Taxes are complex, and they become even more so when trying to understand some of the more specific criteria and how they will affect your business. Sales tax and use tax are commonly confused, and it isn’t hard to see why. They both refer to the tax imposed on a purchase, but in order to file your taxes correctly, you’ll need to determine which applies to your business.
Understanding the Difference Between Sales and Use Tax
Though a sales tax and a use tax are both applicable to purchases you might make, there are some differences. A sales tax is applicable in the following circumstances:
- A product is purchased in a retail environment.
- Personal property is sold.
- A tangible item is bought. These criteria differ from those applied to a use tax, which are as follows:
- Goods are used and no sales tax was paid at time of purchase.
- A service, rather than a product, is bought.
- A purchase is made, but the item is kept in inventory prior to use or resale.
- Product is bought with no intention of resale.
- An item initially intended for resale is instead used for internal purposes.
In short, a sales tax and a use tax are mutually exclusive. You may be liable for a sales tax if you purchase an item and immediately use or resell it, or you might be faced with a use tax if you avoided sales tax initially or are using the product internally.
Other Issues That May Determine Your Tax Liability
It can still be difficult to understand whether your business is liable for sales tax or use tax. One important aspect not to forget is the state you are conducting business in. Use tax may be applicable, rather than sales tax, if you’ve made a purchase for your business from out-of-state. Rather than paying for the sales tax in the state the item is sold, your home state may claim taxes since the item will be used in that state. Typically, the rate is the same either way.
Most Common Applications of Use Tax
Since sales and use tax are usually applied at the same rate, paying sales tax is often simpler than delaying the charge and paying a use tax. Nonetheless, there are some specific circumstances in which business owners are always subject to a use tax:
- If you maintain an inventory of products, for example you sell paper goods, and you remove stock to use rather than sell, that merchandise is subject to a use tax rather than a sales tax.
- Purchasing an item from a seller who is unauthorized to charge you sales tax also means you are subject to use tax.
- You receive goods via a subscription or Internet order that originated in a different state.
These are the most common instances of use tax application, but it can often still be complex to determine which applies to you.
Determining Whether You Must Pay Sales Tax or Use Tax
If you are operating a business and conducting interstate commerce, things can certainly get tricky when trying to calculate the correct taxes. The best way to do so is to follow these tips:
- Check the regulations in place for the state you are dealing with, and ensure you are abiding by their standards.
- Document all transactions and taxes paid, and keep an organized database to easily track and find information.
Following these guidelines can keep you on the right path and on the up-and-up with tax authorities.
How to Pay Your Sales or Use Tax
Sales tax is typically collected by the merchant who sells you items, so paying it does not usually require any additional effort. Use tax, on the other hand, requires remitting payment to your home state. To do so, you should research the specific methods of payment your state accepts for taxes, and submit your taxes accordingly.
The content on our website is only meant to provide general information and is not legal advice. We make our best efforts to make sure the information is accurate, but we cannot guarantee it. Do not rely on the content as legal advice. For assistance with legal problems or for a legal inquiry please contact you attorney.