Use tax is a state tax you owe on purchases when no sales tax was collected, charged at the same combined state and local rate that would have applied at checkout. If you buy something from an out-of-state seller, a foreign retailer, or a private party and no sales tax appears on the receipt, your state expects you to calculate the equivalent amount and pay it directly. Forty-five states plus the District of Columbia impose sales tax, and nearly all of them have a matching use tax. The five states without a statewide sales tax — Alaska, Delaware, Montana, New Hampshire, and Oregon — have no use tax either.
How Use Tax Differs From Sales Tax
Sales tax and use tax cover the same purchases at the same rate. The difference is who handles the money. Sales tax is collected by the seller at checkout and sent to the state. Use tax is your responsibility: you calculate what you owe and pay the state directly. You never owe both on the same transaction. If the seller collected sales tax, you are done. If the seller did not, use tax fills in.
That self-assessment burden is what makes use tax easy to overlook. Sales tax is invisible to most buyers because the seller handles everything. Use tax requires you to track your untaxed purchases, figure out the correct local rate, and report the amount on the right form. It is one of the most common findings in state audits for exactly that reason.
The rate matches the combined state and local sales tax rate where you use or store the item. If your area has a 4% state rate and a 2% county rate, you owe 6% use tax on any untaxed purchase used there.
When You Actually Owe Use Tax
The situations where individual consumers owe use tax have narrowed a lot since 2018, but they have not disappeared. Two legal shifts explain why most online purchases now come with sales tax already applied.
First, the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. allowed states to require out-of-state sellers to collect sales tax once they cross an economic threshold, typically $100,000 in sales or 200 transactions in the state.1Supreme Court of the United States. South Dakota v. Wayfair Inc. That overturned decades of precedent requiring a physical presence before a state could force collection.
Second, nearly all sales tax states quickly adopted marketplace facilitator laws. These laws make the platform — Amazon, eBay, Etsy — collect and remit tax on behalf of third-party sellers. The upshot is that purchases from major marketplaces almost always arrive with sales tax already collected, so no use tax is owed.
The gaps are what remain. Common triggers for individuals include:
- Purchases from small independent websites and direct sellers who fall below a state’s economic nexus threshold and do not collect tax.
- Purchases from foreign retailers. Federal customs duties do not satisfy your state use tax; those go to the federal government, and state use tax applies on top of them.
- Private-party sales of tangible property such as boats, equipment, or furniture bought from another individual.
- Vehicles bought in another state. Most states collect the use tax when you register or title the vehicle, so you do not have to remember to self-report.
- Items bought tax-free elsewhere and brought home. If you travel to a state with a lower rate or no tax and bring purchases back, use tax may apply on the full amount or on the difference in rates.
A common example is buying furniture directly from a craftsperson in Oregon, where no sales tax exists. Whatever your home state’s rate is, you owe it as use tax when the piece arrives.
Business Triggers Are Broader
Businesses face use tax exposure far more often than individuals, and the dollar amounts are larger. Three patterns come up repeatedly in audits.
Out-of-state vendor purchases. When a company buys office equipment, computer hardware, machinery, or supplies from a vendor that does not collect tax, use tax is owed. Not every vendor has nexus in every state, and purchasing departments do not always flag untaxed invoices.
Inventory converted to business use. Inventory bought for resale is typically purchased tax-free under a resale certificate. If the business pulls items from that inventory for its own use, such as a retailer taking a desk off the shelf for the back office, use tax is owed on the cost. This is an audit favorite because the paper trail is easy to follow: the exemption certificate says “for resale,” but the item never got resold.
Digital goods and software. Roughly half of states tax some form of digital goods, including downloaded software, e-books, streaming subscriptions, and SaaS products, and the rules vary sharply. Some states tax downloaded software but not cloud subscriptions; others tax streaming media but not business SaaS. If your business buys software or digital media from a vendor that does not collect tax, check how your state treats it. Getting this wrong in either direction costs money, either in audit assessments or in overpaying tax you do not owe.
International purchases work the same way for businesses as for individuals. Goods bought from foreign sellers are subject to use tax, and federal customs duties do not offset it. Following the 2026 suspension of the federal duty-free de minimis exemption, even low-value international shipments now face federal duties and fees at the border.2The White House. Continuing the Suspension of Duty-Free De Minimis Treatment for All Countries State use tax applies on top of what you pay federally.
