Sales tax and use tax, these two indirect taxes often confuse many taxpayers just like you. Often these two indirect taxes mix together to form the “sales and use tax”. However, the complications heighten when your taxpaying area levies both of them.
Therefore, it is critical for you to know the differences between them to compile your taxes with utmost accuracy. Don’t worry, here is a complete guide for you on the differences between use tax and sales tax. Going through this you will never jumble up these two taxes ever again.
What is Use Tax?
Use tax is a supplementary sort of tax. It will only be imposed on you when you have to pay or collect the sales tax during a product purchase or sale. Use tax, as its name suggests, imposes on the taxpayer only while using, storing or consuming a taxable good or service. But the thing to remember is that use tax only applies in the absence of sales tax.
Both the local and the central government can have their share in it. Usually, the use tax rates are similar to the rates of sales taxes and they apply on purchases that occur outside the state and may miss out on the sales tax at that point.
What is Sales Tax?
Sales tax is the primary tax that all consumers pay at the time of purchasing a good or service that falls under the taxable category of that particular jurisdiction. The sales tax rate directly adds to the final cost of the product and the end payer or consumer pays it to get the product.
Sales tax is a vital source of revenue generation for any local or central government besides income taxes. Governments use this revenue to improve the educational, infrastructural, and medicinal facilities of the state. That is why in the absence of sales tax your government will levy the use tax from you as its compensation.
What Are the Key Differences Between Use Tax and Sales Tax?
Now after getting a brief understanding of these two indirect taxes, let’s just get deep into their differences. We will understand their basic differences by understanding who is liable to pay sales and use taxes and how their reporting mechanism differs from one another.
Who is Liable To Pay Use Tax?
The answer to who will pay the use tax will entirely depend on what sort of use tax it is. Whether it is a consumer use tax or a seller use tax. In the case of consumer use tax, it is the buyer who figures out the taxes and pays them to the concerned taxation authority.
It happens when the seller doesn’t have a nexus in the location so they cannot collect tax. It also happens when a buyer purchases goods out of state to use or store them. Businesses also file self-assess consumer use tax if they use their inventory to purchase tax-free goods for resale.
On the contrary, if a state has a unique intrastate and interstate sales tax policy then a seller use tax may come at use. For instance, Alabama in the US has an intrastate sales tax policy whereas interstate transaction of goods falls under seller use tax obligations here. Thus, state businesses here have to file seller use tax instead of a direct sales tax.
Who is Liable To Pay Sales Tax?
In the case of sales tax, the seller always has the responsibility of collecting and paying the tax to the concerned taxing authority. The buyer here obviously pays the tax, but they do not have to pay it directly to the government. Here, the seller does the job of collection and submission.
However, at the time of an audit, who will be liable for the sales tax depends entirely on the rules of that particular state. Based on this a state can be either a vendee or consumer tax state or a vendor or seller privilege state.
How to Report Sales Tax?
Businesses can report sales tax on an annual, quarterly or monthly basis depending on their rate of transactions. For this purpose, businesses have to register themselves for the sales tax permit. To report a sales tax business, need to figure out how much tax they have collected during a particular period. They can complete the tax return process online or in paper mode.
How to Report Use Tax?
The seller’s use tax reporting occurs similarly to that of the sales tax. However, here in the case of consumer use tax, the consumer is directly responsible for reporting their user tax. Businesses have to report their consumer use tax on their regular sales, excise tax returns, or use tax returns.
Conclusion
To sum up, both sales and use taxes are indirect taxes the government levies from the consumers. Sales tax directly falls on the consumer when they purchase goods. On the other hand, use tax obligations come only in the absence of sales taxes. The main difference between them lies in when the taxes are imposed on the consumer; within the state or outside of it.
Also, Read – Difference Between Sales Tax and VAT: A Detailed Guide
FAQs
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Why Knowing The Difference is Important For You?
It is very important for you to know the differences between use tax and sales tax to file them correctly. A lack of understanding will lead you to unnecessary complexities, penalties and interests on taxes.
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How to Simplify the Sales and Use Tax Compliance?
You can relax the burden of tax compliance from your shoulders by hiring an accounting professional. You can also opt for various tax automation software and services to help you file your taxes.
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Do all states with a sales tax have a use tax?
Use tax is a complementary tax that applies only in the absence of the sales tax. Therefore, all states with sales tax have an inherent complementary use tax liability.
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Are sales and use tax rates similar in all states?
Usually, the sales and use tax rates are similar. However, the sales and use tax rates can vary according to the rules and regulations of different jurisdictions.
