DEFINITION of 'Use Tax'

A sales tax on purchases made outside one's state of residence on taxable items that will be used, stored or consumed in one's state of residence and on which no tax was collected in the state of purchase. If the purchase would have been taxed had it been made in the purchaser’s state of residence, then use tax is due. The use tax rate is the same as the resident's local sales tax rate, which includes both state and local sales taxes. A resident who does not pay use tax may be subject to interest and penalties.

BREAKING DOWN 'Use Tax'

For example, California residents are required to pay sales tax on purchases of merchandise such as furniture, gifts, toys, clothing, vehicles, mobile homes and aircraft. If a Californian purchases clothing from a California retailer, the retailer will collect sales tax from the purchaser at the time of purchase and remit it to the tax authorities. No additional tax will be due.  

If a Californian purchases clothing from an online retailer in Oregon that does not collect sales tax from the purchaser, by law the purchaser must pay a use tax on that clothing purchase to a California tax authority called the Board of Equalization. On the other hand, if the Californian purchased groceries in Oregon and did not pay any sales tax on the purchase, generally no use tax would be due because the state of California does not tax many groceries.

Retailers are usually not required to collect sales tax on purchases made by consumers in states where the retailer does not have a physical presence (called "nexus") such as a sales office, warehouse or sales representative, so the burden falls on the consumer to calculate and remit the tax to his or her state government.

A use tax is supposed to protect in-state retailers against unfair competition from out-of-state sellers that aren't required to collect tax. It is also supposed to ensure that all of a state's residents help fund state and local programs and services, regardless of where they shop. Similar laws apply in most states, not just California. 

RELATED TERMS
  1. Tax Rate

    The percentage at which an individual or corporation is taxed. ...
  2. Sales Tax

    A consumption tax imposed by the government on the sale of goods ...
  3. Tax Base

    The assessed value of a set of assets, investments or income ...
  4. Taxes

    An involuntary fee levied on corporations or individuals that ...
  5. Assessment

    Occurs when an asset's value must be determined for the purpose ...
  6. Consumption Tax

    A tax on the purchase of a good or service. Consumption taxes ...
Related Articles
  1. Taxes

    Use Tax Vs. Internet Sales Tax: How Are They Different?

    Learn about the differences between a use tax and an Internet sales tax. Find out about transactions in which the taxes apply, and to whom they apply.
  2. Taxes

    10 States With High Sales Taxes

    Most states have sales taxes of some kind for goods and services. Here's a rundown of the states that have the highest sales taxes.
  3. Taxes

    Internet Sales Tax Vs. Brick & Mortar Sales Tax

    Learn about the differences between sales taxes and Internet sales taxes, and the goods and services that typically incur each type of tax.
  4. Taxes

    States That Pay The Most Taxes

    These five states may pay through the nose in taxes - but the benefits may just be worth it.
  5. Taxes

    Where Can You Buy Tax Free on Amazon?

    Time was, you could shop online without paying sales tax. That's less and less the case.
  6. Insights

    How Does Amazon Charge Taxes on Its Products? (AMZN)

    Most of the tax burdens are shouldered by retailers and individual sellers, creating hidden costs for consumers.
  7. Taxes

    5 State Tax Issues For When You Leave the Military

    When you're budgeting for post-military life, certain state tax issues need to be considered.
  8. Taxes

    Understanding Taxes

    Taxes are mandatory fees that individuals and corporations must pay to their governments.
  9. Taxes

    9 States Where You'll Pay the Most in Taxes

    Which state you live in can mean thousands of dollars saved or lost in taxes each year. Here's a list of states to avoid when it comes to tax rates.
  10. Taxes

    How an Internet Sales Tax Will Affect Your Small Business

    Learn about how the Marketplace Fairness Act may impact small business owners should it pass in the House and what the act requires from business owners.
RELATED FAQS
  1. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
  2. What are the best and worst states to pay taxes in?

    Explore and compare the wide variations that exist in the overall tax burden imposed by different states, including which ... Read Answer >>
  3. Does location matter for taxes when calculating gross sales?

    Learn more about gross sales taxes and how merchants are impacted by them. Find out if different business locations are impacted ... Read Answer >>
  4. What is the difference between a regressive tax versus a progressive tax?

    Determine how progressive and regressive taxes impact your personal finances, and learn more about how you pay both types ... Read Answer >>
Hot Definitions
  1. Benchmark

    A standard against which the performance of a security, mutual fund or investment manager can be measured.
  2. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  3. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  4. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  5. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  6. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
Trading Center