Sales Tax vs Use Tax: Difference and Comparison

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 are both 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.

Key Takeaways

1. Sales tax is a tax on the sale of goods and services, while use tax is a tax on the use or consumption of goods and services.
2. The seller collects sales tax at the time of purchase, while use tax is self-assessed by the purchaser when the seller does not collect sales tax.
3. Sales tax rates and regulations vary by state and locality, while use tax is based on the same rates and regulations as sales tax.

Sales Tax vs Use Tax

Sales tax is a tax that is applied at the time of purchase, as a percentage of the purchase price. It is applied to the sale of most tangible goods and some services. Use tax, is a tax applied to the use of tangible goods that were purchased out of state and then brought into the state for use.

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. The buyer pays this tax 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

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	The sellers collected this tax 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, and 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 the consumer has to pay for a good or purchased service. 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, so you must 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, you can purchase goods 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 is easier to enforce.

Sales tax is 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: retailer use tax and 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 enforced for certain large tangible commodities.

Sometimes the use tax enforcement process is more different than 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.
2. While use tax is generally imposed on the consumer who did not pay the sales tax at the time of purchasing items.
3. 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.
4. The consumer has to pay the tax directly to the government or taxing authority.
5. 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.
6. Use tax is more difficult to enforce than sales tax.
7. 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.

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