Sales tax compliance comes in many forms, and use tax is one of them. You may see the term “sales and use tax” when applying for a sales tax permit in a state, filing a sales tax return in a state, or checking your economic nexus thresholds within a state.

What’s the definition of sales tax? What’s the definition of use tax? What’s the difference between use tax and sales tax?

Sales and use tax generally refer to the same thing: A percentage tax on the price of a sale that is collected by a merchant or consumer and remitted to the government. However, there are subtle differences in how these taxes are collected and remitted.

Sales tax defined:

Sales tax is a tax on the sale, transfer, or exchange of a taxable item or service, at the point of sale. Businesses with nexus in a state, must charge sales tax to customers located in those states where they have nexus. Sales tax is collected in addition to the price of the item and charged to the end customer. Sales tax is not meant to be paid out of pocket by the business, it is meant to be collected from the customer.

Sellers Use Tax or Vendors Use Tax

You’ve likely heard the terms “use tax” and “sales tax” used together, possibly even interchangeably, however not all “use tax” is the same. There is a big distinction between something called Consumers Use Tax and Sellers Use Tax (you may see the term “Vendors Use Tax” as well).

Sellers use tax is a transaction tax (like sales tax), calculated as a percentage of the sales price, and remitted by an out-of-state seller to the state. Sellers use tax only applies to “remote sellers” who are generally defined as businesses who have nexus in the state (such as economic nexus) but who are not based in the state.

Some states have the option to register for a regular sales tax license or the option to register for a sellers use tax license. In most cases, this is usually just differentiating businesses who are physically located in a state vs businesses located outside the state. A few examples of states with both sales tax license types and sellers use tax license types are listed below.

• Texas

  • If you’re located in state you’ll register with a standard Sales Tax license, however if you’re located outside of Texas you’ll register for a Single Local Use Tax license
  • If you’re not sure what license type you are registered as, you can search your Texas license number on the Texas Comptroller site to see if you are setup with the Single Local Use Tax type.

• Alabama

  • If you’re located in state you’ll register with a standard Sales Tax license. The ID number for regular Sales Tax licenses are formatted with the prefix “SLS” and then followed by the letter R and nine digits, like this “SLS-R123456789”
  • If you’re located out of state, you’ll register with a Simplified Sellers Use Tax license (SSUT). The ID number for SSUT licenses type are formatted with the prefix “SSU” and then followed by the letter R and nine digits, like this “SSU-R123456789”

• Oklahoma

  • If you’re located in state you’ll register for a standard Sales Tax license. The ID number for regular Sales Tax licenses are formatted with the prefix “STS” and then followed by 10 digits, like this “STS-12345678-12”
  • If you’re located out of state, you’ll register for a Vendors Use Tax license. The ID number for Vendors Use Tax licenses are formatted with the prefix “SVU” and then followed by 10 digits, like this “SVU-12345678-12”

• Missouri

  • If you’re located in state you’ll register for a standard Sales Tax license
  • If you’re located out of state, you’ll register for a Vendors Use Tax license

Consumers Use Tax

Consumers Use tax is a complement to sales tax, applied when taxable goods or services are used, stored, or consumed within a state after being purchased from out-of-state vendors who didn’t collect sales tax. Its purpose is to protect local retailers and ensure tax fairness, especially in the era of online commerce.

Consumer use tax is paid directly by the purchaser to the state department of revenue by filing a use tax return, including an amount on a sales tax return, or in some states, by including an amount on the income tax return.

An easy way to think about Consumer Use tax is whether your business “consumed” or “used” something for your business and you didn’t pay sales tax when buying the that item.

Examples