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When it comes to state taxes, many businesses are familiar with sales tax but often overlook use tax. While the two are closely related, misunderstanding the difference can lead to unexpected compliance issues and possibly penalties and audits. Understanding how each tax works is essential for businesses that buy, sell, or use taxable goods and services.
Sales tax is a tax imposed on the sale of taxable goods and services. It is typically collected by the seller at the point of sale and remitted to the state or local taxing authority.
For example, when a retailer sells office furniture to a customer in California, the retailer charges sales tax on the transaction and sends that tax to the state.
Businesses that make taxable sales are generally required to:
Use tax complements sales tax. It applies when sales tax was not collected on a taxable purchase, but the item is still used, stored, or consumed in a state where tax is due.
In simple terms, if you purchase a taxable item without paying sales tax, you may owe use tax directly to the state. This is why proactive tax compliance planning matters for every business.
Businesses often trigger use tax obligations when they:
For example, if a California business purchases machinery from an Oregon supplier that does not charge California sales tax, the California business may owe California use tax on that purchase. For a broader overview, you can also refer to the IRS guidance on sales and use tax for businesses.
The primary distinction comes down to who remits the tax.
| Sales Tax | Use Tax |
| Collected by the seller | Self-assessed by the buyer |
| Charged at the point of sale | Paid after purchase if tax was not collected |
| Common in retail transactions | Common in out-of-state or untaxed purchases |
| Seller remits to the state | Buyer remits directly to the state |
Many businesses mistakenly assume that if a vendor does not charge sales tax, no tax is due. However, states are increasingly enforcing use tax compliance, especially as interstate e-commerce continues to grow.
State tax agencies routinely identify unpaid use tax during audits by reviewing:
Failure to report use tax can result in interest charges, penalties, and increased audit exposure.
To reduce risk, businesses should implement processes to identify untaxed purchases and properly accrue use tax at the time of purchase.
Best Practices Include:
Businesses operating in multiple states should also monitor nexus rules and changing tax laws, as requirements vary by jurisdiction. Learn more about staying ahead of regulations as a contractor.
Sales tax and use tax are two sides of the same coin. While sales tax is collected by sellers during a transaction, use tax ensures states still receive tax revenue when sales tax is not charged.
For businesses, understanding both taxes is critical to avoiding potential, and sometimes costly compliance issues. A proactive approach to sales and use tax management can help minimize audit risk and encourage accurate reporting.
If you need assistance with sales and use tax compliance, we are happy to help you navigate complex state requirements and stay ahead of changing regulations.
~ the addtech crew
*The information provided in this blog post is for general informational purposes only and does not constitute accounting, tax, financial, or legal advice. It is not intended as a substitute for professional consultation tailored to your specific circumstances.*
At adding technology, we know you want to focus on what you do best as a contractor. In order to do that, you need a proactive back office crew who has financial expertise in your industry.
The problem is that managing and understanding key financial compliance details for your business is a distraction when you want to spend your time focused on building your business (and our collective future).
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Schedule a conversation today, and in the meantime, download the Contractor’s Blueprint for Financial Success: A Step by-Step Guide to Maximizing Profits in Construction.” So you can stop worrying about accounting, technology, and compliance details and be free to hammer out success in the field.
