Use tax is a state tax you owe when you buy a taxable item without paying sales tax and then use, store, or consume it in your home state. It exists as a backstop: if the seller didn’t collect sales tax at the register, the obligation shifts to you to report and pay the equivalent amount directly to your state. Every state that has a sales tax also has a use tax, and the rate is almost always the same. You never owe both on the same purchase.
The five states without a general statewide sales tax — Alaska, Delaware, Montana, New Hampshire, and Oregon — generally do not impose a use tax either.
How Use Tax Relates to Sales Tax
Sales tax and use tax are the same tax collected at different points. A seller with a connection to your state (called “nexus”) collects sales tax at checkout and sends it to the state. When no seller collects, you owe use tax at the same rate.
Historically, nexus required a physical presence in the state, such as a store or warehouse. In 2018, the Supreme Court held in South Dakota v. Wayfair, Inc. that a seller’s economic activity in a state can create nexus without any physical presence.1Supreme Court of the United States. South Dakota v. Wayfair, Inc. After Wayfair, every state with a sales tax adopted economic nexus rules requiring remote sellers above certain sales thresholds to collect. In practice, that means most large online retailers now collect sales tax in every taxing state, so the number of purchases where you personally have to self-report has dropped sharply. Use tax still applies, though, in the situations described below.
When You Owe Use Tax
Even with widespread collection by major retailers, several everyday transactions still create a use tax obligation:
- Buying from a smaller out-of-state seller that doesn’t meet your state’s economic nexus threshold and therefore charges no sales tax.
- Buying furniture, electronics, a vehicle, or other goods from a private party, whether through an online marketplace or in person. Private sellers almost never collect sales tax.
- Bringing goods home from another state or country for personal use — jewelry, clothing, electronics, and similar items purchased while traveling.
- Placing catalog or phone orders with small vendors that don’t charge sales tax.
- For businesses: pulling items from tax-free resale inventory for internal use. If you bought office supplies with a resale certificate and then used them yourself, you owe use tax on what you diverted.
Digital Goods and Software
Whether use tax applies to digital purchases depends on your state, and there is no uniform rule. Roughly three-quarters of states with a sales tax apply it to at least some digital goods, but coverage varies.
Downloaded software, e-books, music files, and other digital products you own permanently are taxable in most states that tax digital goods. Streaming subscriptions, where access ends when payment stops, are treated inconsistently: some states tax them explicitly, others tax only permanent downloads, and definitions have led to litigation in states with narrower language. Cloud-based software you access without downloading is a separate gray area; taxing it usually requires specific legislation or a broader services tax, so states that tax traditional downloaded software don’t automatically tax cloud services. If you subscribe to software-as-a-service or streaming, check your state’s rules.
Credits and Exemptions
Credit for Tax Paid to Another State
If you already paid sales tax to another state on a purchase, your home state generally credits that amount against the use tax you would otherwise owe. This prevents double taxation. Say you bought a laptop while visiting a state with a 5% sales tax, and your home combined rate is 8%. You owe use tax on the 3% difference. If the other state’s rate matched or exceeded your home rate, you owe nothing more.
Common Exemptions
Most states apply the same exemptions to use tax that they apply to sales tax. Broadly, these often include:
- Items bought with a valid resale certificate, as long as you actually resell them.
- Purchases by qualifying nonprofits, religious and educational organizations, and government entities.
- Groceries and prescription drugs, in states that exempt them from sales tax.
- Property stored temporarily in a state while in transit to a final destination elsewhere.
Exemption rules differ meaningfully from state to state. Check your state revenue department’s guidance before assuming a purchase is exempt.
How to Calculate What You Owe
You need three things: the purchase price of the taxable item, the combined state and local tax rate at your address, and any sales tax already paid to another jurisdiction.
Look up your combined rate on your state revenue department’s website, which usually has an address-based rate tool. Multiply the purchase price by that rate, then subtract any sales tax you already paid. The result is your use tax.
Example: you buy a $1,000 piece of furniture from an out-of-state seller who charged no tax, and your combined local rate is 7.5%. You owe $75. If that seller had charged 4% sales tax from their state, you would owe $35 — the $75 liability minus the $40 already paid.
Reporting and Paying Use Tax
Individuals
Most states with a use tax include a line for it on the state income tax return. You enter the total you owe on that line and pay it along with the rest of your state taxes. This is the most common way individuals handle it.
Some states also provide a lookup table based on adjusted gross income. If you didn’t keep receipts for every small untaxed purchase, you can report the table amount instead. These estimates are modest, often from a few dollars up to under $100 depending on income, and they only cover routine small purchases. A large untaxed item like a vehicle or expensive equipment has to be calculated and reported separately at its actual value.
If your state doesn’t put a use tax line on the income return, or if you need to report outside your annual filing, you can typically file a separate consumer use tax return through the state revenue department’s website.
Businesses
Businesses generally report use tax on a combined sales and use tax return filed monthly, quarterly, or semiannually depending on transaction volume. Most states require electronic filing. The return asks for total taxable purchases in the period, the applicable rate, and any credits for tax paid to other jurisdictions.
Paying
States accept electronic bank transfers, checks with a paper return, and card payments through their portals. Card payments often carry a convenience fee from a third-party processor. When use tax is on your income tax return, it’s simply added to your total state tax liability.
Penalties for Not Paying
Not reporting use tax can lead to penalties, interest, and in rare cases fraud charges. The structure is similar across states:
- Late filing penalties, usually a percentage of unpaid tax per month or partial month, capped at a maximum percentage of what’s owed.
- Late payment penalties on any unpaid balance, even if you filed on time.
- Interest on unpaid tax from the original due date. State rates commonly fall between 5% and 12% annually.
- Fraud penalties for intentional evasion, sometimes 50% or more of the tax owed.
States can audit for unreported use tax. The standard window is three years from the filing date, but it can extend to six years or more if you substantially understated liability, and many states have no time limit at all if you never filed a return. For businesses, use tax is one of the most commonly assessed items in state sales tax audits, especially where resale certificates were used to buy tax-free inventory later diverted for internal use.
Records to Keep
Good records protect you in an audit. For each untaxed purchase, keep:
- Receipts or invoices showing the seller, item, price, and date.
- Shipping confirmations showing when and where items were delivered.
- Proof of any sales tax paid to another state, which supports your credit claim.
- Copies of filed returns and confirmation numbers, including income tax returns showing the use tax line.
Hold these for at least three years after filing, which matches the standard audit window in most states. Because some states have longer windows in certain circumstances, keeping records for four to six years gives you a safer margin.2Internal Revenue Service. What Kind of Records Should I Keep