# Understanding Use Tax: Definition, Purpose, and Key Differences From Sales Tax

![Use Tax: A tax imposed on goods that are used, distributed, or stored in an area where sales tax is normally imposed but are purchased where no sales tax is collected.](https://www.investopedia.com/thmb/_X6VOgz4cmNjH3UW1l-y7a3jjhs=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/use-tax.asp-final-13a19bd544534d67b4cc5c74cb320eb5.png)

*— Julie Bang / Investopedia*

## What Is a Use Tax?

Use tax is levied on goods acquired tax-free from outside states, intended for use in your home state, where sales tax is typically required. Buyers are to compute and remit this tax, mirroring the local sales tax rate. This self-assessed tax mainly ensures fair competition for in-state sellers and funding for state services, although enforcement remains challenging.

### Key Takeaways

*   Use tax is a type of sales tax imposed on goods bought out-of-state when no sales tax was collected in the purchase jurisdiction.   
    
*   Consumers are responsible for calculating the use tax, often making it challenging to enforce.   
    
*   Both use and sales taxes typically share the same rate, but use tax is self-assessed by the consumer.   
    
*   The purpose of the use tax is to protect in-state retailers and ensure fair competition with out-of-state vendors.   
    
*   Failure to pay use taxes can lead to fines or penalties for consumers.  
    

## How Use Tax Works

The use tax is a type of sales tax charged on certain goods. Unlike sales tax, use tax applies only in specific cases, not on all goods and services. The use tax is charged by a consumer's home municipality or state in any number of cases. Some of the most common ones include:

*   Whenever a consumer purchases items outside their home jurisdiction and the seller doesn't charge a sales tax. The use tax is charged if the customer intends to use or store the goods in an area where a sales tax is imposed.
*   When goods are purchased out-of-state and the seller doesn't charge a sales tax.
*   Professionals who purchase goods for their trade in a jurisdiction where there is no sales tax but will be used in an area where there is one.

The use tax rate matches the local sales tax rate, including state and local taxes. It is up to consumers to calculate and pay use taxes on any applicable purchases they make. Residents who don't pay use tax may face [interest](https://www.investopedia.com/terms/i/interest.asp) and penalties.

For example, California residents must pay sales tax on things like furniture, gifts, toys, clothing, vehicles, mobile homes, and aircraft. If Californians buy clothing from local retailers, sales tax is collected and sent to tax authorities. No additional tax will be due. They would pay tax if they bring any of these goods back to California if they were purchased in Arizona, where no sales tax is charged.

## Comparing Use Tax and Sales Tax

The use tax is essentially the same as a sales tax. A [sales tax is imposed by the government](https://www.investopedia.com/how-to-calculate-sales-tax-7113366) on the sale of goods and services. It is added to the purchase price at the [point of sale](https://www.investopedia.com/terms/p/point-of-sale.asp), which means the seller collects it and [remits](https://www.investopedia.com/terms/r/remittance.asp) it directly to the government.

Sales tax rates vary by jurisdiction. Some states charge a higher sales tax than others, while [some don't charge any at all.](https://www.investopedia.com/articles/personal-finance/112415/5-states-without-sales-tax.asp) Certain states don't impose a sales tax on certain items, such as food, clothing, and books. Others have a blanket tax on everything.

The use tax is usually the same rate as the local/state sales tax. The difference lies in how it's accounted for and who calculates it. The use tax is self-assessed and remitted by the end consumer, so if you make a purchase and are liable for your state's use tax, it's up to you to figure out how much you owe and pay it.

The use tax is generally more difficult to enforce than the sales tax and, in practice, is only applied to large purchases of tangible goods.

> **Important**
>
> The number of states that impose a use tax. It is the same as the number of states with a sales tax.

## The Connection Between Use Tax and Nexus

A nexus is generally defined as a physical presence, such as a sales office or warehouse. But this presence is not limited to these examples. In fact, you can have a nexus just by having an employee or an affiliate in a state or even a partner website that directs traffic to your webpage in exchange for a share of profits. So how does this relate to a use tax?

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. As such, the onus falls on the consumer to calculate and remit the tax to his or her state government. Whether a business owes sales taxes to a particular government depends on the way that government defines nexus.

