax was charged and whether it was the correct state and rate for where the item will be used.
6. Where tax was not charged and the item is taxable, the system or the clerk accrues use tax: a debit to the expense or asset account (use tax is part of the cost) and a credit to a use tax payable account.
7. The use tax payable account is reconciled to the amount reported on the return each period.
8. Exemptions claimed by the business are documented, so the AP clerk knows which purchases are legitimately exempt.

Without this, use tax is only found when someone remembers to look, which usually means at audit.

How Auditors Find Unpaid Use Tax

Use tax is often the largest single category of assessment in a sales and use tax audit of a business that does not sell much taxable product. Auditors know exactly where to look.

Fixed asset additions. The asset register lists significant purchases with dates and vendors. Auditors test whether tax was paid on each one. Large equipment purchases from out-of-state vendors are prime targets.

Expense account sampling. Auditors commonly select accounts such as supplies, software, repairs and maintenance, computer equipment, and advertising and promotion, and test invoices for tax paid. Many states permit sampling methods that project an error rate from a test period across the whole audit period, so a few untaxed invoices can turn into a large assessment.

Vendor master file. Out-of-state vendors in the vendor list are a starting point for review.

Inventory withdrawals. Auditors compare inventory purchased under resale certificates with what was sold, looking for items consumed internally.

Exemption certificates given by the business. If the business claimed exemptions when buying, the auditor tests whether the use matched the exemption.

Information sharing. States exchange information with each other and receive data from various sources, and some states have required reporting from non-collecting remote sellers in the past.

Because the assessment period for a business that never filed may not be limited the way it is for a filer, unpaid use tax can reach back further than clients expect. The state's rules govern how far.

Use Tax and the Seller's Side: Why the Same Mistakes Happen

For businesses that also sell, use tax problems often mirror sales tax problems. A business with weak processes for checking taxability on what it sells usually has weak processes for checking it on what it buys. The same knowledge solves both: knowing which products and services are taxable in each state, which exemptions apply, and how to document them.

That knowledge also connects to nexus. A business only has to collect sales tax in states where it has nexus, but it can owe use tax in any state where it uses taxable property, regardless of nexus, because use tax follows the location of use. Our post on sales and use tax nexus rules covers the collection side.

A Use Tax Review Checklist for Accountants

When you take on a business client, or before a sales tax audit, run through these:

• [ ] Does the client have a process to accrue use tax on untaxed purchases?
• [ ] Is there a use tax payable account, and does it reconcile to returns?
• [ ] Have fixed asset additions for the last few years been tested for tax paid?
• [ ] Have high-risk expense accounts (supplies, software, repairs, computer equipment) been sampled?
• [ ] Are inventory withdrawals for internal use tracked and taxed?
• [ ] Are exemption certificates the client has given on purchases supported by actual use?
• [ ] Is the client registered for consumer use tax where required?
• [ ] For equipment moved between states, is credit for tax paid elsewhere documented?
• [ ] Are digital products and services reviewed for taxability in each state of use?

If the review turns up material past exposure, the next decision is how to correct it. Many states offer voluntary disclosure programs that can limit the lookback period and waive penalties for taxpayers who come forward before being contacted. Get advice before simply filing past-due returns, since eligibility can depend on the state not having contacted the business first.

Automation and Its Limits

Tax engines and AP automation can flag untaxed invoices and calculate accruals, which makes the process scale. They do not decide taxability on their own; someone still has to configure product codes, exemptions and locations correctly, and review exceptions. Our post on AI for sales and use tax compliance covers where automation helps and where it still needs human review.

Learn the Determination Side

Most use tax errors come down to one question asked wrongly: is this purchase taxable where it will be used? The Relieving Sales and Use Tax Determination Headaches webinar is focused on exactly that problem of making sales and use tax determinations. For broader coverage, see our sales and use tax training catalog and the sales and use tax FAQs.

Frequently Asked Questions

What is the difference between sales tax and use tax?

Sales tax is imposed on retail sales in a state and is collected by the seller. Use tax is imposed on the storage, use or consumption of taxable items in a state when sales tax was not paid on the purchase, and it is generally paid by the buyer directly to the state. The two are complementary: in a state that has both, a taxable purchase should bear one or the other at the applicable rate, not both and not neither.

When does a business have to pay use tax?

When it uses, stores or consumes taxable goods or services in a state and the seller did not charge that state's sales or use tax. Typical cases are purchases from out-of-state vendors that did not collect tax, inventory bought tax-free for resale and then used internally, purchases under exemptions that turn out not to apply, equipment moved into a state from elsewhere, and taxable software or services bought without tax being charged.

What is consumer use tax?

Consumer use tax is use tax that the purchaser self-assesses and remits because the seller did not collect tax. Businesses usually report it on their sales and use tax return or on a separate consumer use tax return, depending on the state. It differs from seller's use tax, which an out-of-state seller collects from the buyer and remits to the buyer's state. If seller's use tax was charged, the buyer owes nothing further.

Do I owe use tax if the seller charged tax from another state?

Usually only the difference, if any. States generally allow a credit for sales or use tax legitimately paid to another state on the same item, typically limited to the amount of their own tax. If the other state's tax was equal to or higher than the tax where the item is used, nothing more is usually due. Keep the invoice showing the tax paid, because the credit has to be supported on audit.

Is use tax rate the same as the sales tax rate?

In most states, yes: use tax is designed to equal the sales tax that would have applied had the purchase been made in the state, including applicable local rates. Rules for which local rate applies (the location where the item is first used, for example) differ by state. If a seller charged a lower rate than the one that applies where the item is used, the buyer may owe the difference as use tax.

How do auditors find unpaid use tax?

They test fixed asset additions for tax paid, sample invoices in expense accounts such as supplies, software, repairs and computer equipment, review out-of-state vendors in the vendor master file, compare resale purchases with sales to find inventory consumed internally, and check whether exemptions the business claimed match how items were used. Where a state allows sampling, errors in a test period can be projected across the whole audit period, which is why small gaps produce large assessments.