What Is Use Tax? When Businesses Owe It and How to Report It

TL;DR

• Use tax is the buyer’s tax obligation when a seller does not collect sales tax on a taxable purchase.

• Sellers collect sales tax at checkout. Businesses calculate and report use tax on untaxed purchases.

• Out-of-state purchases, items removed from resale inventory, and employee expenses can create use tax obligations.

• SaaS and digital purchases may trigger use tax because each state classifies software and digital services differently.

• Businesses usually report use tax on a sales and use tax return or a consumer use tax return. Missed payments can lead to back taxes, interest, penalties, and audit exposure.

What Is Use Tax?

Use tax is the counterpart to sales tax owed by the buyer when sales tax was not collected at the point of purchase. A business generally self-assesses the tax when it buys taxable goods or services for use in a state and the seller leaves sales tax off the invoice.

For example, a company may order office equipment from an out-of-state vendor and have it shipped to a branch in another state. If the vendor does not collect the applicable sales tax, the buyer reviews the purchase, calculates use tax based on the destination jurisdiction, and reports the amount to the state.

Use tax can also apply when a business buys an item tax-free for resale but later uses it internally. A retailer that removes a laptop from resale inventory for an employee may owe use tax because the business became the laptop's final user.

The underlying purchase must still be taxable under the relevant state and local rules. A valid exemption may remove the liability, while sales tax already paid usually reduces or eliminates the use tax due on the same transaction.

When Do Businesses Owe Use Tax Instead of Sales Tax?

Businesses owe use tax when they buy taxable goods or services without paying sales tax. Common triggers include an untaxed purchase from an out-of-state vendor, inventory bought under a resale exemption and later used by the business, or a purchase from a remote vendor that has no obligation to collect tax in the buyer’s state.

A vendor’s collection duty usually depends on nexus, which describes a sufficient connection with a state. Physical operations can create nexus, and remote sales above a state’s economic threshold can do the same. Several states have eliminated the 200-transaction economic nexus test and now rely on sales revenue thresholds or other state-specific rules. Buyers should check each state's current requirements before concluding that a vendor with fewer than 200 transactions lacks nexus.

The buyer should review any taxable purchase when the invoice shows no tax. For example, a company may order office equipment from a small remote seller that does not meet the destination state’s collection threshold. The seller may have no duty to collect, but the buyer may still need to calculate use tax at the applicable state and local rate.

A resale certificate also creates exposure when the business changes how it uses an item. If a retailer removes a tax-exempt laptop from inventory for an employee, the retailer has converted the item to business use and may owe use tax. State taxability rules and exemptions determine the final liability.

Sales Tax vs. Use Tax: What Is the Difference?

Sales tax is collected by the seller when a taxable purchase occurs. Use tax is self-assessed and paid by the buyer when the seller does not collect the required sales tax.

For example, an out-of-state vendor may sell office equipment to your business without charging tax. Your business must determine whether the purchase is taxable where the equipment will be used, apply the appropriate rate, and report the amount as use tax.

Sales tax and use tax are mutually exclusive on a given transaction. When the seller collects the full required amount, the buyer generally owes no additional use tax. When the seller collects less than the required amount, the buyer may owe the difference.

The distinction determines who handles collection and remittance. Sellers collect sales tax from customers and send it to the tax authority. Buyers accrue use tax in their accounting records and remit it through the applicable sales and use tax return or consumer use tax return.

Do SaaS and Digital Purchases Trigger Use Tax?

SaaS and digital purchases trigger use tax in states that tax them when the vendor does not charge sales tax. States classify software differently: some tax SaaS as a taxable service or digital product, and others exempt it.

A company paying for a project management subscription billed with no tax needs to check the rule in each state where employees use the software. The same subscription can be taxable for staff in one state and exempt for staff in another, so accounts payable should review recurring software invoices as closely as equipment purchases.

How Do Businesses Report and Pay Use Tax?

Businesses self-report use tax on a combined sales and use tax return or a dedicated consumer use tax return. Most businesses remit it on the filing schedule assigned by the state, which often matches their sales tax schedule.

Use tax reporting starts when accounts payable records a purchase without the required sales tax. Your review should include vendor invoices, employee expense reports, and procurement card transactions. Taxable SaaS and digital purchases enter the same review flow as other vendor purchases.

A repeatable accrual process follows five steps.

1. Flag invoices where the vendor charged no tax or charged less than the expected amount.

2. Determine whether the purchase is taxable in the jurisdiction where your business uses the product or service. Valid exemptions and tax paid to another state may reduce or eliminate the amount due.

3. Apply the combined state and local rate for the relevant location. If the vendor collected some tax, calculate only the remaining difference.

