Although it’s common to speak of “sales and use tax” as a single entity, the term actually describes two distinct types of taxes: (1) sales tax and (2) use tax. Both types can apply to the sale of taxable goods or services. However, any given taxable transaction will involve only sales tax or use tax—if one tax doesn’t apply, then the other does.
To understand the difference between sales and use tax, it is first necessary to explore the concept of business nexus. This is used to determine whether, for legal purposes, a business has a significant operational presence in a particular state. If they do, then they must collect state sales tax on applicable transactions.
The easiest way to establish a business nexus in a state is to maintain a physical location there, such as a storefront. There are other ways as well, which vary by state law. In many states, simply having an agent or representative conducting business there on behalf of the company is enough to establish a nexus.
What if the business has no physical presence in the state at all? A sales tax might still apply to the business’ transactions. The 2018 Supreme Court decision South Dakota v. Wayfair, Inc. permitted states to impose a sales tax on out-of-state sellers even in the absence of a storefront or other physical location.
As a result, a number of states have created a specific threshold for determining whether an out-of-state vendor has a business nexus: during a calendar year, it must accumulate from state residents either $100,000 in total sales, or at least 200 distinct transactions. Businesses that exceed this threshold must hold a valid seller’s permit, or sales tax license.
But what happens when an out-of-state business has no nexus in a given state? Does sales tax apply? No, but use tax does. But what is use tax? Although the seller is not required to charge sales tax, the buyer has the responsibility to pay tax to the state—this is known as a use tax. The seller does not charge a use tax; the buyer pays it directly to the relevant agency. The use tax applies to buyers who use, store, or consume property that is ordinarily taxable under state law.
To illustrate the differences between these two categories of taxes, FastFilings, providers of one of the easiest ways to get a seller’s permit online, has put together a brief infographic, which you can view in the space below.
