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Use Tax: Definition & Meaning

Updated: November 25, 2022

Use tax is a common tax that people will pay when they have purchased from remote sellers across state lines.

A tax on the sale, transfer, or exchange of a taxable good or service is known as a sales tax . Sales tax often applies to purchases made by end users or final consumers. The buyer is often responsible for paying the sales tax in addition to the purchase price.

Read on as we take a closer look at this form of tax.

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    KEY TAKEAWAYS

    • The use tax is a form of sales tax.
    • It is primarily used for purchases of taxable items or taxable services that weren’t taxed in the state it was purchased in.
    • It is a tax that occurs when an individual purchases from an online retailer.
    • Use tax can be reported on your state income tax return.
    • The rate of tax for a use tax is identical to your local sales tax rate.

    What Is the Use Tax?

    Use tax is a sales tax on purchases made for taxable items that will be consumed, stored, or used in the state of residency and on which no tax was collected in the state of purchase. Use tax is owed if the purchase would have been subject to taxation had it been made in the state where the buyer resides.

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    How to Report and Pay Use Tax

    The easiest way to report and pay the use tax that you owe is on your state income tax return. Remember that each state handles use tax differently, and they class types of purchases differently as well.

    Most states allow you to pay your use tax the following ways:

    • eForms
    • Online business services account
    • Web upload
    • ACH credit
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    Use Tax Rates

    The resident’s local sales tax rate, which incorporates both state and local sales taxes, and the use tax rate are identical. If a resident doesn’t pay use tax, interest and penalties may apply.

    Because of this, you’ll have to check with your local government in order to find out what the local use tax rate is. Be sure to ensure that you are paying the correct tax rate to avoid any overpayments or any fines coming from underpayments. 

    Use Tax Example

    Let’s say that a resident of Georgia wants to buy clothing from a Georgian retailer. The retailer will collect the sales tax from the buyer when it comes to the point of sale. It will then be remitted to the tax authorities. In this case, no further tax is due. 

    Now let’s say that the Georgian bought the clothes from an internet retailer that is based in California. This would mean that the retailer doesn’t collect the sales tax on the goods, but the buyer must still pay a use tax on what was purchased. 

    Summary

    Use tax can be tricky to understand when implemented across state lines. Each state has different rules relating to how it charges use tax. So if you are in doubt about whether or not you have to pay use tax, it is best to consult your state government website for any further information. This will help any individual taxpayer avoid a civil penalty.

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    FAQS on Use Tax

    What Is the Difference Between a Sales Tax and a Use Tax?

    The main difference between a sales tax and a use tax is that a sales tax is collected by the seller, whereas the use tax is self-assessed and paid by the end consumer.

    What Triggers Use Tax?

    Use tax is triggered when the sales tax isn’t collected in the state where a good or service is purchased in.

    Is Use Tax an Expense?

    No, use tax is a liability that the user must pay on their state income tax return.

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