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.

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. 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. Section 1231 Property

    A tax term relating to depreciable business property that has ...
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 IRS Form 990 Tells About a Nonprofit

    Want a picture of an organization's activities? This annual form, open to the public, sums up everything from salaries paid to missions accomplished.
  8. Retirement

    The 3 Most Common 401k Rollover Mistakes

    No one is born knowing the tax rules for 401(k)s and IRAs, but only dummies, scaredy cats and suckers don't buckle down to learn them.
  9. Taxes

    Top Reasons to File Separately When Married

    Most of the time, it makes sense for couples to file their taxes jointly. Except for these possible exceptions...
  10. Taxes

    What IRS Form 1023 Is Used For

    To be treated as a tax-exempt organization, start by filling out this form.
RELATED FAQS
  1. Are dividends considered passive or ordinary income?

    Despite the fact that earning dividends requires no active participation on the part of the shareholder, they do not meet ... Read Full Answer >>
  2. Is dividend income taxable?

    Dividend income is taxable but it is taxed in different ways depending on whether the dividends are qualified or nonqualified. ... Read Full Answer >>
  3. Can I use my IRA savings to start my own savings?

    While there is no legal reason why you cannot withdraw funds from your IRA to start a traditional savings account, it is ... Read Full Answer >>
  4. Are spousal Social Security benefits taxable?

    Your spousal Social Security benefits may be taxable, depending on your total household income for the year. About one-third ... Read Full Answer >>
  5. What is the Social Security tax rate?

    The Social Security tax rate is 12.4% as of 2015. Of that amount, the employee is responsible for half, or 6.2%, and the ... Read Full Answer >>
  6. What is the Social Security administration responsible for?

    The main responsibility of the U.S. Social Security Administration, or SSA, is overseeing the country's Social Security program. ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Recession

    A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, ...
  2. Bubble Theory

    A school of thought that believes that the prices of assets can temporarily rise far above their true values and that these ...
  3. Stock Market Crash

    A rapid and often unanticipated drop in stock prices. A stock market crash can be the result of major catastrophic events, ...
  4. Financial Crisis

    A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated ...
  5. Election Period

    The period of time during which an investor who owns an extendable or retractable bond must indicate to the issuer whether ...
  6. Shanghai Stock Exchange

    The largest stock exchange in mainland China, the Shanghai Stock Exchange is a nonprofit organization run by the China Securities ...
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!