Consumer Use tax is a substitute for sales tax. It is paid directly to the state by the purchaser of taxable property or taxable services when the vendor does not charge tax at the time of sale. Just because your vendor does not charge you tax at the point of sale does not always mean the transaction is non-taxable.
All states which have a sales tax also impose a use tax. The purpose of use tax is twofold: to mitigate consumer circumvention of sales tax, and ensure a level playing field between in-state and out-of-state retailers. Even after the recent South Dakota v. Wayfair, Inc. decision, many internet retailers do not charge sales tax to residents of states in which they have no physical presence. Moreover, it is not uncommon for states which have no sales tax to entice consumers in neighboring states to conduct purchases across states lines. These realities have created a situation wherein billions of dollars of potential sales tax revenue are lost each year.
If I didn’t pay sales tax on an item, am I always obligated to remit use tax?
Some items are not subject to consumer use tax. If the purchase would not be taxable if the item were purchased from an in-state vendor, then it will not be subject to use tax if it’s purchased from an out-of-state vendor. This would include the following types of items:
A) purchases of inventory for resale*
B) purchases of statutorily exempt property, e.g. groceries
C) purchases of real property or items that will be permanently affixed to real property
* If a company withdraws items from inventory for use inside the company, this changes the taxable character of the items from nontaxable to taxable and use tax must be remitted.
Because use tax and sales tax are invariably linked, use tax noncompliance is a major source of risk exposure when companies undergo a sales tax audit. Many auditors take advantage of the complex compliance requirements and make a special effort to find transactions that are subject to use tax.