Use Tax Definition
Use tax is typically a type of sales tax levied in the United States of America by various state governments on products or services where tax is not levied when the products or services are sold, instead, it is levied for storage, use, consumption etc by the merchant of such products or services mainly targeting on purchases that are made outside the tax jurisdiction of the person.
Use tax is a kind of sales tax having various similar characteristics as that of sales tax. However, it is not exactly similar to it. Sales tax is levied when the goods or services are sold to the end customer. Use tax is typically imposed on the taxable goods or the services that are bought for use, enjoyment, consumption, or storage mainly from outside of the tax jurisdiction of that person. So, this tax is not levied on those goods and services on which sales tax is already applicable to avoid double taxation or cascading effect of tax on the item.
Typically there are two types – one is the consumer, and the other is the retailer or vendor tax. The former is the tax charged on the purchaser and is self-assessed by him and paid to the respective state government while the later is the tax charged on the sales made by the vendor to the buyer outside the state of the vendor, i.e., interstate sales.
How does it Work?
Typically, use tax is charged on the purchaser. In case of the consumer use tax, at the time of purchase of goods or services, the purchaser is required to calculate it, and such tax is then self-assessed by the merchant itself as per the specified norms of the state government. In this case, the merchant itself pays the self-assessed tax to the respective state government.
However, in the case of a retailer or vendor, the tax charged is on sales made by a vendor to a buyer outside the vendor’s state, i.e., interstate. Sales Tax is paid to the Government if the vendor or retailer is registered in the state of delivery.
How to Calculate Use Tax?
It is charged based upon a certain percentage of goods purchased by the merchant.
The rate of use tax is the same as the rate charged on sales tax. Moreover, the rate of sales tax, as well as the use tax, differs from state to state. The specific percentage of tax is charged on various purchases and expenses incurred by the merchant, for example, purchase of office equipment, materials goods, and services, etc. based upon the specific state law, which may be changed by various amendments in state law.
The rate is charged on the total amount of purchase, and such amount obtained is deducted from the full purchase amount. The remaining amount is charged as an expense in merchant’s books of accounts while the use tax is remitted to the Government on predefined due dates.
Let’s take the example of a US-based company.
Let us assume that a company P Q R incorporation purchases individual plants of 50 thousand dollars from the state outside the company’s tax jurisdiction. If the seller doesn’t collect and pays the sales tax, use tax is charged.
Suppose tax is charged @ 10 %, hence the total use tax will be $ 5 ($50 * 10%). Thus the purchaser company pays $5 to the Government, and the remaining $45 is booked as an expense in the books of P Q R inc.
Difference Between Sales Tax and Use Tax
The basic points of differences are as below:
Sales tax, as the name suggests, is levied on sales, transfer, barter, exchange, etc. of goods and services covered under the sales tax. Hence, end-user or consumer of products or services bear the tax and is paid by the merchant of goods to the state government of the US. Whereas, use tax is levied on certain goods and services when those are bought by the merchant itself for various reasons. E.g., like use, enjoyment, consumption, or storage, mainly from outside of tax jurisdiction where the sales tax is not levied. There are types; the customer use tax and retailer or vendor use tax. In the case of customers, use tax is firstly self-assessed by the purchaser and where the sales tax is not deducted. While in the vendor, the tax deduction is by the vendor. Hence, one can say that the use tax is a compensatory or complementary tax where the sales tax is not charged.
In sales tax, the burden of tax is on the customer as it is charged on the customer, but the seller collects the same. However, in case of use tax, the primary buyer is liable to assess and pay taxes to the Government of a particular state. Thus, Sales tax is the responsibility of the seller, while the use tax is the responsibility of the buyer.
Hence it can be concluded that the use tax is compensatory and complementary to the sales tax. Use tax is charged where the sales tax is not charged on a particular product. Thus the person needs to be clear on what tax is charged. E.g., when products are purchased online, no sales tax is charged by the seller; hence use tax is charged.
This article has been a guide to Use Tax and its definition. Here we discuss how it works, how to calculate it along with the example, and differences from sales tax. You can learn more about from the following articles –