Consumer’s Use Tax vs. Seller’s Use Tax: Nearly Every Business owes Use Tax - do you pay yours?

Use Tax Overview

Use tax is defined as a tax on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. It is known as a complementary tax to sales tax and can be applied if a different state sales tax was charged at a lesser rate or if an incorrect rate is charged entirely. However, use tax will most often apply when a business makes a purchase from an out-of-state-seller that is not required to collect sales tax in the purchaser’s state. Use tax exists as a way for states to ensure they do not lose on possible tax revenue due to situations where unregistered sellers do not collect, or businesses make purchases outside of the state for use within their jurisdiction.  It is also applied to items that were exempt from tax when purchased, yet later used in a taxable manner.

After hearing this you may wonder if you are responsible for paying use tax? To determine this, it is important to know that there are two types of use tax when working to identify who is responsible for the use tax: “Consumer’s” use and “Seller’s” use.

Consumer’s Use Tax

Consumer’s use tax is typically imposed on the storage, use, or consumption of a taxable item or service on which no sales tax has been paid. A purchaser should pay a consumer use tax on any taxable tangible personal property stored or used in their state, unless the purchaser had paid the correct state sales tax to the seller. If a seller does not collect sales or use tax from the purchaser, the purchaser now becomes responsible for remitting the consumer’s use tax directly to the state (unless the property is purchased for resale or is exempt by statute).

Seller’s Use Tax

Seller’s use tax, which is also known as retailer’s or vendor’s use tax, typically functions in the same way as a sales tax. The difference is that seller’s use tax applies to sales that are conducted by a vendor located outside of the state but is registered to collect tax in the state of the sale. Therefore, if a vendor charges a customer seller’s use tax at the appropriate rate, the customer will not have a consumer’s use tax obligation. Essentially, the out of state vendor is facilitating the payment of the use tax for their customer. To determine which state’s tax will be collected, it is necessary to know the “ship to” state to determine the rates. The “ship to” state’s tax rules are the ones to be followed to determine whether the item is taxable. Some states may also impose local use taxes where the method of determining the correct local use tax rate is based on the destination within the state.

Possible Questions

After this brief overview of use taxes, you may have some important additional questions, such as: Is my accounting or finance team conducting use tax accruals? If I was to be audited by a state today, would my company possibly be at a risk of not being compliant? Should my business be charging customers seller’s use tax on sales to states outside of our home state? These are just a few of the questions you should have when it comes to being compliant with state use taxes. With any questions, Allyn would be happy to provide guidance for ensuring your company has been accurate when reporting your taxes.

Tips for the Taxpayer

Recently, some companies have felt additional pressure to be compliant due the increased enforcement of sales and use tax laws. It is in their best interest that businesses make themselves aware of how different types of state and local transaction taxes may affect them in the long and short term. Without an understanding of these different types of taxes, there is more potential for mistaken reporting which can lead to a tax liability and potential audits in the future. Upon a review, a business should have a system in place to ensure they can track where and from whom they should collect taxes to help neutralize any mistakes in reports.

How Can We Help?

Allyn’s tax team is staffed with seasoned tax professionals experienced in all aspects of Federal, multi-state and local tax compliance and consulting for large US and global corporations. We use that experience to your advantage.

Allyn files state and local sales and use tax returns in every US taxing jurisdiction. We routinely conduct nexus reviews in all US states for companies and advise clients with proactive measures to improve their tax compliance. Allyn can register businesses in the states at the Secretary of State level as well as with the Department of Revenue. We can manage your tax compliance, create a solid tax process, and provide audit defense for your company.

Contact us and we can provide a customized cost-effective solution to meet your company’s needs. For further information on Allyn Tax services, please contact: tax@allynintl.com.

For More Information

If you are interested in learning more about this topic or other tax topics, please visit our Tax Publications under News and Events at www.allynintl.com.

Contributor: Jacob Bowen

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About Allyn International

Allyn International is dedicated to providing high quality, customer centric services and solutions for the global marketplace. Allyn's core products include transportation management, logistics sourcing, freight forwarding, supply chain consulting, tax management and global trade compliance.  Allyn clients range from small local businesses to Fortune 500 firms. Allyn conducts business in more than 20 languages and has extensive experience in both developed and emerging markets. Highly trained experts are positioned throughout North America, Europe and Asia and Allyn regional headquarters are strategically located in Fort Myers FL USA, Shanghai P.R. CHINA and Prague, CZECH REPUBLIC. For more information, log on to www.allynintl.com.