Let’s use Arkansas as an example, where residents pay a sales tax on most items they buy. If an Arkansan buys a pair of jeans from an Arkansan shop, they will be charged a sales tax at the point of sale. This local use tax is then sent to the tax authorities. No other tax is charged. But, Arkansans would pay a use tax if they bought their jeans in Delaware (and wore them back to Arkansas), where no sales tax is charged.
As you can tell, use tax enforcement isn’t easy. Buyers need to report their purchases and pay use taxes. What’s more, use tax by state varies.
Five states have no sales tax or use tax. They are:
Unfortunately, state governments lose a lot of revenue without use taxes. Because the use tax is tricky territory, it is generally only applied to larger purchases of ‘tangible’ goods.
The use tax is imposed on goods that are used, distributed, or stored in an area where sales tax is normally imposed but are purchased where no sales tax is collected.
Consumers are responsible for calculating and remitting the use tax to the government. A resident who fails to pay use tax could be fined, with interest charged.
Unlike the sales tax, use taxes are imposed in specific contexts. Use taxes are not applied on all goods and services. Here are some scenarios where use tax is charged:
Use tax is calculated based on the percentage of goods and services bought by the seller. The merchant’s purchases could include consumables, materials and services. This rate is identical to the rate charged on sales tax.
The rate is charged on the total purchase amount. This is then deducted from the full purchase amount. The remaining amount is charged as an expense in the merchant’s account books, while the use tax is remitted to the government.
Notably, the rate of use and sales taxes differs from state to state.
Let’s delve into the different types of use taxes:
Business use tax is paid by a company on items that are purchased from another state. These items are used by the company and not sold to a customer. The company must therefore pay the sales tax rate of the state where the items are used, stored, or consumed. If the company is registered to collect sales tax, use tax is reported and paid with the sales tax return.
Consumer use tax is imposed by state and local governments on purchases that are subject to sales tax, but tax was not charged.
It is complementary to the sales tax and generally the same rate as the local sales tax. Consumers are responsible for calculating and remitting the use tax to the government.
We can’t conflate the use tax and the sales tax. Here we look at the use tax vs sales tax.
The government sales tax is added to the purchase price at the point of sale. The seller is responsible for remitting this to the government. All sales tax rates are not equal. Indeed some states charge a higher rate, while others charge none at all. Certain states have a blanket sales tax on all goods and services, while others only charge sales taxes on specific items.
The use tax is accounted for differently. It is usually self-assessed and remitted by the shopper. The onus is on the end-consumer to figure out how to pay what is due.
