Introduction
Sales tax and use tax are often confused, but they have different meanings that every business owner and online seller should understand. Sales tax is usually applied at the point of sale, but use tax can be more confusing. This article explains consumer use tax, vendor use tax, and how these taxes impact businesses and consumers, especially in the context of online purchases.
Sales Tax vs. Vendor Use Tax vs. Consumer Use Tax
Understanding the differences between these taxes is essential for compliance and accuracy.
What is Sales Tax?
Sales tax is a tax collected by retailers on goods or services sold locally. Retailers act as agents for the state, collecting this tax from customers and remitting it to the tax authority. This system is straightforward for in-state transactions.
What is Vendor Use Tax?
Vendor use tax applies when buyers purchase from an out-of-state seller who ships goods to the buyer’s state. Though similar to sales tax, it applies to transactions where the retailer does not operate locally but still sells taxable goods or services.
What is Consumer Use Tax?
Consumer use tax is paid by the buyer when a retailer does not charge sales or vendor use tax during the purchase. This often happens with online or catalog purchases from vendors without a physical presence in the buyer’s state.
When is Consumer Use Tax Due?
Consumer use tax is due in two main scenarios:
- For Businesses: When businesses buy items from vendors that didn’t charge tax, they report and pay this tax along with their sales or vendor use tax returns.
- For Individuals: Consumers generally pay use tax on untaxed purchases when filing their state income tax returns, usually by April 15.
What Purchases are Subject to Consumer Use Tax?
If an item is taxable under sales tax laws when purchased locally, it is also subject to consumer use tax when bought online or through a catalog. Examples include:
- Clothing, electronics, and furniture
- Shipping charges (some states tax transportation costs)
Compliance Challenges with Consumer Use Tax
Compliance varies between individuals and businesses:
- Low Compliance Among Consumers: Many people don’t pay consumer use tax, even though it is a legal requirement. States rarely enforce this for individual taxpayers, leading to widespread noncompliance.
- Higher Compliance Among Businesses: Businesses undergo regular audits and often have tax advisory services, improving their compliance. However, even businesses can make mistakes and face audits for unpaid use tax.
Why Understanding Use Tax Matters for Online Sellers
Online sellers must understand use tax, especially with increasing regulations that require remote sellers to collect taxes in states where they do not have a physical presence. Because consumers don’t always comply, states are pushing for stricter rules for online sellers to ensure proper tax collection at the point of sale.
How Can Consumers and Sellers Manage Use Tax?
While TaxJar focuses on sales tax compliance, it doesn’t offer direct support for consumer use tax. Consumers and businesses should seek professional tax advice to stay compliant. A tax expert can help identify taxable purchases, calculate owed use tax, and assist with reporting.
Conclusion
Sales tax, vendor use tax, and consumer use tax are all important in state revenue systems. For both businesses and consumers, understanding these taxes is key to compliance and avoiding penalties. While sales tax is commonly understood, consumer use tax is often underreported, especially by individual taxpayers. Whether you’re an online seller or a buyer, being informed about your tax obligations will help you navigate the evolving world of e-commerce taxation. For sales tax support, TaxJar is a great tool, but for use tax concerns, consulting a tax expert is the best route.
