Sales Tax vs. Use Tax: Do You Know the Difference?

Sales Tax 

Sales Tax is defined as a tax on the sale, transfer, or exchange of a taxable item or service. It is generally added to the sales price and charged to the purchaser or ultimate consumer. This form of taxation can be traced back to the 1930’s as a way for states to increase their revenues, the first state being Mississippi. Currently, 45 states, as well as the District of Columbia, impose sales and use taxes in one form or another.  

There are two implications of sales tax to be most aware of when considering who is ultimately liable for the tax:  

• Seller Privilege tax: is imposed on the seller for the privilege of selling tangible personal property within a state or taxing jurisdiction. This tax could be included in the purchase price of the tangible personal property; however, it may not be separately listed. There may be variations on how the tax is imposed but in an audit situation, the focus will always be on whether the seller remitted the proper tax.  

• Consumer Levy tax: is imposed on the consumer of tangible personal property or taxable services yet required by state statute to be collected and remitted by the seller. This tax will generally be separately listed. Most states are considered consumer levy tax states.  

Who Remits Sales Tax? 

In most cases, the seller or merchant is responsible for collecting and remitting sales tax to the appropriate tax authority. A business is required to collect sales tax only if registered within the state for tax collection. This involves maintaining records and filing tax reports. Non-compliance with these requirements can lead to penalties. Businesses can use resale or exemption certificates to avoid paying tax on items purchased for resale or for an exempt use. Please reference, Resale Certificates: 101, for more information.  

Use Tax 

In contrast, “Use Tax” is complementary to the sales tax and does not apply if the sales tax was charged. It 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. Use Tax is self-assessed by the business (purchaser) and usually accrued. It is also applied to purchases previously exempt from tax which are subsequently used in a taxable manner.  

A common form of use tax is Consumer’s Use Tax, which generally applies to purchases made out-of-state, including mail orders, internet orders, or phone orders from another state. This tax is imposed when sales tax was not charged at the time of purchase and is designed to recapture revenue from such transactions. 

If the retailer does not have nexus in the consumer's state, they are not required to collect sales tax. In these cases, the responsibility for remitting the tax shifts to the consumer. 

Who remits use tax? 

The responsibility for remitting use tax typically falls on the purchaser when sales tax was not paid at the time of purchase. The consumer must report and pay the tax directly to the appropriate government agency. Use tax primarily applies to out-of-state purchases where no sales tax was collected. Although the consumer is generally responsible for remitting the tax within the applicable calendar year, many fail to do so. To address this, the Supreme Court’s South Dakota v. Wayfair decision updated regulations, redefining nexus and setting new guidelines. For specific use tax requirements, it's best to consult your state's Department of Revenue or Taxation. 

Next Steps

Now that you have been provided with some basic knowledge of sales and use taxes, what’s next? You may have more questions with which Allyn would be happy to help. It is important to educate those within your business and determine what should be done and whether you are compliant with the diverse sales tax laws and regulations in all the US states and localities. Ask yourself these questions:

• Are you filing the appropriate sales tax return type?
• Are you collecting the appropriate amount of sales tax?
• Are you self-accruing use tax when applicable?
• What is your collection responsibility in each state?
• If you were to be audited by a state today, would your company be at risk?

Contributor: Racheal Wilkinson and Megan Bryarly

Tips for the Taxpayer

In recent years, states are becoming more insistent in the world of sales and use taxes with both regulation changes and enforcement. It is more important than ever for businesses to be aware of how sales tax affects them. Without an understanding of the varieties of sales and use tax, there is more potential for mistakes and audits. Businesses need to have policies and procedures in place that help them determine where, how much, and from whom to collect. Many companies may not have the knowledge, expertise, or time to build this foundation. An expert resource may be the best choice to help manage the world of sales and use tax and guarantee your business is tax compliant.

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 U.S. taxing jurisdiction. Our team routinely conducts nexus reviews in all US states for companies and advises clients with proactive measures to improve their tax compliance. Allyn can register businesses in the U.S. 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.

Furthermore, our services are conducted with a recognized dedication to customer service, rated over 350% higher than current industry averages. 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.

About Allyn International

Allyn International provides 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 and South America, Europe and Asia. Allyn’s regional headquarters are strategically located in Fort Myers, Florida, U.S.A., Shanghai, P.R. China, Prague, Czech Republic, and Dubai, U.A.E. For more information, visit  www.allynintl.com.