What Is Use Tax? How It Differs from Sales Tax and Why It Matters

Most business owners know about sales tax. Use tax? Not so much. Yet use tax applies to nearly every state that collects sales tax, and ignoring it can trigger audits, penalties, and back taxes that add up fast.

Here is the short version: use tax is a companion to sales tax. It fills the gap when you buy something and the seller does not charge sales tax. The most common trigger is buying from an out-of-state vendor who has no obligation to collect your state's tax.

If you operate a business that buys supplies, equipment, or inventory from out-of-state sellers, you need to understand use tax. And if you hold a resale certificate, you may already be protected from it on qualifying purchases.

Use Tax, Defined

Use tax is a tax on the use, storage, or consumption of tangible personal property (and in some states, certain services) when sales tax was not collected at the point of sale.

The rate is identical to your state's sales tax rate. In Texas, that means 6.25% at the state level (plus applicable local rates). In California, the base rate is 7.25%. The math works the same as sales tax. The only difference is who pays it and when.

Sales tax is collected by the seller at the time of purchase and remitted to the state.

Use tax is self-reported and paid by the buyer directly to the state, typically on a sales and use tax return.

Same rate. Same state. Different collection mechanism.

When Does Use Tax Apply?

Use tax kicks in under specific circumstances. All of them share one trait: the seller did not charge sales tax on the transaction.

Out-of-State Purchases

This is the most common scenario. You buy $5,000 in office furniture from a supplier in Oregon (a state with no sales tax). That supplier has no obligation to collect your state's tax. When the furniture arrives at your office in Illinois, you owe Illinois use tax on the $5,000.

Online Purchases Where Tax Was Not Collected

Before the 2018 South Dakota v. Wayfair Supreme Court decision, this happened constantly. Online retailers with no physical presence in your state did not collect your state's sales tax. That has changed significantly; most large online retailers now collect sales tax in all states. But smaller vendors, international sellers, and niche suppliers still sometimes skip it.

Purchases from Individuals

Buying a used forklift from a guy on Craigslist? He is not going to charge you sales tax. Your state expects you to report and pay use tax on that purchase.

Items Brought Into Your State

You attend a trade show in Nevada, buy $3,000 in display equipment, and bring it back to your business in New Jersey. No sales tax was charged in Nevada (Nevada has sales tax, but the seller may have applied their own state's rate or none at all depending on the situation). New Jersey wants its use tax.

Withdrawing Inventory for Business or Personal Use

This one catches many business owners off guard. Say you own a hardware store and you take a power drill off the shelf for your own use. That drill was purchased tax-free with your resale certificate. The moment you convert it from resale inventory to personal or business use, you owe use tax on its purchase price.

A Real-World Example

Let us walk through a concrete scenario.

Sarah runs a small candle-making business in Georgia. She buys wax, fragrance oils, and jars from three different suppliers:

1. Supplier A is in Georgia. They charge Georgia sales tax on every order. No use tax issue.
2. Supplier B is in Montana. Montana has no sales tax. Supplier B charges no tax. Sarah owes Georgia use tax on these purchases.
3. Supplier C is a small online vendor in California. They do not have economic nexus in Georgia and do not collect Georgia sales tax. Sarah owes Georgia use tax on these purchases as well.

Sarah's Georgia sales and use tax return has a line for reporting use tax. She adds up her untaxed purchases from Suppliers B and C, multiplies by her local rate, and remits it to the Georgia Department of Revenue.

But here is the key part: Sarah has a Georgia resale certificate. The wax, oils, and jars she buys become part of candles she sells to customers. Because those materials are purchased for resale, she does not owe use tax on them, even though Suppliers B and C did not collect sales tax. The resale exemption applies.

The items Sarah buys for her own business operations (a new laptop, shipping labels, a desk lamp) that were not taxed at purchase? She owes use tax on those.

How Use Tax Relates to Resale Certificates

This is where use tax and resale certificates intersect in an important way.

A resale certificate exempts qualifying purchases from both sales tax and use tax. When you buy goods for resale and present a valid resale certificate, you are not simply avoiding the seller's sales tax collection. You are also eliminating your use tax obligation on those goods.

The logic is straightforward. Use tax exists to ensure goods are taxed at least once. If you are buying goods that will be resold to an end consumer (who will pay sales tax at that point), the goods will be taxed. There is no gap to fill.

Without a resale certificate: You buy $10,000 in inventory from an out-of-state supplier. No sales tax is charged. You owe your state $700 in use tax (at a 7% rate).

With a resale certificate: You buy the same $10,000 in inventory. No sales tax is charged. You owe $0 in use tax because the goods are for resale.

That is a $700 difference on a single purchase. Over a year of regular inventory purchases, the savings compound quickly.

