A use tax is the tax you owe your home state when you buy something taxable and the seller doesn’t collect sales tax on it. The rate matches the combined sales tax rate where you live, and you’re the one responsible for calculating it and paying it. It comes up most often with online purchases from smaller retailers, things you buy while traveling, and private-party sales like used cars. Every state that has a sales tax also has a use tax, and the obligation shifts to you as the buyer whenever the seller doesn’t handle it.
Why Use Tax Exists
The tax closes a simple gap. If buying from an out-of-state seller let you skip sales tax entirely, local stores would be at a permanent disadvantage and your state would lose revenue on goods actually consumed inside its borders. So the use tax rate is identical to the combined sales tax rate where you live, including any local and district taxes stacked on top of the state base. If your area’s combined sales tax is 8.25%, your use tax rate is 8.25%.
You aren’t being taxed twice. When a seller collects sales tax, you owe nothing more. When the seller doesn’t collect, that same amount becomes your responsibility, reported by you instead of by the retailer.
When You Actually Owe It
A handful of everyday situations trigger use tax:
- Online purchases from a smaller retailer that falls below your state’s economic nexus threshold and doesn’t collect your state’s tax.
- Private-party vehicle and boat sales. This one is enforced consistently because the DMV or its equivalent collects the tax when you register the vehicle. You can’t finish the registration without paying.
- Things you buy while traveling in a state with a lower rate or no sales tax and bring home to use.
- Catalog and phone orders from out-of-state sellers where no tax was charged. Less common now, but still on the list.
- Inventory withdrawals. A business buys goods tax-free under a resale certificate and then pulls items off the shelf for its own use. That withdrawal is a taxable event.
Five states don’t impose a general sales or use tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. If you live in one of them, this isn’t something you have to track.
How the Wayfair Ruling Narrowed Consumer Use Tax
Before 2018, a seller only had to collect your state’s sales tax if it had a physical presence there, like a store, warehouse, or sales rep. That rule came from a 1992 Supreme Court case, and it meant most online retailers didn’t collect tax for states where they had no physical footprint. Consumers technically owed use tax on those purchases, but almost nobody paid.
The Supreme Court changed that framework in South Dakota v. Wayfair, Inc., ruling that states could require out-of-state sellers to collect based on their economic activity in the state, not just physical presence. The South Dakota law at issue applied to sellers delivering more than $100,000 in goods or services into the state, or completing 200 or more transactions there, on an annual basis.1Supreme Court of the United States. South Dakota v. Wayfair, Inc.
Every state with a sales tax has since adopted some version of an economic nexus law. The most common threshold is $100,000 in annual sales, though the range runs from $10,000 to $500,000 depending on the state. Several states have dropped the transaction-count threshold entirely and rely on the dollar amount alone. The practical result is that large online retailers now collect sales tax in every state that imposes one. Consumer use tax obligations have narrowed, but smaller sellers below nexus thresholds, private-party transactions, and cross-border purchases still leave the responsibility with you.
A Worked Example
Say your combined state and local rate is 7.5%, and you buy a $1,200 piece of exercise equipment from a small online retailer that doesn’t collect your state’s sales tax. The calculation is $1,200 × 0.075 = $90. That $90 is what you’d report and pay to your state’s revenue department.
Now imagine you bought that same equipment while visiting a state with a 4% sales tax and paid $48 at the register. Back home you’d owe the difference: $90 minus the $48 credit, or $42.
The rate that matters is the one where you use or store the item, not where you bought it. That combined rate includes state, county, city, and any special district taxes. Your state’s revenue department website has a lookup tool where you enter your address and get the exact percentage.
Credit for Tax Already Paid to Another State
You generally won’t be taxed twice on the same purchase. If you paid another state’s sales tax at the point of sale, your home state gives you a dollar-for-dollar credit against the use tax you owe, and you only pay the difference when your home state’s rate is higher. The credit can’t exceed your home state’s use tax, so it won’t generate a refund if you paid a higher rate elsewhere. Most states also don’t grant credits for taxes paid to foreign countries or U.S. territories.
Keep the receipt showing the tax paid in the other state. You’ll need it to claim the credit on your return or at a vehicle registration counter.
Common Exemptions
Use tax exemptions generally mirror whatever your state exempts from sales tax. The most common ones are groceries and unprepared food, prescription medications, and in some states, clothing below a certain dollar threshold. If an item would be tax-free at a local store, it’s typically exempt from use tax when bought out of state too.
Items bought for resale are also exempt, as long as the buyer holds a valid resale certificate and the item is actually resold. The moment a business diverts a resale item to its own use, the exemption is gone and use tax is owed on that item’s purchase price.
How to File and Pay
For most individuals, the easiest route is your annual state income tax return. Many states include a use tax line directly on the individual return. You total your untaxed purchases for the year, apply the appropriate rate, and enter the amount. Some states offer a simplified lookup table based on your income so you can estimate the tax without tracking every small purchase, though the table only covers a limited amount and you’ll need to calculate the actual figure for larger items.
If your state doesn’t include a use tax line on the income tax return, or if you owe more than a certain threshold, you may need to file a separate consumer use tax return. These forms are available through your state’s revenue department website and are typically due by mid-April, matching the income tax deadline.
Businesses handle it differently. A business that regularly buys taxable goods from out-of-state sellers without being charged sales tax generally needs to register for a sales and use tax account with the state and report use tax on its periodic sales tax return, whether that’s monthly, quarterly, or annually depending on volume.
Keep Your Receipts
Hold on to invoices, receipts, and shipping records for every purchase where you weren’t charged sales tax. Those documents should show the date, the item, the price, and where it was delivered. You’ll need them for accurate reporting and to protect yourself in an audit.
The IRS recommends keeping tax-supporting records for at least three years, and six years if underreported income exceeds 25% of what’s shown on your return.2Internal Revenue Service. How Long Should I Keep Records State lookback periods for sales and use tax audits generally run three to four years, and some states extend to five.3Multistate Tax Commission. Lookback Periods for States Participating in National Nexus Program A safe rule is at least four years from the filing date, longer if your state’s lookback period goes further.
Penalties for Not Paying
States take unpaid use tax seriously, even though individual compliance has historically been low. Expect penalties and interest that compound the longer you wait. Penalty rates range widely across states, from as low as 1% per month to lump-sum assessments that can reach 25% or more of the unpaid balance. Interest accrues on top, and many states impose flat minimum penalties regardless of how small the tax owed is.
For businesses the stakes are higher. Auditors reviewing business records look for inventory withdrawals, untaxed equipment purchases, and supplies bought under a resale certificate but consumed internally. The paper trail is usually clear enough to spot. Voluntary disclosure programs exist in most states and typically let you come forward, pay back taxes for a limited lookback period, and avoid the harshest penalties. If the state finds you first, that option is off the table.