Use tax is the counterpart of sales tax. When you buy taxable goods without paying sales tax (typically from an out-of-state vendor) and use them in a state that taxes them, you owe use tax at that state’s (and often the local) rate. Contractors doing lump-sum real-property work are usually treated as the consumer of their materials, so they pay tax on materials rather than charging it to the owner, but rules vary by state and contract type.
Why it matters
Sales and use tax audits of contractors often find unpaid use tax on materials and equipment rentals, with interest and penalties.
Worked example
An out-of-state vendor bills $20,000 of materials with no tax for a job where the rate is 7.25%. The bill accrues use tax on the same job and cost code: Dr Material $1,450 / Cr Use Tax Payable $1,450 (illustrative).
Common mistakes
- Accruing at your office’s rate instead of the jobsite’s.
- Forgetting tax on equipment rentals.
How os.construction handles it
In the accounting preview, AP bills compute use tax per tax-code component. See Accounts payable.