There is so much to know about sales tax compliance compared to just sales tax. The majority of the businesses deal in use tax that comes in one or two types: the seller use tax and consumer use tax. All though all three of them come together as sales and use tax, there are a few major differences that we will explore in this post.
To register any business with the state and file or pay use or sales tax, first it is important to understand what every tax is all about and which situations allow for what kind of tax, and when you are responsible to remit sales tax, the consumer use tax or seller tax. Let us go ahead to understand more about these terms below.
What’s Sales Tax?
The Sales Tax can be defined as a tax on a sale, transfer, and exchange of the taxable product and service. Generally, sales tax will apply on a sale only to an end-user and ultimate consumer. The sales tax is added to its sales cost and charged to its purchaser.
Sales tax can be applied just to the intrastate sales and where the customer and seller will be located in the same state. The sales taxes are also considered as “trust taxes” and where the seller will collect its tax from the customer to remit the collected tax to an appropriate taxing jurisdiction.
What’s Use Tax?
The Use Tax can be defined as the tax on the use, storage, and consumption of any taxable product and service where no sales tax is paid. This type of tax is the complementary and compensating tax to another type of tax and doesn’t apply if sales tax was already charged.
The use tax generally applies to any purchases done outside its taxing jurisdiction but it is used within a state. So, use tax applies to the items bought exempt from the tax that is used subsequently in the taxable way manner.
Understanding the major differences between the use tax and sales tax
It is so much to understand that sometimes it gets a bit confusing to understand how it works. Here is a brief overview of similarities or differences between the sales tax and use tax:
Sales Tax and Use Tax:
- They differ based on the location or area
- Both are one kind of tax
- It is should be remitted to the tax agency by the seller or buyer
- Both of them follow the same tax rate (5% for sales or use tax)
Following might differ depending on if you are dealing with the sales tax or use tax:
- How it is paid (type of form or electronic payments)
- Who should pay or remit it (business or customer)
- When tax gets paid (at a sale time and later)
How does the Use Tax work?
Use tax process is quite straightforward and it stays on the customer side of their purchase. Here is the quick detail on how it works, right from its transaction to tax return.
Sale Point
What will be taxed? Most of the products are taxable under the state’s law. For example, Texas taxes TV’s, and you stay in Texas. But, when you order the TV from Oklahoma and from the seller who has got no Texas nexus, you will not pay sales tax to a seller. This transaction payment is the plain product rate. However, then separately, you need to pay tax to Texas state. In the recent Wayfair case, the Supreme Court ordered that even the digital sales should be considered for sales tax calculations. So it’s totally based on your state laws.
Paying
You need to calculate tax on a product that is based on the local sales tax prices. After that, you enter this as the line item on the yearly income tax return.
Enforcing
Suppose the buyer doesn’t pay the use tax where they live, they can face penalties and interest. However, to be very honest, compliance is tough for the states to enforce. Generally, it is successfully enforced over large the purchase of various tangible products, like vehicles.
Tips to Calculate and Remit Sales & Use Tax
The rates of sales tax and use tax will differ from one state to another and from the locality, thus one of the important tips that we will offer to the sellers online is to understand where you have the Nexus. Nexus will be defined as having a physical and economic presence in the state and locality.
