Defining Sales Tax, Sellers Use Tax, and Consumer Use Tax

Master the Basics: Sales and Use Tax Explained

Navigating the intricate landscape of taxation requires an understanding of sales tax, sellers use tax and consumer use tax – fundamental pillars in the realm of taxation. As major components of the taxation framework, these three distinct categories play pivotal roles in the economic ecosystem. Read more to learn their compliance requirements, and what is sales and use tax.

What is Sales Tax?

Sales Tax Definition and Meaning

Sales tax is a transaction tax, calculated as a percentage of the sales price of taxable goods and certain taxable services. Understanding the meaning of sales tax is crucial for both businesses and consumers. Sales tax is usually imposed on the purchaser (consumer), but the seller collects the tax from the purchaser and remits it to the state, county, and local taxing jurisdictions. In some jurisdictions, a similar tax, called a "transaction privilege tax," is imposed on the seller, but it is still passed on to the consumer. If a consumer of a state makes a taxable purchase within his/her own state, the full sales tax is paid at the time of the transaction.

Understanding how sales tax works is essential for proper tax compliance and payment. From a sales tax economics definition perspective, this type of tax is considered a consumption tax, as it is levied on the sale of goods and services. What does sales tax pay for? Generally, sales tax revenue is used to fund various state and local government services, including education, infrastructure, and public safety.

What is Considered to be a Taxable Sale?

Taxable Sale Definition

The definition of a taxable sale varies by taxing jurisdiction, but generally includes:

• Transfer of title or possession of taxable tangible personal property for consideration.
• Exchange, barter, lease, or rental of taxable tangible personal property.
• Performance of a taxable enumerated service for consideration.

What is Sellers Use Tax?

Sellers Use Tax Definition

Sellers use tax is the same as a sales tax. It is a transaction tax, calculated as a percentage of the sales price of goods and certain services. However, the key difference is that the sellers use tax is imposed on vendors outside of the state but are registered to collect tax in the state. Sometimes this tax is called a retailer's use tax or a vendor's use tax. 

Sometimes, sellers use tax is not filed on a sales tax return. Instead, it is filed on a separate return called a sellers use tax return, vendors use tax return, or retailers use tax return. The sellers use tax rate is the same as the sales tax rate, which may include local sellers use tax. This is an important aspect of use tax vs sales tax to understand for proper compliance.

What is Consumer Use Tax?

Consumer Use Tax Definition

Consumer use tax (sometimes called a compensating use tax) is complementary to the sales tax. Understanding what consumers use tax is crucial for individuals and businesses making out-of-state purchases. It is imposed by state and local governments and is calculated as a percentage of the sales price of goods and certain services; but paid as a use tax. Typically, consumer use tax is imposed on transactions subject to sales tax, but tax was not charged.

Usually, this occurs when items are purchased out-of-state, ordered through the mail, over the Internet, or by phone from another state. It is imposed on the use, storage, or consumption of tangible personal property in the state. The use tax often applies when a company purchases from an out-of-state seller that is not required to collect sales tax in the purchaser’s state.

Retailers are not usually required to collect sales tax on taxable purchases from consumers in states where the retailer does not have some connection to the state (known as "nexus"). Retailers create this connection if they have a physical presence, make regular deliveries with their own vehicles into the state, have sales representatives located in the state, affiliate nexus, click-through nexus or marketplace nexus and economic nexus. Following the Wayfair Act of 2018, economic nexus rules were established by most states, typically requiring businesses to meet specific revenue thresholds (e.g., $100,000) or transaction volumes (e.g., 200 transactions) within a particular taxing jurisdiction. The use tax burden falls on the consumer to calculate and remit the tax to their state government. Therefore, if the seller does not collect the tax from the purchaser and the transaction is taxable, the purchaser is responsible for remitting the use tax to the state.

Consumer use taxes are imposed by state and local governments for two reasons — to prevent someone from evading a sales tax by buying goods or taxable services from a non-taxing state and shipping them into the state that imposes the sales tax. The use tax protects retailers in the state or municipality because it removes the incentive for consumers to shop outside that locality to avoid paying the sales tax. The use tax rate is the same as the sales tax rate, which includes state and may include local sales taxes. A taxpayer who does not pay use tax may be subject to interest and penalties.

Transactions Subject to Consumer Use Tax

• Purchases from mail-order companies not required or registered to collect sales tax from the state of delivery.
• Deliveries from out-of-state companies that are not required or registered to collect sales tax from the state of delivery.
• Buyer gives an in-state merchant a blanket resale or exemption certificate and transaction is taxable.
• Purchases from an out-of-state or in-state company that is required to collect sales tax but does not.
• Benefit received from an out-of-state performance of a service.
• Purchases made on the Internet from vendors who are not required to be registered and sales tax is not charged.

Consumer Use Tax Examples

A person buys a vehicle from a dealer in a neighboring state, and the dealer does not charge sales tax on the car. The buyer must pay use tax on the vehicles purchase price when they return to their state and/or city.

ABC Manufacturing Co. purchases office furniture for their accounting department. The furniture is purchased from XYZ Wholesale Co., an out-of-state vendor, and sells via the Internet. After the order is placed and invoiced, XYZ Wholesale Co. delivers them via common carrier. XYZ Wholesale Co. does not include any sales tax on the invoice. The office furniture would have been charged sales tax if purchased from an in-state vendor. 

Therefore, ABC Manufacturing Co. must self-assess and remit the consumer use tax that is due on the purchase to the state Department of Revenue.

These examples illustrate the application of use tax in various scenarios, highlighting the importance of understanding tax liability in different situations.

If you are interested in learning more about Consumer Use Tax solutions for your business or what Vertex has to offer, reach out to our team today.