Use Tax

AAA

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.

INVESTOPEDIA EXPLAINS '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. Retail Inventory Method

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

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

    A Canadian tariff scheduled to be implemented on July 1, 201 ...
  4. Sales Tax

    A tax imposed by the government at the point of sale on retail ...
  5. Retail Sales

    An aggregated measure of the sales of retail goods over a stated ...
  6. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
RELATED FAQS
  1. Can I get a tax credit from conducting research and development?

    It is possible for a company to qualify for a research and development tax credit for conducting research and development. ... Read Full Answer >>
  2. What is the government's role and what is the private sector's role in neoliberalism?

    Neoliberalist economic theory supports minimization of government intervention and laissez-faire policy. Neoliberalism is ... Read Full Answer >>
  3. What tax implications are there for parties involved with a reverse repurchase agreement?

    A reverse repurchase agreement – sometimes referred to as a reverse repo – is the purchase of an asset with a simultaneous ... Read Full Answer >>
  4. How are benefits from a provident fund taxed?

    Not all provident fund benefits are treated equally, even in the same country. Thailand, for instance, has three separate ... Read Full Answer >>
  5. How does a qualifying widow obtain widow's allowance?

    The requirements that a widow must meet to obtain a widow's allowance include having a child who is claimed as a dependent ... Read Full Answer >>
  6. What is an IRS letter audit / audit by correspondence?

    Every year, the Internal Revenue Service (IRS) sends numerous notices to taxpayers. Letter audit, or audit by correspondence, ... Read Full Answer >>
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. Taxes

    What is an Ad Valorem Tax?

    An ad valorem tax is a levy placed on real or personal property based on the assessed value of that property.
  8. Retirement

    Does it Make Sense to Have an MLP in an IRA?

    Here's why MLPs should — and shouldn't — be considered for an IRA.
  9. Entrepreneurship

    MLPs: How They Are Taxed

    The advantages of MLPs outweigh the disadvantages, especially if you play your cards right.
  10. Mutual Funds & ETFs

    Pros and Cons of Master Limited Partnerships

    Want steady income? Consider looking into MLPs.

You May Also Like

Hot Definitions
  1. Bund

    A bond issued by Germany's federal government, or the German word for "bond." Bunds are the German equivalent of U.S. Treasury ...
  2. European Central Bank - ECB

    The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed ...
  3. Quantitative Easing

    An unconventional monetary policy in which a central bank purchases private sector financial assets in order to lower interest ...
  4. Current Account Deficit

    A measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services ...
  5. International Monetary Fund - IMF

    An international organization created for the purpose of: 1. Promoting global monetary and exchange stability. 2. Facilitating ...
  6. Risk-Return Tradeoff

    The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk) are associated with ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!