Difference Between Sales Tax and Use Tax (With Table)

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Tax is a financial charge that one has to pay to the government. We pay the tax so that the government can utilize that money for public services. Sales tax and use tax both are important to generate revenue. A sales tax is a tax paid for the sales of certain goods. Although they are almost the same, both have some key differences also.

Sales Tax vs Use Tax

The difference between sales tax and use tax is that sales tax is a tax on the sale of a taxable good or service. On the other hand, a use tax is a tax applied on the use or consumption of an item. Use tax is paid for the item on which sales tax has not been charged.

A sales tax is generally a consumption tax imposed by the government on the sale of goods. If a business has a nexus, then it is liable for sales tax. State government levies sales tax to generate revenue on the sale of goods within the state. Sales tax rates are different for different goods. It depends upon the nature of the goods that are purchased.

Use tax is a type of tax applied where a product or service is brought by a merchant and then converted for use. A lot of people don’t know about use tax. This tax is paid by the buyer directly to the taxing authority or the government. The use tax is generally chargeable when the sales tax is not paid for the same goods.

Comparison Table Between Sales Tax and Use Tax

Parameters of Comparison  Sales Tax  Use Tax  
Meaning  Sales tax is applied by a taxing authority or government when taxable goods are purchased.  Use tax is applied to a product or goods where the sales tax has not been paid by the consumer earlier.  
When it’s paid  When you purchase an item within your state.  When you purchase an item from out of state.  
How it’s paid  This tax is collected by the sellers from the customers and remitted to the taxing authority via sellers.  The tax is paid directly to the taxing authority by the consumer.  
Applied on  On purchase of any goods or service.  On purchase of goods which have no sales tax.  
Examples  Seller privilege tax, Consumer sales tax, Retail transaction tax.Consumer use tax, Seller use tax.

What is Sales Tax?

Sales tax is applied when someone purchases a thing or item from the merchant or vendor. It is applied by the government on the sales of various taxable goods. It is the additional amount of money that the consumer has to pay for a good or a service that is purchased.

The sales tax is chargeable to the customers, and the vendor collects it. The vendor or the seller acts as an agent of the state or government and remits the tax to the authority. If you brought an item from a particular state, you are considered to have consumed the item in that state, and therefore you need to pay the sales tax.

Most of the states in a country charge a sales tax on individual purchases. It includes local percentage rates. If you do not want to pay local sales tax, then you can purchase goods from elsewhere. A business with nexus has to pay sales tax. Sales tax is a kind of indirect tax paid by the citizens to the government, and it is easier to enforce.

Sales tax is very essential to maintain the development of the local community of any state. We pay it because the goods in the modern economy generally pass through various manufacturing stages, sometimes handled by various entities, and that’s why sales tax is important.

What is Use Tax?

Use tax is a tax chargeable on consumers who do not pay sales tax at the time of buying goods or items. It is generally applied to out-of-state purchases where no sales tax was collected. Unlike regular sales tax, consumers are responsible for paying the use tax directly to the taxing authority.

There are two types of use tax, one is retailer use tax, and another is consumer use tax. It is applied when you sell a taxable item in another state, and you don’t have sales tax nexus. Very few people know about the use tax. In the case of use tax, it is the liability of the consumer or purchaser to pay the tax directly to the state or the taxing authority.

Generally, if you brought some goods from another state that has no sales tax, then you may be required to deposit use tax when you return to your state. It is completely the liability of the buyer, not of the seller. Use tax is usually enforced for certain large tangible commodities.

Sometimes the use tax enforcement process is more different than ta sales tax. It is applied only on some large purchases of tangible goods. Use tax is applicable when you use any taxable government service, and if you have already paid sales tax for an item or service, you don’t have to pay the use tax for the consumption of the item.

Main Differences Between Sales Tax and Use Tax

  1. Sales tax is applicable to the consumer by the government on the sale of various goods. While use tax is generally imposed on the consumer who did not pay the sales tax at the time of the purchasing of items.
  2. Sales tax is collected from the buyer by the merchant and transmitted to the taxing authority. While the use tax is the liability of a consumer. The consumer has to pay the tax directly to the government or taxing authority.
  3. Sales tax is applied when you buy an item in your state. While use tax is applied when you buy an item from another state.
  4. Use tax is difficult to enforce than the sales tax.
  5. There are three types of sales tax, seller privilege tax, consumer sales tax, and retail transaction tax. While use tax has two types, consumer use tax and seller use tax.

Conclusion

All the business owners and the consumers are likely familiar with tax. Taxes are one of the biggest sources of income for the government. It is punishable by law if we don’t pay tax. It is very important to know the implementation of different kinds of taxes.

Sales tax and use tax both are financially responsible for the growth of the country. There are different tax rates on different goods. A tax is a financial charge that we all pay directly or indirectly to the government. As responsible citizens, we must pay the taxes in time.

References

  1. https://www.aeaweb.org/articles?id=10.1257/aer.104.1.1
  2. https://www.leg.mn.gov/docs/2015/other/150534.pdf
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