What is the difference between sales tax and use tax?

Sales tax and use tax are two sides of the same obligation. Both exist to ensure the state gets its consumption tax revenue on taxable transactions. The difference is who pays and when.

Sales tax: seller collects at the point of sale

Sales tax is what you’re charged at checkout. The seller calculates it, adds it to the transaction, collects it from the buyer, and remits it to the state on a regular schedule.

When a seller has nexus in the buyer’s state, the seller is legally required to collect sales tax. The buyer’s obligation to pay is satisfied at checkout.

Use tax: buyer self-reports when sales tax wasn’t collected

Use tax is the backstop. When a buyer purchases something from a seller who didn’t collect sales tax (because the seller had no nexus in that state) the buyer technically owes “use tax” to their state at the same rate sales tax would have been.

The logic: the state wants to tax consumption by its residents regardless of where the purchase happened. If the seller didn’t collect it, the buyer is supposed to self-report and pay it directly.

In practice, individual consumers almost never voluntarily pay use tax. States know this but have limited enforcement mechanisms for small consumer purchases.

How this played out before 2018

Before the Wayfair ruling, online sellers only had to collect sales tax in states where they had physical presence. Most multi-state online retailers collected in just a few states. Every other state purchase was technically subject to use tax, owed by the customer, almost never paid.

This created a significant enforcement gap. States tried various approaches, requiring retailers to notify customers of their use tax obligations, auditing large consumer purchases, but collection rates stayed low.

How this changed after 2018

Economic nexus laws require out-of-state sellers to collect sales tax once they cross a state’s threshold. For larger sellers (over $100K in a state), the obligation now sits back with the seller: the consumer is charged sales tax at checkout rather than theoretically owing use tax they’ll never pay.

The use tax gap has narrowed significantly for consumer purchases, though it remains for purchases from small sellers below the threshold.

Use tax still matters for businesses

For business buyers, use tax audit exposure is real. If a company purchases equipment from an out-of-state vendor without paying sales tax, and that purchase shows up in an audit, the company may owe use tax plus interest and penalties.

Multi-location businesses that buy supplies across state lines, companies purchasing software or subscriptions, and businesses that import goods into a state for their own use all have potential use tax exposure.

As a seller, you may owe use tax too

Use tax isn’t just a buyer issue. If your business purchases equipment, supplies, or other taxable items for its own use from a seller who doesn’t charge sales tax, your business may owe use tax to your state. This is a separate obligation from the sales tax you collect on your own sales.