Sales tax is often the most talked about tax for US remote sellers. However, there are several other taxes that sellers may need clarification on. Tax compliance around remote sellers involves other taxes, such as use, excise, and value-added (VAT) taxes.
People often face difficulty differentiating them and consider them as the same thing. If you are one of them, this blog is for you. It discusses the difference between sales tax and other types of taxes.
What is Sales Tax?
A sales tax is a consumption tax assessed on the sale of taxable goods or service. It is usually added to the selling price of an item, so the seller collects it when a customer makes a taxable purchase. The customer pays sales tax in addition to the cost of the purchased product or service to the seller, who collects and remits it to the US federal government. The seller is responsible for sales tax collection, remittance, filing, and reporting. As a seller, you must have an economic or physical nexus to become eligible to collect and remit sales tax to the state. Each state has its regulations and rates for sales tax. Glimpse and learn about various sales tax facts in each state in our earlier blog. Lastly, some key points to remember about sales tax are:-
- Sales tax is imposed on tangible personal property, including furniture, toys, clothing, and other goods.
- It is collected at the point of sale from the buyer.
- The sales tax rate is usually calculated as a percentage of the transaction price.
- If the seller fails to collect the due sales tax, they must pay it out of their pockets.
What is Use Tax?
Use tax is the tax on the use, consumption, or storage of taxable products and services. It is imposed on items where no sales tax has been paid earlier. If the sales tax is imposed on some products or services, use tax does not apply to such items. Use tax serves as a way to ensure that buyers who purchase items from online or out-of-state sales, where sales tax was not collected, still contribute to tax collection. Use tax is also called consumer use tax, as the buyer or consumer pays sales tax. Consumers directly pay use tax to the state’s Department of Revenue and file separate use tax returns.Example of Use Tax
If your business is based in any state that charges sales tax, such as Florida, and sells to local customers there, you must collect and remit sales tax. If a buyer purchases a taxable item from some state that does not impose a sales tax and uses it in another state, they must pay use tax as a consumer if they don’t plan on reselling the item.Key Differences between Sales Tax vs. Use Tax
Use tax and sales tax are often considered the same, but the two have some differences. Here are some of the critical differences between use tax and sales tax.- Use tax rates can be different from sales tax rates. It is complementary to sales tax.
- It is only applicable on the purchase of taxable products where no sales tax was paid at the time of purchasing.
- It may apply to items exempt from sales tax.
- In consumer use tax, the purchaser is responsible for remitting the tax to their respective taxing jurisdiction.
What is Excise Tax?
The government imposes an excise tax to generate revenue that could be used to fund state programs. Excise tax refers to the tax imposed on specific items, mainly luxury goods or non-essential activities. The tax is usually included in the price of the taxable product or service. Understanding excise tax implementation is relatively simple. It entails that all businesses pay excise tax on certain goods and services. However, goods used for a specific purpose, for instance, alcohol used in medicines, might be tax-exempt.Example of Excise Tax
Excise tax is usually imposed on fuel, alcohol, tobacco, airline tickets, and wagering. If a buyer visits a gas station to fill up their vehicle, a portion of the price includes excise tax. The seller collects and pays this tax to the government. In contrast, sales tax is imposed on a wide range of tangible goods, including furniture, toys, packaged food, and clothing.Key Differences between Sales Tax vs. Excise Tax
Here are some critical differences between excise tax and sales tax.- Excise tax only applies to specific goods and services.
- Excise tax is determined based on the volume of the taxable goods sold.
- The calculation for excise tax can be more complex than sales tax.
- Some excise taxes are known as sin taxes because they discourage certain activities harmful to society (such as cigarette production).