For many people, the terms “sales tax” and “use tax” are enough to make them shudder — but don’t worry, we’re here to break them down in simple terms.
When talking about use tax vs. sales tax, both types of taxes help fund essential government programs. While they’re similar, they’re not quite the same thing.
In this article, we’ll review the main differences between sales and use tax and share how Mosey can revolutionize business compliance.
What Is Sales Tax?
We’re all familiar with the extra bit we pay when we buy something at a store or online. That’s sales tax. It’s a percentage of the sales price, and the rate the taxpayer owes can change depending on where they live, as different states and even cities set their own rates. That’s why you’ll often notice that prices differ when buying things in-state vs. out-of-state.
So, what does sales tax apply to? It covers many things, from those new shoes you bought to that fancy new gadget you ordered online. Even your phone bill or an app could be subject to sales tax.
Of course, there are some exceptions. For instance, most states don’t tax essentials like groceries or prescriptions, and if they do, it’s at a lower sales tax rate.
If you’re a business owner, you’re the one who collects sales tax from your customers when they make a purchase. Then, you send that collected tax to your state’s Department of Revenue. It’s a big responsibility but a necessary one, as those tax dollars go on to fund essential services like schools, roads, and even police and fire departments.
Who Remits Sales Tax?
Who’s responsible for taking care of sales tax? That falls on the seller, aka the business owner. You’ll collect the sales tax right when your customer makes a purchase.
Then, it’s your job to send that money to the right place. Each state has a department that handles it, usually the Department of Revenue. They’re in charge of ensuring tax dollars are used for the abovementioned essential services.
To stay on top of sales tax, keep accurate records of all your sales and the tax you’ve collected. This will help you fill out your sales tax return, a report you submit to the state, usually every month, quarter, or calendar year.
It shows how much sales tax you collected and how much you owe the state. If you don’t keep good records or pay the tax on its due dates, you could face hefty fines later on.
Still, there are a few exceptions to the rule. For instance, if you’re buying goods to resell, you can typically get a resale certificate. That lets you buy those items tax-free, as the sales tax will be collected from the final customer when you sell the product.
What Are Examples of Sales Tax?
Next, we’ll review some examples of sales tax to see how it works in real life. Let’s say you’re buying a new laptop for $1,000 in a state with a 7% sales tax rate — a pretty standard state tax rate.
From there, sales tax can go one of two ways:
Example 1
The store adds the sales tax to your purchase price. So, you’ll pay $1,000 (the laptop’s price) + $70 (the sales tax) = $1,070.
Example 2
The price tag on the laptop says $1,000, but there’s a note that says “tax included.” This means the sales tax is already baked into that price. To determine how much tax you’re paying, you could add 1 to the tax rate of 7% (for 1.07) and divide the total price by that number. That would show you that the laptop costs $934.58, and the remaining $65.42 is the sales tax.
Remember when we talked about sales tax exemptions? They can vary depending on where you are. For example, in California, most groceries are exempt from sales tax, but prepared foods, like a sandwich from the deli, are still taxable.
Conversely, clothing and footwear under $110 are exempt from state sales tax in New York, but you might still pay the local sales tax rate.
Sales tax can initially seem tricky, but it’s pretty straightforward once you get the hang of it. Just remember that the rules can change depending on where you’re doing business, so always check with your state’s Department of Revenue for the most up-to-date information.
What Is Use Tax?
Now that you’ve got a handle on sales tax, let’s discuss its close relative, use tax. Use tax is especially important if you shop online or do business across state lines.
Simply put, use tax is a tax you pay on items you buy that aren’t subject to sales tax. Say you ordered a custom surfboard from an out-of-state shop that doesn’t charge sales tax. You’re still on the hook for paying tax on that surfboard, but instead of paying it to the seller, you pay it directly to your state. That’s use tax in action.
Why Does Use Tax Exist?
It’s all about fairness and ensuring everyone pays their share. In the past, people could avoid paying sales tax by buying things from out-of-state sellers, giving them an unfair advantage over local businesses.
The use tax rate usually matches the sales tax rate in your state. If your state sales tax is 6%, your use tax will typically be 6% as well. That applies to a wide range of taxable items, from sales of tangible personal property to taxable services like telecommunications or streaming subscriptions.
You might be wondering, “When is this tax due?” It’s usually due when you file your state income tax return. There’s a special section on tax forms where you can report your out-of-state purchases and calculate the use tax you owe. Some states even have separate use tax return forms.
What Is the Wayfair Decision?
However, things got a bit more complicated (or some might say, more fair) in 2018, thanks to the Supreme Court’s decision in a case called South Dakota v. Wayfair. Before this ruling, states could only require businesses with a physical presence in the state (like a store or warehouse) to collect sales tax.
That meant that many online retailers, especially smaller ones, could fly under the radar and not collect sales tax on retail sales made by residents of other states.
The Wayfair decision changed all that. It ruled that states can now require out-of-state businesses to collect sales tax, even if they don’t have a physical presence in the state.
This concept is called economic nexus, and it’s based on the idea that if a business makes a certain amount of sales within a state, it has an economic connection to that state and should, therefore, collect sales tax.
It’s important to note that each state has its own rules about economic nexus. Some states have a sales threshold that triggers the requirement to collect sales tax, while others base it on the number of transactions. You can usually find additional information on your state’s Department of Revenue webpage or by checking their FAQs.
Who Remits Use Tax?
Usually, it’s the buyer’s responsibility to pay use tax. You must figure out how much you owe and then pay that amount directly to the state government. That’s often done when filing your state income tax return; there’s usually a special spot on the form.
However, there are some exceptions. Some sellers might voluntarily collect the use tax from you at the time of purchase and then send it to the state themselves. Also, the specific rules can vary depending on where you live and where the seller is located.
If you’re unsure about the rules in your state, the best thing to do is check with your local government or Department of Revenue. They can give you the most up-to-date information and answer any questions.
What Are Examples of Use Tax?
To make things even more clear, let’s look at a couple of examples of use tax in action:
Example 1
You buy a brand-new boat from a seller in a different state. They don’t collect sales tax because they don’t have a physical business location in your state. In this case, you would owe use tax to your home state.
Example 2
You purchase a fancy new sound system online from a retailer that doesn’t have a presence in your state, and they don’t charge sales tax. Even though it was an online purchase, you’d still need to pay use tax on that sound system.
Example 3
You live in a state that has a lower sales tax rate than the neighboring state. You buy a new motor vehicle from the neighboring state to take advantage of the lower sales tax. You might owe use tax to your home state for the difference between the tax rates.
Mosey Can Help You Stay Compliant
While both use tax and sales tax generate revenue for state and local governments, it’s important to understand the key differences. The seller collects sales tax at the point of sale, while use tax is typically the buyer’s responsibility.
The rules around sales and use tax can be complex and vary from state to state. That’s why you should stay informed on tax compliance.
Consider using a compliance management platform like Mosey to help you manage your requirements, automate tax registration, and keep your business running smoothly. Schedule a demo of Mosey today to learn how we can take care of compliance issues so you can focus on running your business.
Read more from Mosey:
- Texas Sick Leave Law 2024: An HR Guide for Texas Employers
- POWR Act Checklist: A Guide to Colorado’s Anti-Discrimination Act
- How To Create a Competency Model for HR Professionals 2024
- Nevada Modified Business Tax (MBT) Guide 2024
- Employee Termination Letter: Laws, Examples, & FAQs
- When and How To Set Up Workers’ Compensation: A 2024 Guide
