In the US, 45 states currently impose sales tax and use tax. These taxes are two sides of the same coin: both exist to tax the consumption of goods and services, and together, they’re designed to make sure that tax gets paid regardless of where or how a purchase happens. In practice, they differ when it comes to whether the buyer or the seller pays the tax. Conflating them can be a costly mistake for a growing business.

Below, we’ll explore the difference between use tax and sales tax, what the compliance obligations are for each, and how to evaluate your exposure on both sides.

Highlights

• Sales tax is collected by the seller at the point of sale (POS), while use tax is self-assessed and remitted by the buyer when sales tax wasn’t collected.

• Businesses are exposed on both sides simultaneously: as sellers with sales tax collection obligations, and as buyers with use tax liabilities on untaxed purchases.

• As use tax exposure accumulates, it can become an audit target. A dedicated accrual process is key for any business with out-of-state purchasing.

What is sales tax?

Sales tax is a transaction-level tax collected at the point of sale (POS). When a customer buys a taxable product or service, the seller collects the tax and remits it to the appropriate state or local tax authority. Although the customer ultimately bears the economic cost, the seller carries the legal responsibility. If tax should have been collected and wasn’t, the state looks to the seller to make it right.

Since the Supreme Court’s 2018 South Dakota v. Wayfair decision, businesses with sufficient economic nexus are generally obligated to collect and report sales taxes on items sold to customers within the state where the transaction has taken place, even if they don’t have a physical presence there.

What is use tax?

Use tax applies when a taxable purchase occurs, but no sales tax was collected at checkout. The goal is to prevent tax from disappearing just because a purchase crossed state lines or came from a seller without a collection obligation. Use tax is imposed by the buyer’s state, based on where the item is used or stored, and the buyer is responsible for self-assessing and remitting use tax. Sellers without a collection obligation have no liability for that transaction, even if the buyer never pays.

There are two types of use tax.

Consumer use tax

Consumer use tax applies when individuals or businesses buy taxable items from out-of-state sellers that don’t charge sales tax. Business purchases are documented, auditable, and frequently reviewed. It’s important that businesses ensure they’re self-assessing for use tax to avoid running into trouble if audited.

Seller use tax

Seller use tax applies in narrower situations in some states, typically involving complex business structures. It arises when a seller has nexus in a state but isn’t registered to collect sales tax as the seller of record. An example of this would be dropshipping, because the retailer has nexus with the destination state, but a third party fulfills the order. In these cases, the remote retailer might still be responsible for remitting tax, even if it never touched the inventory. B2B companies can also be subject to this if they buy from out-of-state vendors that don’t charge sales tax.

How do sales tax and use tax work together?

Sales tax captures tax at the POS, wherever possible. Use tax catches taxable purchases when sales tax wasn’t collected.

Some states allow buyers to credit sales tax already paid to another state against their use tax liability. For example, if you pay 6% sales tax at purchase, and your home state’s rate is 7%, you only owe the 1% difference, not the full amount again.

The structure works best for large, traceable purchases with strong documentation, such as equipment, vehicles, and major capital assets, where both parties have incentives to get the tax right. But use tax can fail when businesses lack the systems to track untaxed purchases. Liabilities can accumulate until an audit forces the issue.

What is the difference between use tax and sales tax?

Sales tax and use tax differ in who owes it, when it applies, and how it’s reported. They also have different geographic triggers and different types of audits.

Here’s a closer look at how these differences break down:

• Who owes it: Sales tax is collected by the seller and remitted by the seller. Consumer use tax is self-assessed and remitted by the buyer, and seller use tax is remitted by a remote seller.

• When it applies: Sales tax applies at the time of sale when the seller has a collection obligation. Use tax applies after the fact, when sales tax wasn’t collected but should have been.

• How it’s reported: Sellers report sales tax and seller use tax on periodic state returns. Buyers report use tax either on a dedicated use tax return, a consumer use tax filing, or, in some states, an income tax return line.

• Geographic trigger: Sales tax depends on where the sale occurs and whether the seller has nexus. Use tax depends on where the buyer uses or stores the item.

• Audit focus: Sales tax audits examine sales and tax collected. Use tax audits examine purchasing records and accounts payable.

What are the compliance risks of getting use tax vs. sales tax wrong?

Businesses might not discover their exposure to a tax compliance issue until an auditor does. Here are some potential issues to keep in mind when handling compliance.

Sales tax

• Failing to register: If you have nexus in a state and haven’t registered, you risk accumulating liability on every taxable sale into that state.

• Collecting at the wrong rate: Registering but collecting at the wrong rate is a problem: with over 13,000 tax jurisdictions in the US, rate errors are very possible.

Use tax

• Silent exposure: Use tax liability builds fast. Auditors might start with capital expenditures because they’re large, traceable, and commonly purchased from out-of-state vendors.

• Overlap risk: Even if businesses collect sales tax correctly, they might fail to compute use tax on their own purchases in the same states. Auditors will review both sides together, and the mismatch will show up.

Many states offer voluntary disclosure programs with reduced penalties and shorter lookback periods. The catch is that you must identify the issue before the state does.

How should businesses evaluate their use tax vs. sales tax obligations?

Treating sales tax and use tax as a single compliance issue can create problems for your business.

Here’s how you can evaluate these distinct—and equally important—tax obligations:

• Map nexus first: Identify where your business has physical presence (e.g., offices, employees, inventory) and economic presence. That determines where sales tax collection is required.

• Audit your purchasing records: Review vendors that don’t charge sales tax. Determine which purchases are taxable and whether use tax is being accrued.

• Assign internal ownership: Sales tax typically lives with finance or payment teams. Use tax belongs with accounts payable (AP). If nobody owns it explicitly, it’s likely not getting done.

• Revisit as you grow: New locations, remote hires, and fulfillment centers change both nexus and tax exposure.

• Automate where it makes sense: Stripe Tax automates sales tax calculations and collection for businesses that process payments through Stripe. It generates the records needed for filing, but doesn’t replace the obligation on the buyer’s side. The use tax side requires a separate accrual process, whether that’s built internally or handled through dedicated tax compliance software.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, value-added tax (VAT), and goods and services tax (GST) on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.