Use tax

Use tax is a sales tax on purchases made from suppliers outside of one's state of residence, and on which sales tax was not already charged. The buyer is liable for payment of use tax. The amount to be paid is the sales tax rate applicable to the buyer’s location, and the tax is paid to the government entity that has jurisdiction over the buyer’s location.

A useful way to view the use tax concept is that, theoretically, all purchases made by a buyer should be assigned a sales tax – which is classified as a sales tax if the seller charges the tax and remits the proceeds to the government, and as a use tax if the buyer has to pay the tax to the government. Use tax most commonly arises when a buyer orders goods from out of state (such as from an Internet store), and the seller (not having nexus in the buyer’s state) does not have to charge sales tax on the transaction.

Use tax is typically based on the purchase price of an asset. Thus, if the local sales tax is 7% and an asset was acquired for $1,000, then the buyer owes a use tax of $70. The situation is not so clear when the user has constructed an asset, such as self-constructed machinery. In this case, there are several possible ways to devise the basis upon which the use tax is calculated. They are:

  • The cost of the materials used to construct the asset
  • The full cost to construct the asset, which includes labor
  • The fair market value of the asset, if it were to be sold on the open market

Most states allow use tax to be calculated just based on the cost of the materials used to construct the asset, which is the easiest calculation method.

Related Courses

Sales and Use Tax Accounting