4. Record the liability in the general ledger for the appropriate filing period. Keep the invoice, taxability decision, location, rate, and calculation with the entry.

5. Reconcile the accrued balance against the return, then file and remit by the assigned deadline. Reverse an accrual if the vendor later issues a corrected invoice and collects the tax.

Monthly reconciliation helps catch missing invoices before a quarterly or annual return comes due. Finance staff should also compare use tax accruals with accounts payable totals and investigate unusual changes by vendor, expense category, or location. Each filed return should match the supporting ledger and purchase records so the business can explain how it calculated the tax during an audit.

What Happens If a Business Does Not Pay Use Tax?

A business that fails to pay use tax can owe the original tax, accrued interest, penalties, and additional amounts identified during an audit. Interest generally continues to accrue until the business pays the liability, while penalties may apply to late returns, late payments, or inaccurate reporting.

For example, a company that pays $60,000 a year for software subscriptions billed without tax, in a state that taxes SaaS at a hypothetical 6% combined rate, accrues $3,600 of unpaid use tax each year. Across a three-year lookback, that is $10,800 before interest and penalties.

California applies a standard three-year statute of limitations and an eight-year period when no return was filed under Revenue and Taxation Code section 6487.

Poor purchase records can increase the assessed amount. If a business cannot document which vendor invoices included sales tax, an auditor may examine purchase records and calculate use tax on transactions that lack proof of tax payment or exemption. Recurring software subscriptions, employee purchases, and invoices from out-of-state vendors often require particular attention because sales tax may not appear on the invoice.

A business can reduce further exposure by reviewing prior periods, calculating unpaid tax by jurisdiction, and filing the required returns. When a liability covers several years or states, the business may also need to evaluate voluntary disclosure programs before registering or contacting a tax authority.

How Do Finance Teams Track Use Tax on Vendor Purchases?

Finance teams track use tax exposure by flagging untaxed vendor invoices when accounts payable records them, then reconciling those invoices monthly against state taxability rules. Each flagged record should identify the purchased item or service, the location where the business uses it, and any tax the vendor collected. Accounts payable can then calculate the difference between tax paid and tax owed.

Manual tracking often fails when an employee overlooks an invoice or assumes every software subscription receives the same tax treatment. Vendor descriptions may also hide taxable SaaS charges inside general service categories. Even when staff identify a taxable purchase, they may apply the vendor’s location rate instead of the rate for the location where the business uses the purchase.

A monthly reconciliation should compare the purchase ledger with vendor invoices and expense reimbursements. Finance staff should review missing tax amounts, exemption codes, and unusual changes in vendor tax collection. Documented taxability decisions give auditors a record of why the business accrued tax or treated a purchase as exempt.

When a review finds unpaid tax from prior years, Taxwire files the prior-period returns and runs voluntary disclosure agreements, which typically cover a three to four year lookback. Taxwire also recovers tax that vendors overcharged. Implementation takes one week, and support responds in under an hour.

Frequently Asked Questions

Is use tax the same rate as sales tax?

Use tax generally applies at the combined state and local sales tax rate for the location where the business uses the purchase. A credit may reduce the amount due when the business paid sales tax to another state.

Can use tax apply to purchases from another state?

Use tax can apply when an out-of-state seller ships taxable goods or provides taxable services without collecting the required sales tax. The buyer must review the tax charged and self-assess any unpaid amount under the destination state’s rules.

Do exempt organizations owe use tax?

Exempt organizations may owe use tax because an organization’s exempt status does not necessarily cover every purchase. Eligibility depends on the state, the organization, and how it uses the item. The organization should give the vendor a valid exemption certificate when the purchase qualifies.

What records support a use tax audit defense?

A business should retain vendor invoices, purchase orders, proof of tax paid, exemption certificates, and records showing where each purchase was used. Accrual workpapers, filed returns, and payment confirmations should connect the invoice review to the amount reported.

Does an accountable plan or expense reimbursement change use tax liability?

An accountable plan governs the federal income tax treatment of employee reimbursements, and state rules separately determine use tax liability. If an employee buys a taxable item without paying sales tax, the applicable state rules determine whether the employee or the reimbursing business must report use tax. Proof that the employee paid the correct sales tax generally prevents a second tax assessment on the same purchase.

Key Takeaway

CFOs, controllers, and tax leaders at multistate businesses should treat use tax accrual as a recurring accounts payable control. Finance should flag untaxed purchases when invoices enter the ledger, review taxability each month, and resolve exceptions before filing deadlines.

Proactive accrual limits the exposure that can build between audits. Once finance establishes the review process, Taxwire can handle the recurring return work through managed filing.