
In many states, sales tax remains a crucial means of implementation of a public financing measure. As of mid-2025, California still holds one of the highest sales tax rates of 7.25 percent, with several other states having rates of 7.0 percent, including Indiana, Mississippi, Rhode Island, and Tennessee.
From the federal standpoint, the IRS estimates that in tax year 2022, the gross tax gap, which is the difference between what is owed and what is paid on time after adjustment, was $696 billion, with a voluntary compliance rate of 85 percent.
Both numbers include a strong point to make: In 2025, with evolutions in tax compliance, plenty of businesses are challenged in following their responsibilities, especially when dealing with both use tax vs sales tax requirements. Then, how are sales tax and use tax different, and what makes both necessary? Let’s get through your entire tax preparation checklist below!
Table of Contents
What Is Sales Tax?
Sales tax is a state and local tax imposed on the retail sale of goods and certain services.
- Who collects it: the seller adds that into the price at checkout and remits it to the proper state or local agency.
- When it applies: Whenever you sell a taxable product or service in an area where you have nexus to collect tax.
Examples of Sales Tax
- A clothing shop in Illinois sells a $100 jacket and adds the state’s combined rate (for example 6.25 %), collecting $6.25 in tax from the customer.
- A software-as-a-service provider adds sales tax on subscriptions in states where digital services are taxable.
- A furniture store selling locally charges the city’s added local rate on top of the state rate.
Are you confident your business tax filings are fully optimized and compliant?
What Is Use Tax?
Use tax works alongside sales tax and applies when taxable goods or services are used, stored, or consumed in a state and no sales tax was charged.
- Who pays it: Generally, the buyer calculates it and remits the tax.
- Purpose: To insure against the possibility that people circumvent tax by buying from sellers in other states that, however, do not collect sales tax.
Examples of Use Tax
- Your company orders office chairs from an out-of-state vendor who doesn’t collect sales tax for your state. When the chairs are delivered, you owe use tax at your state’s rate.
- A retailer purchases inventory tax-free with a resale certificate but later uses some of those goods for internal purposes. Those goods become subject to use tax.
- You buy equipment online from a seller with no nexus in your state and no tax is charged. You’re responsible for paying the use tax.
Key Differences: Use Tax vs Sales Tax
How to Calculate Sales Tax and Use Tax for Your Business
Calculating these tax filing costs doesn’t have to be complicated. Follow these practical steps to work out both sales tax and use tax accurately and stay on the right side of state tax compliance.
1. Find the correct rate to apply
This consists of combining the state, county, and city rates depending on where the title or possession passes to the purchaser.
2. Determine the taxable amount
Normally, it is the purchase price of an item, less exempt items.
3. Apply the formula
Sales tax: taxable amount × sales tax rate.
Use tax: taxable amount × use tax rate (often identical).
4. Credits for tax paid elsewhere
Many states allow credit for sales tax paid to another state.
5. File and remit
-
- Sales tax: collected from the customer and sent in on scheduled returns.
- Use tax: reported by the buyer, often on a sales/use tax return or annual report.
Orbit Tip: Multi-state operations imply multilayered tax compliance. The automated tax software or a trusted advisor such as Orbit Accountants can save time and forestall errors.
How This Difference Affects Your Business
Understanding the real-world impact matters just as much as the definition. Herein lies the impact of a difference between sales tax and use tax upon how you conduct, finance, and pursue your compliance.
- Audit Risk: Use tax is a common audit trigger. States hold things in scrutiny when it comes to unreported out-of-state purchases.
- Cash Flow: Sales tax is customer-funded. Use tax comes directly from your budget, so plan accordingly.
- Economic Nexus: Since the 2018 Wayfair ruling, states can make out-of-state sellers collect sales tax even if they have no physical location there.
- Recordkeeping: Maintain invoices and evidence supporting any sales tax paid on claims for credits and incidence of audits.
Tip: If you’re catching up on old returns, use a tax calculator to estimate potential tax filing costs and any overdue tax liability. A solid tax preparation checklist ensures you gather every required document before filing.
Final Takeaway
Sales tax and use tax may appear to be the same; hence, it is critical to know the dissimilarity. By comprehending when each is applicable and getting the right systems in place, you are saving your business from heavy fines and sweating an audit.
Need a tax compliance review or help setting up multi-state sales and use tax systems?
Get in touch with Orbit Accountants and let us handle all the complex situations in your business so that you focus entirely on strategizing the growth for the same.
Frequently Asked Questions
Do all states have both taxes?
Most states that charge sales tax also impose a matching use tax.
When do I pay use tax instead of sales tax?
When you purchase taxable goods or services without being charged sales tax and bring them into your state.
Why does Use tax have to exist if sales tax is in place already?
It is to ensure fairness, so that buyers cannot avoid the tax by shopping across state lines.
How do states enforce use tax?
Through audits, income-tax return disclosures, and third-party reporting.
What happens if I don’t pay use tax?
Expect interest, penalties, and possible audits.
Are there exemptions from use tax?
Yes. Many states mirror their sales tax exemptions, such as for manufacturing inputs or resale.
Who is responsible for paying use tax?
Typically the buyer. Some states also require certain remote sellers to collect it.
How can Orbit Accountants help?
Orbit Accountants can:
- Review your nexus in every state where you sell or buy.
- Set up automated systems to calculate and remit taxes.
- Identify overlooked use tax liabilities and help correct them.
- Represent you in audits or inquiries.
Disclaimer: This article is provided by Orbit Accountants for informational purposes only and does not constitute professional accounting, tax, or legal advice. Every business situation is unique—please consult with a qualified advisor or reach out to Orbit Accountants for guidance tailored to your needs.