Most sellers focus on sales tax — the tax collected from the buyer at the point of sale. But there's a complementary tax most businesses overlook: use tax. Understanding use tax saves you from compliance surprises and audits that target exactly this gap.
What is use tax?
Use tax is a tax on the use, storage, or consumption of tangible goods within a state when the buyer did NOT pay the state's sales tax at purchase. Rates match sales tax rates. Use tax exists to prevent out-of-state arbitrage: if Amazon doesn't charge you Illinois sales tax on a $500 tablet, Illinois still wants its cut when you bring the tablet home.
When does a business owe use tax?
- Out-of-state purchases. You buy office supplies from a vendor in another state; they don't charge your state's sales tax because they have no nexus there. You owe use tax.
- Resale inventory converted to business use. You bought widgets tax-free with a resale certificate, then took some for internal use. The converted units now owe use tax.
- Equipment moved between states. Moving machinery from one state to another can trigger use tax in the destination state if it wasn't taxed originally.
- Online digital purchases. SaaS, cloud storage, or digital product purchases from vendors without nexus in your state — if those items are taxable in your state.
How do businesses report use tax?
Most states include a line on the sales tax return for self-reported use tax. If you're not registered for sales tax but owe use tax, most states offer a separate consumer use tax filing. Larger businesses often build a dedicated use-tax accrual process, with monthly journal entries estimating the untaxed purchases.
Why it matters now
Post-Wayfair, most out-of-state vendors collect sales tax, so use tax exposure has decreased for many businesses. But some gaps remain: small vendors without nexus, foreign vendors, asset transfers between states, and services delivered by out-of-state consultants. Audit teams specifically check these categories during sales and use tax audits.
Further reading
Read the glossary for related terms like resale certificate and exemption certificate, or review your top state rules on sales tax returns ( California, Texas).