Most business owners understand sales tax and forget about use tax. It is a tax you have to volunteer to pay when a vendor does not charge you, and auditors love this category because it is rarely tracked correctly.
Quick Answer
Sales tax applies when you sell to customers and is collected at the point of sale. Use tax applies when you buy from out-of-state vendors who do not charge tax, and you self-report it. Most state returns combine both on a single Sales and Use Tax filing, but the obligations move in opposite directions.
1. Sales Tax: You Are the Middleman
Sales tax is a trust tax. You collect it from customers and hold it on behalf of the state until your next return is due.
- The trigger: you have nexus in a state, either through physical presence (office, warehouse, employees, inventory) or economic presence (revenue or transaction volume from sales to that state's customers).
- The collection: you add the tax at the point of sale based on the customer's location and the taxability of the item or service.
- The remittance: you hold the collected tax separately and remit it to the state on the prescribed cycle (monthly, quarterly, or annually depending on your volume).
Failing to remit sales tax that was collected is treated as a criminal offense in most states. The money belongs to the state from the moment you collect it. Holding it past the due date is not the same as a late corporate income tax payment.
2. Use Tax: You Are the Consumer
Use tax is the compensating obligation. It exists so that out-of-state vendors do not get a competitive advantage over in-state vendors who have to charge tax.
- The online purchase: your business buys $3,000 of equipment from an out-of-state vendor who does not charge sales tax. The state where the equipment is used expects you to self-assess and remit the tax that was not collected at the point of sale.
- The inventory pull: you bought items tax-free for resale, then took some off the shelf for office use. Use tax applies to the cost of those items.
- The promotional giveaway: items purchased tax-free for resale and given away rather than sold are subject to use tax on the cost basis.
If a tax line never appeared on the receipt, the obligation moves to your business. Auditors check fixed asset ledgers and large vendor invoices first, because these are where the unpaid tax tends to sit.
3. The Digital Goods Expansion
Many states expanded their definitions of taxable services through 2024 and 2025 to include things that were previously exempt. The categories that most often surprise small business owners:
- SaaS and software-as-a-service: now taxable in roughly half of US states. Some states tax the subscription fee; others tax it only if delivered through a download. The distinction has become a frequent audit topic.
- Cloud storage and hosting: monthly fees for data hosting are taxable in a growing number of jurisdictions, often without notification to the customer.
- Digital advertising: a small but growing list of states have started taxing digital ad spend. If the platform does not collect, the buyer self-assesses.
- Streaming services and digital subscriptions: treated like sales of tangible personal property in some states and exempt in others. The treatment differs by jurisdiction even within the same product category.
If your business is paying for software or digital services from out-of-state vendors and the invoices show no tax line, ensure that you are checking whether use tax applies in each state where the service is consumed.
4. Economic Nexus After Wayfair
The 2018 Supreme Court decision in South Dakota v. Wayfair changed sales tax rules for remote sellers. Before Wayfair, states could only require sales tax collection from sellers with physical presence. After Wayfair, states can impose collection obligations based on economic activity alone.
Most states adopted economic nexus thresholds within two years of the decision. The common patterns:
- Revenue-based threshold: $100,000 in gross sales to a state's customers in the prior or current calendar year is the most common threshold. Some states use $250,000 or $500,000.
- Transaction-count threshold: 200 separate transactions to a state's customers, often in addition to or in place of a revenue threshold. About a third of states have eliminated the transaction-count threshold since 2020 to simplify compliance.
- Marketplace facilitator laws: all 45 states with a sales tax now require marketplaces (Amazon, eBay, Etsy) to collect on behalf of third-party sellers. The seller's own nexus calculation is unaffected, but the collection mechanism shifts.
Crossing a threshold creates a registration obligation. Filing zero returns or filing late after registration both produce penalties. The right time to register is when the threshold is crossed, not when the first sale is made.
Sales and use tax registration, return filing, and audit defense are all part of our flat-fee compliance services.
5. The 2026 Audit Triggers
State revenue agencies share data with each other and with the IRS more aggressively than they used to. Several patterns now produce automatic flags.
- High equipment spend with zero use tax: fixed asset additions over a threshold with no use tax line on the same return is the single most common audit trigger. Large purchases from out-of-state vendors get flagged automatically.
- Mismatch with federal Schedule C or 1120: the gross receipts on the federal return are compared against state sales tax returns. Differences over a tolerance threshold trigger inquiries.
- Missed nexus thresholds: many states have removed transaction-count thresholds and rely solely on revenue thresholds. A business that crosses the revenue threshold for a state and continues to file no return there gets a notice.
- Industry-specific patterns: construction contractors, manufacturers, and distributors get more scrutiny because their transaction patterns produce predictable use tax exposure.
If you are running a business with operations in multiple states, the broader compliance picture (Secretary of State filings, payroll registration, income tax nexus) runs alongside sales and use tax. Our Compliance 101 guide covers the full picture.
6. Common Mistakes That Cost the Most
- Treating exempt purchases as permanently exempt: an item purchased tax-free for resale becomes use-taxable the moment it is removed from inventory for any non-resale purpose. The exemption applies to the use, not the purchase.
- Assuming online vendors handle the tax: many large online platforms (Amazon, eBay, etc.) collect tax on consumer sales but not always on B2B sales. The buyer's obligation does not disappear because of the platform.
- Ignoring drop-ship arrangements: if your business buys from one vendor and ships to a customer in a third state, the tax obligations follow the sale, not the location of either party. Drop-ship is a frequent audit topic.
- Filing zero returns instead of registering correctly: if you have nexus in a state and your sales there are below the registration threshold, you may still need to register and file zero returns. Skipping registration creates a longer-tail audit problem than filing zeros.
If your business is structured as an LLC and you are still working out the right tax classification, the choice affects how state-level sales tax registration applies. Our LLC Taxation guide covers the four classifications and the compliance implications of each.
This post is for general informational purposes only and does not constitute professional tax, legal, or accounting advice for your specific situation. Reading this post does not create a CPA-client relationship. Tax laws are complex and subject to change. If you would like advice tailored to your situation, consult a qualified tax professional, including through the services offered on this site.