Credit for Tax Paid to Another State
You generally do not get taxed twice on the same purchase. Most states allow a credit against use tax for any sales or use tax you legitimately paid to another state on the same item. Buy furniture in a state with a 5% rate and bring it home to a state with a 7% rate, and you typically owe only the 2% difference. If the rate you already paid meets or exceeds your home state’s rate, you owe nothing more, though the other state will not refund the overage.
To claim the credit you need proof of the tax paid: a receipt showing the amount or rate charged. The credit applies only to actual sales or use tax. Federal excise taxes, customs duties, and foreign taxes do not count. Some states also impose a reciprocity requirement, meaning they will only give a credit for tax paid to states that would extend the same courtesy in reverse. Keep receipts from out-of-state purchases, because claiming this credit without documentation is a fast way to lose it.
Common Exemptions
Use tax exemptions mirror sales tax exemptions in your state. If a purchase would be exempt from sales tax, it is also exempt from use tax. Specifics vary, but certain categories are widely exempt:
- Items purchased for resale, as long as they are actually resold. The moment you divert them to personal or business use, the exemption evaporates and use tax is owed.
- Manufacturing equipment and raw materials used directly in manufacturing or processing, though the definition of “directly used” gets litigated constantly.
- Government and nonprofit purchases. Federal and state agencies are generally exempt, and qualifying nonprofits often are too, usually with an exemption certificate on file.
- Agricultural supplies and equipment used in farming and commercial agriculture.
- Prescription medications and medical devices, which are exempt from sales tax in most states.
An exemption only holds if you can document it. Businesses should keep exemption certificates on file and be ready to produce them during an audit. An unsupported claim is treated the same as not paying the tax at all.
How to Calculate and Report Use Tax
The math is straightforward: multiply the purchase price by the combined state and local rate for the location where you store or use the item. The harder part is remembering to do it and knowing where to report it.
Individuals
Most states fold use tax reporting into your annual income tax return. There will be a specific line, and many states offer a simplified lookup table based on your adjusted gross income that lets you report an estimated amount for small purchases without itemizing each one. If your untaxed purchases significantly exceed the table amount, you are expected to calculate and report the actual figure. If your state does not have an income tax, you may need to file a separate use tax form.
Businesses
Businesses registered for sales tax report and remit use tax on their regular sales and use tax return, typically filed monthly or quarterly. Use tax on your own purchases goes on the same form where you report sales tax collected from customers. Companies not registered for sales tax may need to file a separate business purchaser’s use tax return. Form names and filing requirements vary by state.
Record-Keeping
Good records are your only real defense in an audit. For every purchase where no sales tax was collected, keep the invoice, receipt, or order confirmation showing the vendor, date, item description, and amount paid, along with a note on whether tax was charged and at what rate. For businesses, the IRS recommends keeping purchase records that identify the payee, amount, proof of payment, date, and a description of the item.3Internal Revenue Service. What Kind of Records Should I Keep State retention rules for sales and use tax records run at least three to four years, and longer in states with extended statutes of limitation for non-filers.
Penalties and Audit Risk
State revenue departments know that most people and many businesses underreport use tax, and audit programs are built to catch it. The typical look-back period is three to four years, though states can extend that to six years or longer if you never filed a return or significantly underreported. Fraud can eliminate the statute of limitations entirely.
Penalties for non-payment generally run from 5% to 25% of the unpaid tax, depending on the state and how late the payment is. Interest accrues on top of penalties, often at annual rates between 7% and 12%. For businesses, multi-year non-compliance can snowball into six-figure assessments once back taxes, penalties, and compounding interest combine. Collecting tax from customers and failing to remit it is treated as fraud in most states and can carry criminal charges.
If you realize you have years of unreported use tax, a voluntary disclosure agreement may limit the damage. Most states offer these programs, which typically waive penalties and cap the look-back period at three years in exchange for coming forward before the state contacts you. Once an audit notice arrives, the voluntary disclosure option disappears, so the window to get ahead of the problem is narrow.