Use tax is a type of sales tax on purchases made from another state for items that would be taxable if you bought them locally.
Use tax is also sort of like the evil twin of Sales tax, BUT each of these taxes work differently.
So, let’s backtrack for a second…..
As a legitimate handmade business, one of the things that you need to do BEFORE you actually start your business is to register and license your business with the Department of Taxes in the state where your business operates from.
When you register and license your business, one of the things that you will need to do is set up a Sales & Use tax account – there may be other types of tax accounts that you need to set up as well – but for the purpose of this article, we’ll just focus on Sales & Use tax.
We should all be pretty familiar with the Sales tax part (or we should be) because it’s the tax we charge our customers for the items that they purchase. Here are a few articles I’ve written related to Sales Tax:
- Sales Tax Tracking Tips for your handmade business
- Sales Tax, the Supreme Court Decision & your handmade business
- Sales Tax, Economic Nexus & your handmade business
So, back to Use Tax
Use tax is a totally different thing – and could very well work differently in each state – so first I’ll give you a technical description and then I’ll talk about Use tax and how it applies to me and my business in my home state of Vermont.
First, the technical explanation from Sales Tax Institute:
Use tax is a type of sales tax on purchases made outside of the state of residence or business operation for taxable items that will be used, stored, or consumed in one’s state of residence and on which no tax was collected in the state of purchase. If the purchase would have been taxed if it was made in the purchaser’s home state, then use tax is due.
Did your eyes just glaze over? It’s all VERY confusing. Here is an example of how use tax works for me:
Let’s say I buy a ream (package) of copy paper:
- If I buy that package of paper at the local office supply store in town, I’m charged and pay sales tax. Easy peasy!
- If I buy that same package of paper in New Hampshire (where the have NO sales tax) – now I have to track the amount of sales tax that I would have paid if I had bought it locally and submit the use tax when I file my sales tax return.
Oh, but wait – it gets more complicated!
As a legitimate business, one of the benefits that comes from registering my business is that I can also apply for a Sales Tax Certificate – also known as a Reseller’s Certificate, Reseller’s License, or Tax-Exempt Certificate – depending on your state.
A Sales Tax Certificate is an exemption from Sales or Use tax you would normally pay on certain items for your business, NOT on the sales tax you collect from customers.
How does a Sales Tax Certificate work?
You buy yarn or craft supplies at wholesale prices from large companies (I have a wholesale account with Darice and Knit Picks) and you’ll be combining these supplies into finished items that you’ll sell at a retail price.
By providing both Darice & Knit Picks with my Sales Tax Certificate and my Federal EIN, I don’t have to pay sales tax (or track use tax) when I buy supplies that go into my finished items.
Just to be clear – I would still have to track and pay Use tax on that ream of copy paper I bought in New Hampshire – because the copy paper is something that I would be using in the normal course of my business in my office.
Economic Sales Tax nexus should take care of “most” of the need to track use tax – but I doubt that it will take care of all of it.
There are five states that do not have Sales Tax (Alaska, Delaware, Montana, New Hampshire and Oregon), so if you purchase supplies (think yarn) from a company in those states – you may need to pay Use Tax in your home state.
The bottom line – Sales & Use Tax is totally different and VERY confusing!
While I’ve provided you with a general overview of the difference between Sales and Use Tax in this article, I highly recommend that you seek local professional help for for information specific to your state. A good resource is either your CPA/Tax Preparer or your local Small Business Administration (SBA) office – you may discover that you are responsible for “use tax” on personal purchases too.
Next week, we’ll talk about some ways to track use tax.