When you purchase goods or services, you'll be responsible for paying sales or use tax. By contrast, businesses must also remit the funds collected for sales or use tax to the appropriate state agency. Noting the differences between these two taxes can help you better understand your responsibilities.
Definition of Sales Tax
Investopedia defines sales tax as "a consumption tax imposed by the government on the sale of goods and services." It comprises both state and excise (county and city) taxes and ranges between zero and eight percent.
To illustrate, if the sales tax rate in your state is seven percent (six percent state and one percent excise) and you purchase $100 of clothing, you will pay an additional $7 in sales tax. Or, if you live in Louisiana and the state and excise tax rates are five and three percent, respectively, you will pay a total of eight percent or $8 in sales tax.
Retailers and service providers collect sales tax owed at the point of sale and remit the proceeds to the Department of Revenue in their respective state.
Definition of Use Tax
Use tax is "sales tax on purchases made outside your state of residence on taxable items that will be used, stored or consumed in your state of residence," according to Investopedia. However, you're only responsible for use tax if sales tax was not collected at the point of sale, but the state in which the goods will be used collects sales tax. In that case, the use tax obligation will be equal to the amount of sales tax you'd pay if the item or service were purchased in your state. You can retrieve a use tax form from your state's Department of Revenue website.
So, if you live in Florida and purchase shoes from an online retailer based in Georgia, you'll need to calculate the amount owed, file a use tax return and remit payment to Florida's Department of Revenue. In most states, use tax payments and returns are due on a quarterly basis.
You should also know that states tend to be less stringent with the collection of use tax because it's more difficult to track, notes Accurate Tax.com. As a result, several states have resorted to Internet tax to fill the void. This tax is assessed at the point of sale when items are purchased online. The online retailer is then responsible for sending payment to the applicable states in which their customers reside.
Sales Tax Versus Use Tax
According to the Sales Tax Institute, sales tax applies to tangible personal property and most services. On the other hand, use tax applies to tangible personal property purchased out of state and then consumed in a state that collects sales tax.
Businesses can collect sales or use tax, but both cannot be assessed on the purchase simultaneously.
Calculating Tax Rates
You can retrieve your sales and use tax rates via:
TaxRates.com: Simply enter your address and your sales tax rate will appear.
SalesTaxInstitute.com: This site provides a comprehensive listing of state rates, local rate parameters, and discloses if local rates apply to use tax.
Is Your State Tax-Exempt?
There are a few states that do not assess sales or use tax to consumers. These include Alaska (only at the local level; no state sales tax), Delaware, Montana, New Hampshire and Oregon, according to SalesTaxInstitute.com.
Important Considerations for Businesses
If you have a physical presence, also known as a nexus, affiliate or employee in a particular state, you could be liable for sales taxes. Rules vary by state, so contact your state's Department of Revenue to learn more.
How to Make Sales and Use Tax Payments
If your business generates income from taxable goods, services or rental properties, you'll need to pay sales or use tax.
Payments are remitted to the state's Department of Revenue on a monthly or quarterly basis. Before doing so, you'll need to obtain a Certificate of Registration from that department, which will contain your sales tax ID number.
Most states allow you to file your returns and remit payment for the balances owed online. However, a visit to your local tax collector's office may be necessary to obtain the proper documentation and get set-up in the online sales and use tax payment database.
What If You Don't Pay on Time?
It's always best to make payments when they're due. Otherwise, a penalty may be assessed if you fail to register, file a return(s) or remit payment in a timely manner.
Do You Need Additional Guidance?
Whether you're an individual or business owner, it's important to have a thorough understanding of how sales and use taxes work. Otherwise, you could end up overpaying or incurring underpayment penalties. To protect yourself and ensure you're in compliance with state regulations, solicit the assistance of a certified public accountant or contact your state's Department of Revenue for additional guidance.