Introduction
The word "tax" has been around in the world since 3000–2800 BC in ancient Egypt. It is the compulsory financial charge imposed on the individual who earns enough and is liable to pay tax. The governing body makes rules and regulations for the way taxes should be imposed on people and how the imposed taxes should be further handled.
Tax compliance is a policy designed to ensure that taxpayers pay the correct amount of tax at the correct time and receive all appropriate tax allowances. Also, failure to pay the tax promptly, or even resistance to taxation, is punishable by law. Taxes should be paid in cash or exchange for equivalent labour.
Many countries have adopted taxation to allow the people to pay for operations related to national needs and the functioning of government authorities. Even a percentage of taxation is reduced as a personal annual income for the governing body.
Taxation varies by country; for example, in one country, a tax is imposed on both an individual's and a corporation's income. But, recently, most countries, like India, have started to impose taxes such as wealth tax, estate tax, gift tax, property tax, goods and services tax, sales tax, use tax, and so on.
The aforementioned passage does combine the important points related to tax, although feel free to search for more with the links given below in the reference. And, for now, we will start slowly and first, learn the difference between sales tax and use tax.
Sales Tax Vs. Use Tax
To understand the difference between sales tax and use tax, one must first understand the business nexus. This is to determine whether the business is legally present and operational in the particular state. And if they fall under tax jurisdiction, the liable tax is applied to the fiscal transactions. Some states have established a specific threshold value to determine whether an out-of-state vendor has a business nexus if the state accumulates $1,000,000 from residence or at least 200 distinct transactions.
It is obvious that, unlike sales tax, you do not collect the use tax from the customer. The rate of the use tax is left to the state, which is responsible for fixing the rate. Generally, the use tax is the same as the sales tax. Let's take an example. Consider that you bought food for $100 in the state with taxing authority. Here, in the $100, the sales tax is included as the sales tax is given to the seller, who has a permit from the state taxing authority. But, in the state without taxing authority, the same food item is purchased for $90, and $10 is paid as the use tax. Since the out-of-state vendor does not collect the sales tax, the use tax is self-assessed.
The overall functionality is the same for both sales tax and the use tax except for some minor key features such as locality, tax permits, mode of payment, payment period, and business nexus. And below is the bifurcation of each difference and how it is being applied.
Difference Between Sales Tax and Use Tax in Tabular Form
| Parameters | Sales Tax | Use Tax |
| Meaning | Sales tax, as in GST, is applied by the taxing authority in the state or country to a range of goods and services. | Use tax is levied on goods and services where the seller or vendor does not charge sales tax. |
| Applied on | Range of goods and services, such as food, clothing, utensils, medicines, and so on. | The use tax is applied to the same range of products as the sales tax. But the use tax is applied to the product where the sales tax isn't applied or isn't liable to be imposed. |
| Payment Mode | The sales tax is directly paid to the seller by the consumer, as the seller has to remit the tax to the taxing authority. | The use tax is directly paid by the consumer to the taxing authority. |
| Payment Period | The payment of tax is done at the point of purchase. | The payment of tax is done when you purchase the item. |
| Permit | For a seller to apply the sales tax on a product, the seller must have a sales tax permit. | The requirement of a permit is insignificant since the consumer is directly liable to pay the tax authority. |
| Geographical impact | The sales tax is enforced on things that fall under the region's tax jurisdiction. | The use tax is imposed on items that fall under different or outside of the tax jurisdiction's jurisdiction. |
| Business threshold | Some states have created a threshold value as per a calendar year; the business that exceeds the threshold is liable to legally have a valid seller's permit. | There is no such threshold value since the use tax is enforced outside the taxing authority. |
What is Sales Tax?
The sales tax is the tax paid to the governing body for the sale of certain goods and services. Such taxes. The product seller is liable to collect the full amount of goods and services tax from the consumer at the point of purchase.
Sales tax is considered to be applied only on the interstate level; it is the tax imposed on the people in the state by the same state's governing body, which is why it is also called trust tax, where the seller collects the tax and is further inclined to pay to tax judiciaries. Furthermore, the business owner or seller must have a sales tax permit to remit the sales to the tax judiciaries. It is illegal for a business owner to apply sales tax to products if they do not possess a sales tax permit.
Some countries might have some exemptions from the goods and services tax (sales tax) for food, education, and medicine, although many of the countries do not have any exemptions and have charged the sales tax on almost every product. Hence, along with the annual taxation, the individual is liable to pay GST (goods and services tax) for every product he purchases. The GST is charged every time the item is sold until it is sold retail to the final-end user.
