Sales tax and use tax usually address opposite sides of the same purchasing situation. Sales tax is typically collected by a seller when making a taxable sale. Use tax can become relevant when taxable property or services are used, stored, or consumed in a state but the seller did not collect that state’s applicable sales tax. The exact tax base, rate, registration rules, exemptions, and reporting method depend on the state and sometimes the local jurisdiction.
The practical question is therefore not simply whether a transaction is called a sale. It is who is responsible for handling the tax. A seller with a collection obligation generally charges the customer and remits the tax. When the seller does not collect the applicable tax, the purchaser may need to determine whether use tax is due.
Businesses that must collect either sales tax or seller-collected use tax generally need the appropriate state registration. Because the registration document and agency terminology vary, businesses considering registration should use the relevant state option on the sales tax application page rather than assuming one permit works nationwide.
Sales Tax and Use Tax in Plain Language
Although people sometimes use the terms interchangeably, they describe different ways a state may tax a transaction. Sales tax is normally associated with tax collected by the retailer at the point of sale. Use tax generally addresses a taxable purchase for which the applicable sales tax was not collected, shifting attention to the purchaser’s use, storage, or consumption of the purchase.
California provides a clear jurisdiction-specific example. It imposes sales tax on retailers’ in-state retail sales of tangible personal property. California use tax applies to consumers for tangible personal property used, consumed, or stored in California when applicable California tax was not collected. California also states that the two taxes are mutually exclusive for a transaction: either sales tax or use tax may apply, but not both.
That example illustrates the basic distinction, but it should not be treated as a nationwide definition. States establish their own rules about taxable products and services, exemptions, local taxes, seller registration, purchaser reporting, and filing schedules. A business should classify each obligation under the law of the state connected to the transaction.
Who Sales Tax and Use Tax Affect
Sellers collecting tax
A seller must first determine whether it has an obligation to register and collect tax in the customer’s state. That determination may depend on physical activities, sales volume, transaction activity, and other state-specific connections. Thresholds are set individually by each state and are reviewed periodically, so a figure used for one state should not be carried over to another.
For example, the California Department of Tax and Fee Administration administers California sales and use tax. California retailers subject to the permit requirement must obtain the registration document called a seller’s permit and report and pay sales tax.
California also has a rule for retailers located outside the state. Such a retailer must register with CDTFA and collect California use tax when its combined sales with related persons of tangible personal property delivered into California exceed $500,000 during the preceding or current calendar year. The requirement has applied to taxable sales on and after April 1, 2019. Separate physical-presence requirements continue to apply regardless of that threshold.
Purchasers that were not charged tax
Use tax most directly affects a purchaser when a seller does not collect the applicable tax. This can occur in remote or other transactions, but an uncollected amount is not automatically taxable. The purchaser still needs to consider whether the item or service is taxable, whether an exemption applies, and which jurisdiction’s rules govern its use.
Texas, for example, states that a Texas purchaser owes state and local use tax on taxable goods or services stored, used, or consumed in Texas when the seller does not charge Texas sales tax, unless an exemption applies. This rule can affect individual consumers as well as businesses. It also shows why the absence of tax on an invoice does not necessarily mean no tax is due.
A Short Comparison of the Two Taxes
| Question | Sales tax | Use tax |
|---|---|---|
| Who usually handles the tax? | The seller generally collects it from the customer. | The purchaser may report it when applicable tax was not collected, or a registered remote seller may collect it under the destination state’s rules. |
| What commonly triggers the issue? | A taxable retail sale by a seller required to collect in that jurisdiction. | Use, storage, or consumption of a taxable purchase for which the applicable tax was not collected. |
| Is a separate federal tax ID enough? | No. An EIN is a federal identifier, not a state sales tax authorization. | No. State registration or purchaser reporting rules must be considered separately. |
| Are the rules uniform nationwide? | No. Registration, taxability, rates, and filing obligations vary. | No. The applicable rate and reporting process depend on the relevant jurisdiction. |
Use tax should not be understood as an automatic second tax added after sales tax has already been paid. California expressly treats sales tax and use tax as mutually exclusive for a transaction. In practice, purchasers reviewing an invoice should identify whether the seller collected the correct jurisdiction’s tax rather than focusing only on whether a line labeled “tax” appears.
