What is consumer use tax?
by November 9, 2024
Please note: This blog was originally published in 2015. It’s since been updated for accuracy and comprehensiveness.
You often see “sales and use tax” used together in the same sentence like “peanut butter and jelly.” But there are some important differences. We’re devoting a whole blog post to demystifying “use tax” and explaining why online sellers need to understand this concept.
Sales tax vs vendor use tax vs consumer use tax
As consumers, we are accustomed to paying “sales” tax on the purchases we make at local retailers. Sales tax is a transaction tax and is calculated based on the purchase price of the goods or, in some states, the purchase of services and digital goods. Retailers in the forty-six states (plus DC) that impose sales tax collect sales tax as a fiduciary for the state revenue agency. In layman’s terms, that means that when the retailer collects the sales tax they are acting as an agent for the state revenue agency and they are holding state revenue until it is remitted.
Vendor use tax is also a transaction tax calculated as a percentage on the price of goods, services and digital goods, if they are taxable in the purchaser’s state. It differs from sales tax, however, in that vendor use tax is based on purchases made from a retailer who is based outside of the buyer’s state.
“Consumer use” tax, on the other hand, is the tax paid directly to the state by the purchaser when the retailer does not charge sales or use tax at the time of the sale.
In other words, just because you, as a consumer, don’t have to pay sales tax on a purchase doesn’t mean a tax isn’t due on that purchase.
We are often asked if consumer use tax is new, and the answer is no. Consumer use tax has been around in most states since the early 1950s when the states were imposing their sales tax. Consumer use tax impacts purchases made by individual consumers and by businesses. Here are some of the common questions and answers about consumer use tax.
When is consumer use tax due?
In most states, consumer use tax is due only on the purchase price of items bought from vendors who didn’t charge tax on the sale, most likely because the vendor did not have nexus in the purchaser’s state. As such, there is no such thing as a “tax free” internet purchase or a “tax free” catalog purchase. For companies who have purchased items that were untaxed, the consumer use tax is typically reported and paid when the company’s sales or vendor use tax return is due. If individuals purchased items that were untaxed, they are to report and pay this consumer use tax on their state income tax return, typically due on April 15th.
What items are subject to consumer use tax?
Consumer use tax is imposed on every item that is subject to sales tax if the item had been purchased locally. If shoes are taxable if purchased locally, then shoes are subject to use tax if purchased online or through a catalog from a vendor who does not have nexus in the purchaser’s state. In addition, many states impose tax on transportation charges (like shipping), so the consumer use tax would also apply to those charges.
What level of compliance exists for consumer use tax?
This is a critical question and the one that is driving the entire discussion about requiring remote retailers to collect tax in states beyond where they are located. Consumer use tax compliance by individuals (you and me) is virtually nonexistent. Outside of a few states who provide a dedicated line on their income tax returns, compliance is very low on remitting consumer use tax directly to the state on the items they buy from e-commerce sellers or other remote sellers. Consumer use tax payments by businesses is much higher but not perfect. Because businesses are routinely audited by the state departments of revenue and have outside advisers that help with such tax matters, they comply at higher levels. However, this is not perfect and the state continues to be aggressive with auditing companies who owe use tax.
What does this mean to consumers and online sellers?
As consumers, we all have the obligation to pay the consumer use tax on the taxable purchases we make from vendors who don’t charge us tax. Consumer use tax is not new. If you live in a state with a sales tax, you’re supposed to pay either sales or use tax on all items subject to tax that you purchase.
Does TaxJar support consumer use tax?
No, TaxJar does not provide support for consumer use tax. We recommend reaching out to a tax professional for guidance on managing consumer use tax.
