Use tax is a sales tax you owe on items you buy outside your state but use inside it
Use tax exists because states want to collect sales tax on goods consumed within their borders, whether you buy them locally or elsewhere. If you buy something in a state with no sales tax (or a lower rate) and bring it home to a state with sales tax, you owe the difference to your home state. The tax applies to the full purchase price, just as if you had bought it in-state.
Most people never pay use tax directly because retailers in your state collect sales tax at checkout. Use tax only becomes your responsibility when you buy from a seller who did not collect it — typically online retailers, out-of-state mail order, or in-person purchases during travel. You report what you owe on your state income tax return or through a separate use tax form.
The rate you owe matches your state's sales tax rate, which varies by location. Some states have no sales tax at all, so residents owe no use tax. Others charge between 4 and 10 percent depending on the county or city where you live.
Key Takeaways
- Use tax applies when you buy goods outside your state but use them inside your state, and the seller did not collect sales tax.
- You owe use tax at your home state's rate, and you report it yourself on your state income tax return or a separate use tax form.
- Most online purchases are now subject to sales tax collection by the retailer, so use tax applies mainly to older mail orders, out-of-state travel purchases, and items bought from small sellers.
- Failure to report use tax can result in penalties and interest if your state audits your return, though enforcement varies widely by state.
When you actually owe use tax
You owe use tax only when three conditions are met: you bought something outside your state, you brought it into your state to use, and the seller did not collect sales tax. If the seller already charged you sales tax — even if it was a lower rate than your home state — you do not owe additional use tax.
Common situations where use tax applies include buying a car out of state and registering it in your home state, purchasing furniture or appliances during a trip and shipping them home, or ordering from a catalog company that does not collect tax. Online purchases rarely trigger use tax now because most large retailers collect sales tax in all states. However, small online sellers, international vendors, and some specialty retailers may not collect it.
If you buy something for use outside your state — for example, you live in New York but buy a laptop in California to use at your California office — you do not owe use tax to either state. Use tax only applies to goods you bring into your state for personal or business use there.
How to report use tax on your state return
Most states let you report use tax directly on your income tax return. You list the purchases you made without sales tax, add up the total, multiply by your state's sales tax rate, and enter that amount on the return. Some states provide a worksheet or a line specifically for use tax; others let you write it in as an additional tax owed.
A few states offer an alternative: you can report use tax on a separate form filed with your return. Your state's department of revenue website lists which method applies to you. If you are unsure whether a purchase qualifies, most states provide guidance documents or examples on their websites.
Keep receipts for any out-of-state purchases you report. If your state audits your return, you will need to show proof of what you bought, where, and how much you paid. Many people estimate their use tax based on total out-of-state spending rather than tracking individual items, and states often accept reasonable estimates.
The difference between use tax and sales tax
Sales tax is collected by the seller at the point of sale. Use tax is collected by you, the buyer, after the purchase. Both taxes exist to fund state and local government services, and both are calculated at the same rate in your location.
The key difference is who collects the money and when. When you buy something in a store in your state, the cashier collects sales tax and sends it to the state. When you buy something out of state without tax, you are responsible for calculating and reporting use tax yourself on your tax return. From the state's perspective, the result is the same — the state receives tax revenue on goods consumed within its borders.
Some states call the combined system "sales and use tax" because they treat the two as a single tax with different collection methods depending on where the purchase happens.
States with no sales tax and how use tax works there
Five states have no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Residents of these states do not owe use tax to their home state because there is no state sales tax to owe. However, if you live in one of these states and buy something in a state with sales tax, you pay that state's sales tax at checkout — you do not owe use tax later.
The situation reverses if you live in a state with sales tax and buy something in one of these five states. You owe use tax to your home state on that purchase because the seller did not collect your state's tax. For example, if you live in Massachusetts and buy a coat in New Hampshire, you owe Massachusetts use tax on the coat's price.
Some states without sales tax do have other taxes that serve similar purposes, such as Alaska's business tax or New Hampshire's rooms and meals tax. These are separate from use tax and do not change how use tax works.
What happens if you do not report use tax
Most states do not actively pursue individuals for unreported use tax on small purchases. However, if your state audits your income tax return, the auditor may ask about out-of-state purchases and calculate what you should have reported. If you owe use tax and did not pay it, you will be charged the unpaid tax plus interest and possibly penalties.
The penalty varies by state but typically ranges from 5 to 25 percent of the unpaid tax, depending on whether the state considers it negligence or fraud. Interest accrues from the date the tax was due, usually the date you filed your return or the tax deadline, whichever came first.
Businesses face stricter enforcement than individuals. If you own a business and regularly buy inventory or equipment out of state without paying use tax, your state is more likely to audit and pursue the debt. Some states also cross-check vehicle registrations and property records to identify large purchases that should have triggered use tax.
How online shopping changed use tax
Before 2018, most online retailers did not collect sales tax unless they had a physical location in your state. This created a major gap: people bought goods online tax-free while local stores collected tax, giving online sellers a price advantage. Many people owed use tax on these purchases but did not report it.
In 2018, the U.S. Supreme Court ruled that states could require online retailers to collect sales tax even without a physical presence in the state. Most large online retailers now collect sales tax in all states where they ship. This means use tax applies mainly to purchases from small sellers, international vendors, and specialty retailers that have not yet implemented sales tax collection.
The change reduced the amount of use tax owed by individuals but did not eliminate it. You still owe use tax on out-of-state purchases from sellers who do not collect it, and you still report it on your tax return.
Frequently Asked Questions
Do I owe use tax on everything I buy out of state?
No. You owe use tax only on items the seller did not collect sales tax on. If you bought something in another state and the seller charged you that state's sales tax, you do not owe additional use tax. You also do not owe use tax on items you buy for use outside your state.
What if I buy something online from a company with no physical location in my state?
Most large online retailers now collect sales tax in all states, so you would not owe use tax. However, some small sellers and international vendors may not collect it. Check your receipt: if sales tax was charged, you do not owe use tax. If it was not, you report use tax on your state return.
Can I deduct use tax on my federal income tax return?
No. Use tax is a state tax and does not reduce your federal taxable income. However, some states allow you to deduct state income tax on your federal return, which is separate from use tax. Consult your state's tax guidance or a tax professional for details.
What if I cannot remember exactly what I bought out of state?
Most states allow you to estimate use tax based on your total out-of-state spending. You do not need to list every item. Keep general records of major purchases and trips, and calculate a reasonable estimate of what you owe. States typically accept reasonable estimates without requiring itemized receipts unless you are audited.
Do I owe use tax on a car I bought out of state?
Yes, typically. When you register a vehicle in your state, you usually owe use tax on the purchase price if you did not pay sales tax in the state where you bought it. Some states waive use tax if you paid sales tax in another state, even if the rate was lower. Check your state's vehicle registration rules or contact your state's department of revenue.