Use Tax

Use tax is the lesser-known cousin of sales tax. It applies when you buy something for your business and the seller doesn't charge you sales tax — usually because the seller doesn't have nexus in your state. The use tax rate is typically identical to your local sales tax rate, and you're responsible for reporting and paying it yourself.

Here's a common scenario: you buy $5,000 worth of office furniture from an out-of-state online retailer that doesn't collect your state's sales tax. Your state still wants its cut. You're legally required to report that purchase on your state tax return and pay the equivalent sales tax (the "use tax") directly to the state. Most states have a line on their business tax returns specifically for this.

Use tax also applies to items you buy tax-free for resale but then pull from inventory for personal or business use. If you own a hardware store and take a power drill off the shelf for your own use, you owe use tax on it. The concept exists to prevent businesses from dodging sales tax by simply buying everything from out-of-state sellers. In practice, use tax compliance among small businesses is notoriously low — but that doesn't mean states aren't watching.

Most small business owners have never heard of use tax, which makes it a common audit trigger. States know that compliance is low, and they're increasingly cross-referencing purchase records during audits. If you've been buying equipment, supplies, or inventory from out-of-state sellers without paying use tax, an audit could result in years of back taxes plus penalties. It's not a huge amount for most small businesses — maybe a few hundred to a few thousand per year — but the penalties for non-compliance can multiply the bill. The simplest approach is to track out-of-state purchases where no sales tax was charged and report them quarterly or annually.