Use tax arises when a person or business buys any product or service outside of their home state that did not have sales tax applied. Generally, most purchases have sales taxes which are collected by sellers, but individuals and businesses may not end up paying the sales taxes because they purchased something from out of state. In these cases, 45 states have a use tax where individuals and businesses must report any purchases made that did not have sales taxes applied. For example, often purchases from online retailers will not include sales taxes, but those purchases will incur a use tax paid by the buyer. Use taxes follow the same tax rates as sales taxes and usually have the same exceptions such as groceries. Most states do not actually enforce their use tax laws, with less than a fraction of individuals actually paying the tax. Businesses, however, receive much stricter oversight and must report the covered purchases on their tax returns. Individuals also may be audited for not paying taxes on larger purchases outside the state like vehicles.
[Last updated in October of 2021 by the Wex Definitions Team]