A tax imposed by U.S. states on goods purchased without paying sales tax and later used, stored, or consumed within the state.
What is Use Tax?
Use Tax is a type of state-level tax in the United States that complements sales tax. While sales tax is typically collected by the seller at the point of sale, use tax applies when the seller does not collect tax, but the buyer still owes it because the product or service is used in a taxable state.
Use tax ensures that states can still collect revenue on taxable items purchased out-of-state, online, or from sellers who did not collect sales tax at checkout. The idea is to level the playing field between in-state and out-of-state purchases and prevent tax avoidance.
Use tax is typically owed when:
- A business or individual buys a product online or from another state and the seller did not collect sales tax, and
- That product is brought into or used within a state that imposes sales tax
For example, iIf a business in California buys equipment from a non-California vendor who doesn’t charge sales tax, and the business uses the equipment in California, it must self-report and pay use tax to California. This rule applies whether the purchase was for business or personal use.
Use tax is closely related to sales tax, but it applies in different circumstances. While sales tax is collected by the seller at the time of purchase, use tax is paid by the buyer when the seller doesn’t collect sales tax but the item is used, stored, or consumed in a state that imposes sales tax. In practice, both taxes usually apply at the same rate within a given state. So, for example, if your local sales tax rate is 6%, you would typically owe 6% in use tax on untaxed purchases brought into that state.
Use tax becomes particularly important for businesses that frequently purchase goods from out-of-state vendors, import supplies or equipment from overseas, or operate dropshipping models where sales tax isn’t always charged at the point of sale. These scenarios can trigger use tax obligations even if no tax was collected during the transaction. As a result, many states expect businesses to self-report these purchases and pay the appropriate use tax either on their regular sales tax return or through a separate filing.
Businesses are often audited for unreported use tax, so it’s critical to maintain clear records of untaxed purchases and assess when use tax applies. For non-U.S. founders operating a U.S. business—particularly in e-commerce—this can be an unfamiliar concept. However, understanding that importing or buying products without sales tax doesn’t eliminate your tax obligation is key to staying compliant. Working with a qualified accountant or sales tax advisor can help ensure these obligations are met and avoid potential penalties. Use tax ultimately exists to protect a state’s tax base by ensuring that goods consumed within the state are taxed, whether or not sales tax was collected at the time of purchase.
