Definition
The term sales and use tax refers to a tax on goods and services purchased by an individual outside of their state of residence that will be consumed, stored, or used in their state of residence. Use tax is only due under certain conditions, and is only owed if the property would have been taxed if the purchase occurred in the individual's state of residence.
Explanation
Sales and use tax, also known as use tax, is owed when an individual purchases tangible goods or services from a business located in another state and the goods or services are consumed, stored, or otherwise used in that individual's state of residence. For example, an individual living in New Jersey may purchase a television from a business located in New York. If that business does not charge or collect New Jersey sales tax on the television, then the individual owes New Jersey sales and use tax on this purchase.
Sales and use tax only apply to goods or services that would be taxable in an individual's state of residence. For example, if a resident of New Jersey purchases a prescription medication from a business located in New York, then sales and use tax is not owed since prescription medications are exempt from sales tax in New Jersey.
The amount of use tax owed is the difference between what the individual paid in sales tax and the rate of tax that would have been paid if the purchase was made in their state of residence. For example, a resident of New Jersey can purchase a camera from a business in Alabama. If that business collects 4.0% sales tax on the purchase, the New Jersey resident would owe the difference between New Jersey's sales tax rate of 7.0% and the rate paid in Alabama, or 3.0% to the state of New Jersey.
The purpose of use tax is to protect in-state businesses from the competitive price advantage an out-of-state business would have if they're not collecting sales tax. Unpaid use tax is typically reported, and therefore collected, through state-level income tax returns.