The local economies are quite affected by the sales tax; during the studies conducted by the expert, it was seen that the higher the sales, the more people were likely to travel to other places to purchase goods. In addition, some studies claim that raising the sales tax governing body will reduce the property tax, allowing people to stay in the region and neutralise the economy.
As we saw, the sales tax can differ from country to country, but it can also differ from country to state to city. There is an example of Chicago (Cook County), IL, at 10.25%, consisting of 6.25% state, 1.25% city, 1.75% country, and 1% regional transportation authority.
What is Use Tax?
Many countries levy a type of tax known as a use tax through their numerous state governments. They are usually levied upon the use, storage, or other consumption of tangible personal property that has not been subjected to a sales tax. The use tax is the same as the sales tax, except the seller collects the sales tax from the consumer because he owns the product and pays the use tax on it.
The use tax is created to hinder the purchase of goods and services that are not subjected to the sales tax. The use tax can be collected from some out-of-state vendor who isn't under the state tax court's jurisdiction. The use tax applied on the sale of the property is the same as the sales tax, and it is applied as a compensating tax, which is quite an equal amount to the sales tax, but the condition is that the region should fall under the state's tax jurisdiction.
Let's make the complication between sales tax and use tax simpler. Consider the item you have bought from the store that is subject to sales tax. You will be liable to pay the sales tax directly to the seller. When you purchase the same item from a different state, however, the use tax is imposed when you return to the state where tax jurisdiction is imposed.
There are two types of use taxes: consumer use tax and vendor/seller use tax. The consumer use tax is imposed on the consumer when the consumer directly purchases the taxable items for which a vendor did not collect a sales tax or use tax. In such a case, the consumer pays the use tax directly to the tax court. Vendor or retailer use tax is applied to the seller where he or she sells the taxable items outside the interstate tax jurisdiction.
Main Difference between Sales Tax and Use Tax in Points
- The main key difference between sales tax and use tax is that sales tax is a tax enforced on the sale of goods and services. In the case of use tax, it is enforced on the use or consumption of an item. The use tax cannot be charged on an item that has an enforced sales tax, and vice versa.
- In the case of buying things, when sales tax is enforced, the tax is directly paid to the vendor or seller of the product. And in the case of the use tax, the tax is being paid directly to the taxing authority.
- The sales tax is impacted by geographical locations; when the seller's shop falls under the region of the tax jurisdiction, then the seller is impliedly required to enforce sales tax for the consumer. And when the sellers’ shop is outside the region of the tax jurisdiction, the use tax is implied for the consumer.
- The seller in the region of the taxing authority must have the seller's permit to sell the goods with taxation (sales tax). The vendor outside the region of the taxing authority is not liable to have the tax permit.
- The seller who has the sales tax permit is liable to pay the goods and services tax himself for buying the goods to further bring them into the market. In this way, the seller becomes the medium through which the sales tax is collected from the consumer and further given to the taxing authority. The use tax is not paid by the vendor but by the consumer, directly to the taxing authority. But when the seller keeps the product for his use, he is liable to pay use tax.
- The sales tax is applied to a range of various products, such as foods, clothing, medicines, utensils, and other services like spas, gyms, and many more. The use tax is applied to the same range of products as sales tax, except that the use tax is not applied to products where sales tax is applied.
- There are some business thresholds set for the states that have taxing authority; once the threshold value is crossed, the seller is required to have a permit licence and sell the goods on sales tax; until that time, the seller can sell the goods on use tax.
- Some examples of sales taxes are as follows: sellers' privilege tax, consumer sales tax, and retail transaction tax. Some examples of use tax are as follows: consumer use tax and seller use tax.
Conclusion
Taxation has helped build a more sustainable and reliable working world. When the taxing authority maintains the tax report, tax contributions, and tax transparency, they can build trust with business owners and general citizens of the region. which in turn will benefit the state when the state applies taxes and maintains transparency between consumers and business owners.
As a result, both the sales tax and the use tax are used to support the region's growth and development. Also, it is of crucial importance to know the different kinds of taxes. Not being able to pay or being reluctant to pay the tax is punishable by law. Hence, as responsible citizens, we must pay taxes on time.
References
- What is the difference between sales tax and use tax? | Sales Tax Institute
- Sales Tax vs. Use Tax | How They Work, Who Pays, & More (patriotsoftware.com)
- Sales Tax vs. Use Tax: What's the Difference? (fastfilings.com)
- Sales tax - Wikipedia
- Use tax - Wikipedia