Get your resale certificate and eliminate use tax on inventory purchases.

Which States Have Use Tax?

Every state that has a sales tax also has a use tax. That means 45 states plus the District of Columbia.

The five states with no general sales tax (and therefore no use tax) are:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

Some notable details by state:

In most states, you report use tax on the same return you use for sales tax. If you are registered for a sales tax permit, you already have a line item for use tax. If you are not registered (because you do not make taxable sales), most states have a separate use tax return, or they allow you to report it on your state income tax return.

How to Report and Pay Use Tax

If You Have a Sales Tax Permit

Your regular sales and use tax return includes a section for reporting use tax. Add up your purchases that were not taxed by the seller, apply your local combined rate, and include the amount on the return.

In California, for example, the CDTFA-401 return has a line labeled "Purchases Subject to Use Tax." You report the total there.

If You Do Not Have a Sales Tax Permit

Some states allow individuals and businesses without a sales tax permit to report use tax on their state income tax return. California includes a use tax line on its Form 540 (personal income tax return). New York includes a line on Form IT-201.

Other states require a separate use tax return. Check your state's Department of Revenue website for the specific form.

Record Keeping

Keep records of every purchase where sales tax was not collected. You will need:

• Invoices or receipts showing no sales tax was charged
• The date of purchase
• The vendor's name and location
• A description of what was purchased
• How the item was used (resale, business use, personal use)

These records protect you in an audit. If you claimed a resale exemption on a purchase, you need to show that the goods were actually resold.

Common Mistakes with Use Tax

Ignoring It Entirely

The most common mistake. Many business owners simply do not know use tax exists. They buy from out-of-state vendors, never report the purchases, and hope nobody notices. States have gotten much better at catching this. Many now cross-reference data from shipping companies, payment processors, and federal tax returns to identify unreported use tax.

Forgetting About Withdrawn Inventory

You buy a case of phone chargers tax-free with your resale certificate. You sell 11 of the 12. The last one, you keep for yourself. You owe use tax on that one charger. Most business owners forget this step, but auditors know to look for it.

Not Reporting Purchases from Online Marketplaces

Even though Amazon and other large marketplaces now collect sales tax in most states, purchases from smaller online vendors may still arrive without tax. Review your purchase records quarterly.

Assuming the Seller Handled It

Just because a vendor is located in another state does not mean they collected your state's tax. Check your receipts. If the tax line is blank or zero, you are responsible.

Use Tax Audit Red Flags

State auditors look for patterns that suggest unreported use tax:

• Large out-of-state purchase volumes with no corresponding use tax reported
• Discrepancies between federal expense deductions and reported taxable purchases
• Industry-specific patterns: construction companies, manufacturers, and businesses that regularly buy from out-of-state suppliers are audited more frequently
• Claiming high resale exemptions without matching sales revenue

An auditor at the California Department of Tax and Fee Administration (CDTFA) will compare your purchase records to your reported use tax. If you bought $200,000 in goods from out-of-state vendors, reported $50,000 in use tax purchases, and cannot prove the remaining $150,000 was for resale, you have a problem.

How a Resale Certificate Protects You

A valid resale certificate is your documentation that a purchase was for resale and therefore exempt from use tax. In an audit, you point to the certificate, the purchase records, and the corresponding sales records that show you resold those goods.

Without the certificate, you have no documentation. The auditor assesses use tax on the full amount, plus penalties and interest.

This is one reason why getting a resale certificate matters even if your suppliers do not require one. The certificate is not just about avoiding sales tax at checkout. It is your proof of exemption in an audit scenario.

Apply for your resale certificate today to protect your business.

Use Tax vs. Sales Tax: Quick Comparison

The bottom line: sales tax and use tax are two sides of the same coin. One is collected by the seller. The other is paid by the buyer. Together, they ensure that taxable goods are taxed regardless of where or how they are purchased.

Key Takeaways

1. Use tax equals sales tax in rate and purpose. The only difference is who pays it and when.
2. You owe use tax when a seller does not charge sales tax. Out-of-state purchases, online orders, and private-party transactions are common triggers.
3. A resale certificate eliminates use tax on qualifying purchases. If you buy goods for resale, the resale exemption covers both sales tax and use tax.
4. Every sales-tax state has a use tax. That is 45 states plus D.C.
5. States are getting better at enforcement. Data matching and cross-referencing make it harder to ignore use tax obligations.
6. Keep records. Documentation of your purchases and resale activity is your best protection in an audit.

Related Articles

• What Is a Resale Certificate? The Complete Guide
• Resale Certificate vs. Tax Exempt Certificate: What's the Difference?
• Understanding Sales Tax Nexus: A Complete Guide for Online Sellers