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.