What Is Use Tax, and Does My Small Business Owe It?

By Bill Stilwell · Last reviewed October 17, 2026

The short answer

Use tax is the other half of sales tax. If your business buys something taxable and the seller doesn’t charge your state’s sales tax, your state usually expects you to pay use tax on it yourself, at the same rate. Track those purchases and report them on your state return.

What this means

Sales tax is collected by the seller. Use tax is paid by the buyer when the seller didn’t collect it. States with a sales tax almost always have a matching use tax so that buying from out of state doesn’t become a way around the tax. Items that are exempt from sales tax are generally exempt from use tax too.

You usually owe use tax in three common cases:

Out-of-state or online purchases. You buy a taxable item from a seller in another state, no tax is charged, and you use the item in your state.
Items pulled from resale stock. You bought products tax free with a resale certificate, then used them yourself or gave them away as samples.
Exempt purchases used for something else. You bought an item tax free for an exempt purpose, then used it for a purpose that isn’t exempt.

Made-up example: Ridgeback Mobile Detailing buys a pressure washer from an online seller in another state. The seller doesn’t charge tax. The owner adds the purchase to a “use tax” list, then reports it on the next state sales and use tax return at the same rate a local store would have charged.

Why it matters

You owe it even if nobody billed you. States can find untaxed purchases during an audit and bill you, with interest and penalties.
It adds up. Equipment, tools, and software bought online over a few years can create a large bill.
Product businesses are easy to catch. Records show items bought for resale. If some were used in the business instead, the state can ask for tax on them.

Who this applies to

Most businesses in states that have a sales tax, because nearly every business buys supplies or equipment. It matters most if you buy online, buy from out of state, or buy items tax free for resale. If you live in a state with no sales tax, check whether local use taxes apply. Each state sets its own rules, so check your state department of revenue.

How to do it

Learn your state’s rule. Search your state department of revenue site for “use tax.” The SBA’s “Pay taxes” page links to every state’s revenue department.
Check every business purchase receipt for sales tax. If none was charged on a taxable item, mark it.
Keep a running list of untaxed purchases with the date, seller, item, price, and where you used it. A spreadsheet tab or a bookkeeping category works (see 10.5.4 Receipt Storage).
Track items pulled from resale stock. Note anything bought tax free that you used yourself or gave away.
Report it the way your state asks. If you hold a sales tax permit, there is usually a line for taxable purchases on your sales and use tax return. If you don’t, some states have a separate use tax return, and some let you report it on the income tax return.
Claim credit for tax already paid. If you paid another state’s tax on the item, many states give you a credit for that amount.
Put the filing dates on your calendar (see 10.9.1 Financial Calendar).

What proof to keep

Receipts and invoices for every untaxed purchase
Your use tax tracking list
Copies of returns showing the use tax you reported, and payment confirmations
Receipts showing tax paid to another state, if you claim a credit

Keep these as long as your state requires (see 9.8.2 Record Retention Periods).

Common mistakes

Assuming online purchases are tax free. If the seller didn’t charge it, you may still owe it.
Forgetting items taken from inventory. Free samples and items used in the shop count in many states.
Only checking big purchases. Small software, parts, and supply orders add up over an audit period.
Paying twice. If the seller already charged your state’s tax, you don’t report it again. Keep the receipt.
Not knowing your state’s reporting line. Ask your bookkeeper where use tax goes on your return.

When to get help from a pro

CPA or state and local tax specialist: if you buy a lot from out of state, carry inventory, or got a notice from your state. Questions to ask:

Which of my regular purchases are subject to use tax in my state?
Where and how often do I report it?
Do I have any past purchases I should report now?

Bill’s note

[Bill: add a short note. For example, how you started tracking untaxed software or equipment purchases for SiteSmarty, or a client who got caught off guard by use tax during an audit.]

How I did this for SiteSmarty

[Date I did this:]
[What I actually did, step by step: how I checked SiteSmarty’s purchases for untaxed items and where I report use tax]
[What it cost and how long it took:]
[What surprised me or what I’d do differently:]
[Screenshot or photo to add, with private info blurred: the use tax tracking list or the use tax line on the return]
[Result so far:]

Questions people ask

What is the difference between sales tax and use tax? The seller collects sales tax. You pay use tax yourself when the seller didn’t collect the tax on a taxable item.

Do I owe use tax on things I buy online? Often yes, if the item is taxable in your state and the seller didn’t charge your state’s tax.

What if I bought something for resale and used it? Many states treat that as a taxable use, so you owe use tax on what you paid for it.

How do I report use tax? Usually on your state sales and use tax return if you have a permit. Without a permit, your state may have a separate form or a line on the income tax return.

Audit check

Question: Does the business track taxable purchases on which no sales tax was charged and report use tax on them?
Pass looks like: A written process. A tracking list or bookkeeping category. Use tax reported on each return. Receipts on file.
Fail looks like: No process. Online and out-of-state purchases never reviewed. Inventory items used in the business with no tax reported.
Evidence to collect: Tracking list, sample receipts, returns showing use tax reported, and payment confirmations.

Where this fits

Do this first: 10.2.2 Sales Tax

Do this next: 10.2.4 Local Taxes

Sources

SBA, "Pay taxes" (checked October 17, 2026)
Texas Comptroller, "Texas Sales and Use Tax Frequently Asked Questions: Use Tax" (checked October 17, 2026)
California Department of Tax and Fee Administration, "Use Tax" (checked October 17, 2026)
Streamlined Sales Tax Governing Board, "Exemptions" (checked October 17, 2026)

This page explains general rules and Bill's own experience. It is not legal, tax, or insurance advice. Talk to a qualified professional about your situation.