Use Tax

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. Sales Tax

    A consumption tax imposed by the government on the sale of goods ...
  2. Retail Inventory Method

    An accounting procedure for estimating the value of a store's ...
  3. Core Retail Sales

    U.S. aggregate retail sales excluding automobile and gasoline ...
  4. Harmonized Sales Tax (HST)

    A Canadian tariff scheduled to be implemented on July 1, 201 ...
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated ...
  6. Carbon Dioxide Tax

    A tax on businesses and industries that produce carbon dioxide ...
Related Articles
  1. Taxes

    Possible Effects Of The Online Retail Tax

    The U.S. Senate has passed a bill that will impose a sales tax on online retailers. Discover how the Marketplace Fairness Act could affect your bottom line.
  2. Investing News

    Approved: Paying Online Sales Tax

    States will now be allowed to collect sales taxes on purchases made from Internet-based retailers even if the retailer has no physical presence in that state.
  3. Taxes

    Does Online Tax Software Really Save You Money?

    Both online tax software and tax professionals have their own set of advantages, but which one is actually better for your bottom line?
  4. Taxes

    5 Unusual Sales Taxes You Need To Avoid

    Here are five unusual taxes and ways that you can avoid them.
  5. Taxes

    Congress Ready To Act On Online Sales Tax

    Congress is set to pass a bill that will give states the power to tax online sellers. But will it benefit Americans or just hamper online-based small-businesses?
  6. Taxes

    Why You Should Care About An Internet Sales Tax

    Many retail industry observers expect an online state tax bill to pass in 2012; if it does, how could it affect you?
  7. Investing News

    Hillary Clinton's Liberal Orthodoxy

    Clinton's economic agenda laid out in July is divided into three broad groups: strong growth, fair growth and long-term growth. And her overarching goal is to "give working families a raise."
  8. Investing News

    Bernie Sanders: Socialist or Liberal?

    Sanders' pitch centers on economic inequality in the U.S., which is both more severe than it is in other developed countries and, if current trends continue, projected to worsen.
  9. Investing News

    Obama Floats $10 a Barrel Oil Tax

    President Obama intends to propose a $10 a barrel tax on oil; consumers might have to cough up 25 cents more per gallon.
  10. Markets

    The (Expected) Market Impact of the 2016 Election

    With primary season upon us, investor attention is beginning to turn to the upcoming U.S. presidential election.
RELATED FAQS
  1. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  2. How Long Should I Keep My Tax Records?

    The Internal Revenue Service (IRS) has some hard and fast rules regarding how long taxpayers should keep their tax records. As ... Read Full Answer >>
  3. Are personal loans tax deductible?

    Interest paid on personal loans is not tax deductible. If you take out a loan to buy a car for personal use or to cover other ... Read Full Answer >>
  4. Does a Flexible Spending Account (FSA) cover braces?

    Funds from a Flexible Spending Account (FSA) can be used to cover costs associated with installing, maintaining and removing ... Read Full Answer >>
  5. Does a Flexible Spending Account (FSA) cover glasses?

    The funds in a Flexible Spending Account (FSA) can be used to cover most common medical expenses; this includes the cost ... Read Full Answer >>
  6. Are tax brackets adjusted for inflation?

    Each year, the U.S. Internal Revenue Service (IRS) adjusts tax brackets for changes in the cost of living to calculate federal ... Read Full Answer >>
Hot Definitions
  1. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  3. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  5. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center