Tensions arising from the [e-commerce](https://www.investopedia.com/terms/e/ecommerce.asp) industry's failure to pay sales taxes prompted the U.S. Supreme Court to rule in 2018 that physical presence is not necessary to create a substantial nexus, which can be sufficiently established by economic and virtual contacts. States with sales tax now require [e-commerce sellers](https://www.investopedia.com/5-tax-tips-every-ebay-seller-needs-to-know-11747985) to collect these taxes.  

## Why Use Tax Exists

Use tax protects in-state retailers from out-of-state sellers who don't collect tax. It also ensures 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.

As noted above, it is often difficult to enforce. That's because it's up to consumers to report and pay the use tax. This means governments end up losing a chunk of [revenue](https://www.investopedia.com/terms/r/revenue.asp) to goods purchased in areas where no sales tax is collected, which is why states require online vendors to collect taxes whenever their customers make purchases.  

## Example of Use Tax Application

Let's say that a Californian bought clothing from an online retailer in Oregon. Under Oregon law, the retailer does not collect sales tax on the goods but the retail buyer must still pay a use tax on that clothing purchase to the 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 the majority of groceries.

## What Does the Use Tax Mean?

The use tax is a type of sales tax. It is imposed on goods purchased where no sales tax is charged outside a consumer's jurisdiction and brought back home. The rate is generally the same.

## What's the Difference Between the Use Tax and the Sales Tax?

A sales and use tax are ultimately the same thing. They are both applied to goods and services. The difference lies in how they're calculated and who pays them. While a sales tax is applied at the time a purchase is made and is collected and remitted to the government by the seller, a use tax is calculated and paid by the consumer or end user. The rate, however, is generally the same as the local/state sales tax.

## How Much Is the Use Tax in California?

The use tax rate in California is 7.25%, which is the same as the sales tax applied across the state, as of 2024. Some cities and counties have additional sales taxes.

## The Bottom Line

The use tax is a form of sales tax that applies when you purchase goods out of state without paying sales tax and intend to use them in your home state where sales tax is due. Its primary purpose is to protect local businesses from unfair competition against out-of-state sellers that don't charge sales tax. Consumers are responsible for self-reporting and paying this tax, which often leads to difficulties in enforcement. Failing to pay use taxes can lead to penalties. For detailed guidance on your state's use tax obligations, reach out to your state's tax authority.

> **Article Sources**
>
> 1.  West Virginia State Tax Department. "[Municipal Sales and Use Tax](https://tax.wv.gov/Business/SalesAndUseTax/MunicipalSalesAndUseTax/Pages/MunicipalSalesAndUseTax.aspx)."
>     
> 2.  Commonwealth of Massachusetts. "[Sales and Use Tax](https://www.mass.gov/guides/sales-and-use-tax)."
>     
> 3.  California Department of Tax and Fee Administration. “[California Use Tax for Personal Use](https://www.cdtfa.ca.gov/taxes-and-fees/use-tax/personal-use.htm).”
>     
> 4.  California Department of Tax and Fee Administration. "[California Use Tax, Good for You. Good for California](https://www.cdtfa.ca.gov/taxes-and-fees/use-tax.htm)."
>     
> 5.  Tax Foundation. “[State and Local Sales Tax Rates, 2024](https://taxfoundation.org/data/all/state/2024-sales-taxes/).”
>     
> 6.  Commonwealth of Massachusetts. “[Massachusetts DOR Corporate Excise Tax Guide](https://www.mass.gov/info-details/massachusetts-dor-corporate-excise-tax-guide).”
>     
> 7.  Supreme Court of the United States. “[South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018)](https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf).” Pages 11, 22.
>     
> 8.  U.S. Government Accountability Office. “[Remote Sales Tax: Initial Observations on Effects of States' Expanded Authority](https://www.gao.gov/products/gao-22-106016).”
>     
> 9.  Oregon Department of Revenue. “[Sales Tax in Oregon](https://www.oregon.gov/dor/programs/businesses/pages/sales-tax.aspx).”
>     
> 10.  California Department of Tax and Fee Administration. "[Know Your Sales and Use Tax Rate](https://www.cdtfa.ca.gov/taxes-and-fees/know-your-rate.htm)."