Introduction

Let’s start with a story. Imagine you order $5,000 worth of laptops for your office from an online vendor in another state. The checkout page doesn’t add sales tax, so you happily swipe your card, thinking you scored a deal. Fast forward a year, and you’re suddenly facing an unexpected tax notice from your state. What happened? The culprit is use tax.

So, what is use tax? It’s the often-forgotten partner of sales tax. When a seller doesn’t collect sales tax at checkout, the buyer — that’s you — is responsible for paying use tax directly to the state. Many small business owners don’t even realize they owe it until it’s too late. In this guide, we’ll break down what use tax is, why it matters for small businesses, and how to report it correctly before it snowballs into penalties.

Understanding the Basics of Use Tax

At its core, use tax is designed to make sure that all taxable purchases contribute fairly to state revenue, whether you buy in-state or out-of-state.

Here’s how it works:

• Sales tax is collected by the seller at checkout.

• Use tax is self-reported by the buyer when no sales tax was charged.

States created use tax to prevent businesses from avoiding sales tax by shopping across state lines. Without it, local companies that charge sales tax would be at a disadvantage compared to out-of-state sellers.

If you’ve already explored economic nexus thresholds, you know states are aggressive about protecting their tax base. Use tax is another tool in their arsenal.

Why Small Businesses Need to Worry About Use Tax

The tricky part is that use tax sneaks up on business owners. You might assume that if the seller doesn’t charge tax, you’re in the clear. Unfortunately, that’s not how states see it.

Common scenarios where small businesses owe use tax:

• Ordering equipment or supplies online without sales tax

• Buying software licenses from out-of-state vendors

• Importing promotional items for a trade show

• Furnishing an office with tax-free furniture from another state

Imagine a business that buys $20,000 worth of equipment tax-free in a year. If the state sales tax rate is 6 percent, that’s $1,200 in unpaid use tax. Over time, unpaid liabilities add up, and states are stepping up enforcement.

Worse, if you’re also selling products across state lines, you could face overlapping obligations. As we covered in our international sellers article, global businesses often owe both sales and use tax, creating a double burden.

Key Differences Between Sales Tax and Use Tax

While they sound similar, sales and use tax differ in key ways:

Collection vs. Self-reporting

Sales tax is collected by sellers on taxable sales. Use tax is self-reported by buyers when sales tax isn’t collected.

In-state vs. Out-of-state purchases

Sales tax applies to purchases made in-state. Use tax applies when you buy goods or services from an out-of-state seller without tax.

Responsibility and liability

Sales tax liability usually falls on the seller. Use tax liability is entirely on the buyer.

This distinction matters because it shifts the burden onto small businesses. Unlike sales tax, where the seller handles collection, you are responsible for tracking, reporting, and remitting use tax.

Common Situations Where Businesses Owe Use Tax

Most small businesses owe use tax more often than they think. Let’s look at three common situations.

Online purchases from out-of-state vendors

Not every online retailer collects sales tax. Smaller vendors on Shopify or independent websites may ship tax-free. Those purchases trigger use tax.

Equipment and software bought without sales tax

Business tools, machinery, or cloud software subscriptions are often purchased tax-free. But if the vendor doesn’t collect sales tax, the obligation is on you.

Trade shows, conventions, and imports

Bringing in promotional items from another state or importing goods from abroad typically creates a use tax obligation.

The bottom line: if you buy taxable goods or services without being charged sales tax, expect your state to want its cut.

How to Calculate and Report Use Tax

Paying use tax isn’t as mysterious as it seems. It comes down to three steps:

1. Gather records and receipts

Review your invoices for purchases where no sales tax was charged. These are your use tax liabilities.

2. Apply your state’s sales tax rate

Use the same tax rate you would have paid if the purchase had been made in-state.

3. Report and remit

Some states require reporting on a separate use tax return, while others include it on the sales tax return. Check your state’s Department of Revenue website for instructions.

Failing to report correctly isn’t something to brush off. States can impose back taxes, interest, and penalties.

The Risks of Ignoring Use Tax

Ignoring use tax is like ignoring a leak in your roof. At first, nothing happens. But over time, the damage compounds.

Here’s what small businesses face when they don’t pay:

• Audits: States may examine your purchase history in detail

• Penalties: Fines add up quickly, often exceeding the original tax owed

• Interest: Unpaid tax accrues interest from the due date

• Reputation damage: Noncompliance can spook investors, lenders, or buyers

If you’ve read our breakdown of Avalara vs. TaxJar, you know software alone won’t protect you. States expect accuracy, and missteps can still trigger audits.

Best Practices for Staying Compliant

The good news? Staying compliant doesn’t have to be a nightmare. A few proactive steps can save your business major headaches.

Regular internal reviews

Set aside time each quarter to review untaxed purchases. Catching issues early is far cheaper than dealing with an audit.

Training staff on tax rules

Employees who handle purchasing need to know when use tax applies. Even a small slip can create a big liability.

Working with tax professionals

DIY only gets you so far. Partnering with experts like My Sales Tax Firm gives you confidence and protection.

Use Tax in the Age of E-commerce

E-commerce has made use tax more relevant than ever. Marketplaces like Amazon often collect sales tax, but not always. Independent Shopify sellers, eBay vendors, or international suppliers may skip it.

As a small business, you may owe use tax on your own untaxed purchases, while also needing to collect and remit sales tax to other states. It’s a double challenge.

If your business is crossing borders, whether domestic or international, check out our guide on international seller compliance to see how use tax fits into the bigger picture.

Tradeoffs and Challenges in Managing Use Tax

Managing use tax is a balancing act.

• Manual tracking saves money but eats up time and risks human error.

• Software automation reduces errors but requires ongoing fees.

• Professional help costs upfront but protects you from long-term liabilities.

The challenge is deciding where your business fits on that spectrum. No approach is perfect, but ignoring use tax entirely is the riskiest option.

How My Sales Tax Firm Can Help

At My Sales Tax Firm, we know that compliance is complicated, especially for small businesses with limited resources. Our team helps you:

• Identify where use tax applies in your business

• File accurately with your state

• Defend your business in case of an audit

We handle the headaches so you can focus on running your business.

Conclusion

So, what is use tax? It’s the hidden side of sales tax that kicks in when sellers don’t collect at checkout. For small businesses, it’s one of the most overlooked tax obligations — and one of the most dangerous to ignore.

Key takeaways:

• Use tax applies to untaxed purchases from out-of-state or online sellers

• Small businesses often owe it on equipment, software, and imports

• Compliance means tracking, reporting, and sometimes getting expert help

Need help figuring it out? Don’t wait for an audit to knock on your door. Contact the experts at My Sales Tax Firm today for a free consultation.