Use Tax Explained for Small Businesses

Use tax is a tax you owe as the buyer when you purchase taxable goods or services for use in your state and the seller did not collect your state's sales tax. It is charged at the same rate as sales tax, reported on your own return, and designed so that buying out of state or buying tax-free and then using the item yourself does not avoid tax. For small businesses, it most often comes up with online equipment purchases, supplies bought with a resale certificate, and inventory taken for internal use.

Most owners never think about use tax until an auditor does. This guide explains when you owe it, how to calculate it, where to report it, a worked example with real-looking numbers, and the mistakes that cause audit assessments. It is general information, not tax advice; state rules differ, so confirm with your state revenue department or a sales tax professional.

Sales tax vs use tax

	Sales tax	Use tax
Who is responsible	Seller collects from buyer and remits	Buyer reports and pays directly
When it applies	Taxable sale where the seller has nexus	Taxable item used in the state with no (or too little) sales tax paid
Rate	Rate at the point of sale or delivery	Rate where the item is first used
Where reported	Seller's sales tax return	Buyer's sales and use tax return, or a separate use tax return

The Washington Department of Revenue explains it simply: sales tax is collected by the seller, while use tax is the buyer's responsibility, paid directly to the state when sales tax was not paid on the purchase.

When does a small business owe use tax?

• Out-of-state purchases without tax. Buying a $3,000 printer from a seller who has no nexus in your state and charges no tax.
• Purchases for resale that you use instead. A contractor buys lumber with a resale certificate and uses some for the company's own shed.
• Inventory removed for business use. A retailer takes a laptop from stock for the office, or gives products away as samples or prizes.
• Exempt purchases used for a nonexempt purpose. Equipment bought under an exemption certificate but later used outside the exemption. See our guide to sales tax exemption certificates.
• Moving equipment into a state. Some states impose use tax when you bring business property in, often with credit for tax paid elsewhere.
• Imports. Goods bought from overseas suppliers rarely include US state sales tax.

Since 2018, most large online sellers and marketplaces collect sales tax under economic nexus and marketplace facilitator laws, so use tax gaps have narrowed. But small vendors, B2B suppliers, overseas sellers and exempt purchases still create plenty of liability.

How to calculate use tax

1. Identify the purchase price of the taxable item, generally including shipping where your state taxes shipping (see sales tax on shipping).
2. Find the combined state and local rate where you first use the item.
3. Multiply price by rate.
4. Subtract any sales tax you already paid to another state, if your state allows a credit.
5. Report the result for the period in which you first used the item.

The sales tax calculator works for use tax too, since the rate is the same.

How and where to report use tax

Your situation	Where use tax usually goes
Registered for sales tax (seller's permit)	Your regular sales and use tax return, "purchases subject to use tax" line
Not registered, buys a lot of untaxed items	Some states require registration as a use tax account or qualified purchaser
Occasional purchases, no sales tax account	A consumer use tax return, or a line on the state income tax return in some states

In California, for example, a business with a seller's permit reports use tax on its regular return, and a business without a permit may need to register as a qualified purchaser if it makes more than $10,000 a year of purchases subject to use tax, according to CDTFA guidance. Washington businesses report it on their excise tax return in the period the goods were first used.

Worked example: a small marketing agency

Illustrative figures. An agency in a state with a combined 8% rate reviews its purchases for the quarter:

Purchase	Price	Tax charged	Use tax due
Camera from an out-of-state specialty shop	$2,400	$0	$192
Office chairs from a major online retailer	$1,100	$88 (8%)	$0
Trade show banners from a supplier in a state with no sales tax	$650	$0	$52
Laptop bought in another state at 6% tax	$1,500	$90	$30 (difference)
Freelance design services (nontaxable in this state)	$3,000	$0	$0
Total			$274

The agency reports $274 on its next sales and use tax return. A simple habit, tagging untaxed purchases in the bookkeeping system each month, makes this a ten-minute task. Whether services are taxable depends on the state; see sales tax on services by state.

Digital purchases and use tax

As more states tax software and digital products, use tax on subscriptions is growing. If your state taxes SaaS and your vendor does not charge tax, you owe use tax. California will tax prewritten software and SaaS from January 1, 2027, so California businesses buying software from vendors that do not register should plan for it. Our guide to sales tax on digital products covers state-by-state treatment.

Use tax for contractors and service businesses

Contractors face use tax more than most. In many states, a contractor installing materials into real property is treated as the consumer of those materials, which means the contractor pays sales tax when buying them, or use tax if bought untaxed, rather than charging sales tax to the customer. A contractor who buys materials tax-free on a resale certificate in such a state and then installs them may owe use tax on the full cost. Other states treat certain contracts differently, so check your state's contractor rules before choosing how to buy and how to invoice.

Service businesses such as agencies, consultants and clinics usually do not resell goods, so nearly every taxable item they buy is for their own use. If a vendor did not charge tax, use tax applies. Common examples are equipment from out-of-state specialty suppliers, promotional products, furniture, and software in states that tax it.

Building a simple monthly use tax routine

1. In your bookkeeping software, add a tag or class for "no sales tax charged" when entering bills and card transactions.
2. At month end, filter for taxable items with that tag. Ignore nontaxable services and items where tax was charged.
3. Multiply by your local rate and record a use tax accrual as an expense or as part of the asset cost.
4. Report the total on your next sales and use tax return or use tax return.
5. Keep the vendor invoices and the monthly calculation together, so an auditor can see the process.

Use tax you pay is generally part of the cost of the item, so it is deductible as an expense or added to the asset's basis for depreciation.

Use tax and exemption certificates you give to vendors

When you hand a vendor a resale or exemption certificate, you take on responsibility for the tax if the item is not used as the certificate says. That is the most common path into a use tax assessment for retailers and contractors. Review certificates you have issued at least once a year, make sure staff understand that personal or internal-use purchases cannot go on the resale account, and record use tax promptly when stock is diverted for your own use. Vendors keep copies of your certificates, and auditors can request them to trace what you bought tax-free.

Common use tax mistakes

• Thinking it only applies to individuals. Businesses are the main target of use tax audits.
• Using the seller's state rate. The rate is where you use the item.
• Not tracking items pulled from inventory. Samples, giveaways and internal use are frequent audit findings.
• Double paying. If a vendor already charged your state's tax, do not report use tax again; keep the invoice showing tax paid.
• Ignoring fixed assets. Auditors start with the fixed asset register because big-ticket purchases carry big tax.
• Losing invoices. Without the vendor invoice, you cannot prove tax was paid; see how long to keep invoices.

What to do if you have unpaid use tax

Estimate the exposure by reviewing purchase records for the last three or four years. If it is significant, talk to a sales tax professional about a voluntary disclosure agreement, which in many states limits the lookback period and waives penalties in exchange for coming forward. Going forward, add a monthly accrual step to your bookkeeping and train whoever approves purchases to check whether tax was charged. If you are preparing for a broader review, our invoice audit preparation guide helps organize records, and filing a sales tax return shows where the use tax line sits.

On the selling side, clear invoices that show the tax you charged help your business customers avoid use tax questions too. Create them with our free invoice generator, with no sign-up, and download each invoice as a PDF for your records and theirs.