Use Tax

A use tax is a state tax on the use, storage or consumption of tangible property within the state where sales tax was not collected on the purchase. California's tax agency puts the pairing plainly: "California's sales tax generally applies to the sale of merchandise, including vehicles, in the state. California's use tax applies to the use, storage, or other consumption of those same kinds of items in the state. Generally, if sales tax would apply when you buy physical merchandise in California, use tax applies when you make a similar purchase without tax from a business located outside the state. For these purchases, the buyer is required to pay use tax separately."

Sales tax covers the seller's side of that pair and states the one-line difference between them. What this page adds is the part that falls to the buyer: what triggers the obligation, when it is due, and which of three different ways of paying it applies. The rules below are California's, because it publishes the fullest set; every state that levies a sales tax runs its own version, and the details differ.

The taxable event is not the purchase, and that widens the reach. The statutory trigger is use, storage or other consumption in the state, which is why property bought abroad and carried home can be caught as readily as property ordered from an out-of-state website. California's agency says directly that use tax "generally applies to foreign purchases of tangible personal property brought into California for storage, use, or other consumption."

What is taxable mirrors the sales tax exactly. "Items that are exempt from sales tax are exempt from use tax as well," so a state's grocery exemption or its treatment of a particular service carries across unchanged. California applies the same logic in the other direction: "if the item would have been taxable if purchased from a California retailer, it is subject to use tax." Downloaded software, music and games are not taxed where no tangible storage media is obtained.

The rate is the buyer's rate, not the seller's. California instructs taxpayers to use "the sales and use tax rate applicable to the place in California where the item is used, stored, or otherwise consumed," which for a personal purchase usually means the home address, applied to the total purchase price including handling charges. Separately stated shipping by common carrier or US Mail is generally excluded so long as the charge does not exceed the actual cost.

There are three ways to pay it and they belong to three different kinds of buyer.

A holder of a seller's permit reports it on the ordinary sales and use tax return, on the line for "Purchases subject to use tax," in the period the item was first used, stored or consumed.

A "qualified purchaser" has to register and file an annual return of its own, paying "your use tax due by filing your return for the previous calendar year by April 15." The definition of that term is currently in a temporary form worth knowing about. Before January 1, 2024 it meant a person receiving at least $100,000 in annual gross receipts from business operations and not otherwise registered. From January 1, 2024 through December 31, 2028 the gross-receipts test is replaced by a purchases test: more than $10,000 of purchases subject to use tax in a calendar year, excluding vehicles, vessels and aircraft, where the tax has not been paid to a retailer. On January 1, 2029 the earlier definition returns.

Everybody else reports it on their state income tax return. California describes this as the easiest route, and offers a Use Tax Lookup Table as an alternative to keeping receipts, though the table is limited to nonbusiness items with a purchase price under $1,000. A one-off payment direct to the agency is also available.

Vehicles, vessels and aircraft are handled separately, and the reason is worth stating. Use tax applies to those "purchased from non-dealers (for example, private parties) or from outside California for use in this state," and California states that use tax on such a purchase "cannot be reported on your California State Income Tax return." So the private-party car sale that many buyers assume is untaxed carries a use tax obligation reported through a different channel entirely.

The 2018 change in remote-seller law narrowed use tax's territory without abolishing it. Once states could require out-of-state sellers to collect, most sizeable online retailers began charging tax at checkout, and the purchases that reach a consumer untaxed became a smaller set: in-person buys across a state line, purchases from sellers below a state's economic nexus thresholds, imports carried home, and business self-assessment on inventory or equipment taken out of stock. Sales tax covers what that change was and what it did to sellers.

Its purpose was never revenue alone. California describes the tax, created in July 1935, as "a companion to California's sales tax that is designed to level the playing field between in-state retailers who are required to collect tax, and some out-of-state retailers who are not."

For an individual, in order.

1. Identify purchases where no tax was charged, which for most people means reviewing online and out-of-state receipts. Imports carried home count too.

2. Check whether the item would have been taxable if bought locally. If it would have been exempt, no use tax is owed.

3. Apply your own local rate to the total purchase price, including handling, using the rate where the item is used or stored.

4. Report it. On the state income tax return for most people, on the sales and use tax return for a seller's-permit holder, or on a separate annual return for a qualified purchaser.

5. Treat vehicles, vessels and aircraft separately, because they cannot go on the income tax return.

A hypothetical example. Priya lives in California and, over the year, buys a $3,400 camera from an out-of-state seller that charges her no tax, plus $900 of smaller items from small online sellers that also charge none. Her local combined rate is 8.5 percent, which is stipulated for the illustration.

Her untaxed purchases total $3,400 plus $900, or $4,300. At 8.5 percent that is $4,300 times 0.085, or $365.50 of use tax. Because the camera cost more than $1,000 she cannot use the lookup table for it and reports the actual amounts. She is not a seller's-permit holder, and her untaxed purchases are under the $10,000 qualified-purchaser threshold, so she reports the $365.50 on her state income tax return, due by April 15 of the following year.

Change one fact. If Priya had instead bought a $12,000 boat from a private party, that use tax could not go on her income tax return at all. Vehicles, vessels and aircraft are reported to the tax agency directly, on their own route.

A buyer does not choose whether use tax applies, so the useful frame is what the tax accomplishes and where it fails.

What it is for, and what it does well

• It closes the gap that would otherwise let an out-of-state purchase escape a tax an identical local purchase bears, which is the equal-treatment argument the tax was created for in 1935.
• Because it mirrors the sales tax base exactly, it introduces no new definitions of what is and is not taxable.
• The reporting line on a state income tax return, and a lookup table for small nonbusiness items, make compliance possible without keeping a year of receipts.
• Businesses have a defined route through the return they already file, so self-assessment on untaxed purchases fits existing filings.

The problems

• It relies on the buyer to volunteer, which is a weak collection mechanism compared with a seller who is legally obliged to collect at checkout.
• Most people have never heard of it, and nothing in an untaxed online transaction tells them a liability has been created.
• Working out the correct rate means knowing the combined rate at the place of use, which can differ from the rate a few streets away.
• The rules for vehicles, vessels and aircraft run on a separate track, so the largest single purchase most people make in this category is also the one the familiar route does not cover.
• Definitions move. California's qualified-purchaser test is in a temporary form through 2028 and reverts afterwards, which is exactly the sort of detail a taxpayer will not track.