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 but the same is not exactly similar to it because sales tax is levied when the goods or services are sold to the end customer but use tax is typically levied on the taxable goods or the services that are bought for the purpose of use, enjoyment, consumption or storage mainly from outside of tax jurisdiction of that person. So, this tax is not levied on those goods and services on which sales tax is already applicable in order to avoid double taxation or cascading effect of tax on the item.
Typically there are two types – one is the consumer and 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 case of the retailer or vendor, tax is charged on the sales made by the vendor to the buyer outside the state of the vendor i.e., interstate sales and 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.
Basically, the rate of use tax is the same as the rate charged on sales tax. Moreover, the rate of sales tax, as well as 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’s, 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 total purchase amount and the remaining amount is charged as an expense in the books of accounts of the merchant 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 certain 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 discussed as below:
Sales tax as the name suggest is levied on sales, transfer, barter, exchange etc of goods and services covered under the sales tax. Hence the tax is to be borne by the end-user or the consumer of the products or services and is paid by the merchant of those goods to the state government of the US. On the other hand, use tax is levied on certain goods and services as and when those products or services are bought by the merchant itself for various reasons like use, enjoyment, consumption or storage mainly from outside of tax jurisdiction of that where the sales tax is not levied. There are types; the customer uses tax and the retailer or the vendor use tax. In the customer use tax is firstly self-assessed by the purchaser and where the sales tax is not deducted while in the vendor, the tax is deducted by the vendor. Hence, it can be said that use tax is a compensatory or complementary tax where the sales tax is not charged.
In case of the sales tax, the burden of tax is on the customer as the tax is charged or imposed on the customer but the same is collected by the seller while in case of the use tax the main buyer is the person liable to assess and pay the 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 and is charged where the sales tax is not charged on a particular product. Thus the person needs to be clear that on what tax is charged like when the products are purchased online, no sales tax is charged by the seller and hence use tax is charged.
This has been a guide to Use Tax and its definition. Here we discuss how does it work, how to calculate it along with an example and its differences from sales tax. You can learn more about from the following articles –