Rates also require jurisdiction-specific review. Texas’s state use-tax rate is 6.25%, with up to an additional 2% in local use taxes depending on where the item is used, stored, or consumed. Those figures are Texas-specific, not nationwide rates. Businesses comparing jurisdictions can consult the site’s overview of state sales and use tax rates, while confirming current transaction details under the relevant state’s rules.
Permits, EINs, and Exemption Documents
A sales tax permit and an EIN perform different functions. The IRS calls the federal business tax identifier an Employer Identification Number. An EIN is available free from the IRS and is required in specified federal-tax or entity circumstances, including for employers, partnerships, corporations, and certain other entities. It does not replace a state sales-and-use-tax permit or registration.
A state permit, by contrast, concerns the holder’s state tax responsibilities. Depending on the jurisdiction, the registration document may be called a seller’s permit, sales tax permit, sales and use tax permit, or another state-specific name. The document’s title should not be used to infer that it is valid in a different state.
For a closer comparison of identifiers, see the difference between a sales tax ID and an EIN. Businesses sorting out broader operating documents can also review how a sales tax permit, business license, and EIN differ.
Resale and exemption certificates add another layer. These documents generally concern why tax is not collected on a particular purchase; they are not interchangeable with every seller registration or business license. The form, permitted use, acceptance conditions, and recordkeeping expectations vary by state and exemption type. Businesses purchasing for resale should review the applicable resale certificate and sales tax permit information rather than assuming a federal EIN proves an exempt purchase.
Practical Review and Ongoing Obligations
Sellers can begin by mapping where they have physical operations and where they make sales. They can then compare those facts with each state’s current registration and nexus rules. This review should distinguish direct sales from other sales channels and should not rely on a single nationwide revenue threshold.
Texas demonstrates why state-specific timing matters. A remote seller whose only Texas activities are remote solicitation and whose total Texas revenue is less than $500,000 during the preceding 12 calendar months is not required to obtain a Texas tax permit or collect, report, and remit Texas use tax. Total Texas revenue for this purpose includes taxable and nontaxable sales and specified related charges. After exceeding the safe harbor, the seller must obtain a permit and begin collection no later than the first day of the fourth month after the month in which it exceeded the threshold.
Purchasers should review transactions on which no tax was charged, especially when buying from an out-of-state seller. Relevant records may include invoices, purchase descriptions, delivery information, exemption documentation, and evidence of where the purchase was used. The purchaser can then determine whether the transaction is taxable and how the state requires any use tax to be reported.
Texas provides two reporting paths based on permit status. A Texas purchaser holding a Texas Sales and Use Tax Permit reports use tax as taxable purchases on its next regularly scheduled Texas Sales and Use Tax Return. A purchaser without that permit reports the tax on Form 01-156, Texas Use Tax Return. Other states may use different returns and filing processes.
Registration is not the end of the analysis. A registered seller may have recurring filing, payment, documentation, and account-maintenance obligations under the state’s assigned schedule. Filing frequency and renewal requirements vary, and some accounts may still require attention for periods with no taxable sales. Businesses should keep their registration details current, preserve transaction and exemption records, and check the relevant revenue department’s current instructions before each due date.
Frequently Asked Questions
Is use tax charged in addition to sales tax?
Not necessarily. California expressly states that sales tax and use tax are mutually exclusive for a transaction: either may apply, but not both. Other jurisdictions should be checked under their own rules.
Who pays use tax when a seller does not collect sales tax?
The purchaser may have a use-tax obligation if the purchase is taxable and no exemption applies. For example, Texas says a purchaser owes state and local use tax on taxable goods or services stored, used, or consumed in Texas when the seller does not charge Texas sales tax.
Does an EIN allow a business to collect sales tax?
No. An EIN is a federal business tax identifier issued by the IRS. It is separate from state sales-and-use-tax permits or registrations, which must be obtained according to each applicable state’s rules.
Do online sellers always use the same economic nexus threshold?
No. There is no single nationwide threshold. Each state sets and periodically reviews its own rules, and physical-presence obligations may apply separately from an economic threshold.
How does a Texas purchaser report use tax?
A purchaser holding a Texas Sales and Use Tax Permit reports use tax as taxable purchases on its next regularly scheduled Texas Sales and Use Tax Return. A nonpermitted purchaser uses Form 01-156, Texas Use Tax Return.
Official Resources
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