By: Peter Bunio, Tax Research and Support Lead
Sales tax is a transaction tax, calculated as a percentage of the sales price of taxable goods and certain taxable services. Sales tax is usually imposed on the purchaser (consumer). However, some sales taxes are imposed on the seller, sometimes called a “transaction privilege tax”. However, in either case, the tax is typically collected by the seller from the purchaser and remitted to the state by the seller. The tax is usually imposed on sales of tangible personal property and selected enumerated services. If a consumer of a state makes a taxable purchase within his/her own state, the full sales tax is paid at the time of the transaction.
The definition of a taxable sale varies by state, but generally includes:
- Transfer of title or possession of taxable tangible personal property for consideration.
- Exchange, barter, lease, or rental of taxable tangible personal property.
- Performance of a taxable enumerated service for consideration.
Sellers use tax is the same as a sales tax. It is a transaction tax, calculated as a percentage of the sales price of goods and certain services. However, the key difference is that the sellers use tax is imposed on vendors located outside of the state, but are registered to collect tax in the state. Some times this tax is called a retailers use tax or a vendors use tax. Also, a sellers use tax sometimes is not filed on a sales tax return. It is filed on a separate returns called a sellers use tax return, vendors use tax return, or retailers use tax return. The sellers use tax rate is the same as the sales tax rate, which may include local sellers use tax.
Consumers use tax (sometimes referred to as a compensating use tax) is complimentary to the sales tax. It is a type of “excise tax” imposed by state and local governments, calculated as a percentage of the sales price of goods and certain services; but paid as a use tax. Typically consumer use tax is imposed on transactions that are subject to sales tax, but tax was not charged. Usually, this occurs when items are purchased on out-of-state, ordered through the mail, over the Internet, or by phone from another state. It is imposed on the use, storage, or consumption of tangible personal property in the state. The use tax often applies when a company makes a purchase from an out-of-state seller that is not required to collect sales tax in the purchaser’s state.
Retailers are usually not required to collect sales tax on taxable purchases from consumers in states if the retailer does not have some connection with the state (known as "nexus"). This connection is created by retailers if they have a physical presence, make regular deliveries with their own vehicles into the state, or have sales representatives located in the state. The use tax burden falls on the consumer to calculate and remit the tax to his or her state government. Therefore, if the seller does not collect the tax from the purchaser, and the transaction is taxable, the purchaser is responsible for remitting the use tax to the state.
Consumer use taxes are imposed by state and local governments for two reasons. A consumer use tax is imposed to prevent someone from evading a sales tax by buying goods or taxable services from a non-taxing state and shipping them into the state that imposes the sales tax. The use tax protects retailers located in the state or municipality because it removes the incentive for consumers to shop outside that locality in order to avoid paying the sales tax. The use tax rate is the same as the sales tax rate, which includes state and may include local sales taxes. A taxpayer who does not pay use tax may be subject to interest and penalties.
Transactions that may be subject to consumers use tax include:
- Purchases from mail order companies not required or registered to collect sales tax from the state of delivery.
- Deliveries from out-of-state companies that are not required or registered to collect sales tax from the state of delivery.
- Buyer gives an in-state merchant a blanket resale or exemption certificate and transaction is taxable.
- Purchases from an out-of-state or in-state company that is required to collect sales tax but does not.
- Benefit received from an out-of-state performance of a service.
A person buys a vehicle from a dealer in a neighboring state and the dealer does not charge sales tax on the vehicle. The buyer must pay use tax on the purchase price of the vehicle when he/she returns to his/her state and/or city.
ABC Manufacturing Co. purchases calculators for use by the accounting department. The calculators are purchased from XYZ Wholesale Co., vendor that is located out-of-state, which sells via the internet. After the order for the calculators is placed and invoiced, XYZ Wholesale Co. delivers them via common carrier. XYZ Wholesale Co. does not include any sales tax on the invoice. The calculators would have been charged sales tax if they had been purchased from an in state vendor. Therefore, ABC Manufacturing Co. must self-assess and remit the consumers use tax that is due on the purchase to state Department of Revenue.