Use Tax Accrual Process, Journal Entry, and AP Controls

Short answer: Use tax accrual is the process of self-assessing state tax on a purchase your vendor did not charge sales tax on. When a taxable item or service is bought for use in your state and the invoice shows no sales tax, accounts payable records a use tax liability at the rate in the jurisdiction where the item is used, then the company remits it on the state's sales and use tax return. Miss it and it usually surfaces in an audit, with interest and penalties attached.

What is use tax on an invoice?

Use tax is the buyer-side twin of sales tax. States impose it so that a purchase does not escape tax simply because the seller had no obligation to collect. If you buy a taxable item and the vendor charges sales tax, you are done. If you buy the same taxable item and the vendor charges nothing, your business owes use tax directly to the state at the same rate.

The rate is generally the combined state and local rate where the property is used or the service is received, not where the vendor sits. Most states also give a credit for sales tax legitimately paid to another state, so a purchase taxed at 4 percent elsewhere and used in a 7 percent jurisdiction typically accrues the 3 point difference rather than the full amount. Check your state, because the mechanics vary.

Forty five states and the District of Columbia levy a sales tax and a complementary use tax. The five that do not are New Hampshire, Oregon, Montana, Alaska, and Delaware, known in tax circles as the NOMAD states. Alaska is the asterisk: there is no statewide sales tax, but local boroughs and cities impose their own, so an Alaska address does not automatically mean no tax.

When does accounts payable need to self-assess use tax?

The trigger is simple to state and easy to miss in practice: a taxable purchase, used in a taxing jurisdiction, with no tax on the invoice. In day to day AP work, that usually means one of these.

Out of state vendors with no nexus in your state. Less common since the 2018 Wayfair decision pushed most remote sellers into collecting, but small and specialized vendors still fall below economic nexus thresholds.
Purchases made on a resale or exemption certificate that you then consumed yourself. Pulling inventory out of stock for office or shop use converts an exempt purchase into a taxable one.
Software, SaaS, and digital goods. Taxability varies enormously by state and many vendors take a conservative or simply incorrect position on where they must collect.
Services that are taxable in your state but not the vendor's. Repair, installation, fabrication, and certain professional services are treated very differently state to state.
Freight, installation, and setup charges billed separately when your state treats them as part of the taxable sales price.
Assets moved between locations, where equipment bought untaxed in one state is put to use in another.

The pattern worth internalizing: the absence of tax on an invoice is not evidence that the purchase is not taxable. It is only evidence that the vendor did not charge it.

The use tax accrual process, step by step

Screen the invoice at entry. Three fields decide it: is the item or service taxable in the state where it will be used, did the vendor charge sales tax, and what is the combined rate in that jurisdiction.
Determine the taxable base. Usually the invoice total for the taxable items, plus any freight or installation your state includes in the taxable price. Exclude clearly exempt lines.
Apply the correct rate. Use the combined state and local rate at the point of use. A company with locations in several jurisdictions cannot apply one blended rate and expect it to hold up.
Post the accrual. Book the expense gross of tax and credit a use tax payable liability account, so the cost lands where it belongs and the liability is visible.
Reconcile the liability monthly. Tie the use tax payable balance to the accruals posted during the period before anything is filed.
Report and remit. Pull the period's accruals and report them on the use tax line of your state's sales and use tax return, or on a separate consumer use tax return where the state requires one.
Keep the evidence. Retain the invoice, the taxability decision, and the rate used. An auditor's first question is why you concluded what you concluded.

Use tax accrual journal entry

Take a $10,000 equipment purchase from an out of state vendor who charged no sales tax, used at a location with a combined 7 percent rate. The accrual is $700.

Account	Debit	Credit
Equipment (or the relevant expense account)	$10,700
Accounts payable (vendor)		$10,000
Use tax payable		$700

The tax is capitalized into the asset or charged to the same expense account as the purchase, because use tax is a cost of acquiring the item, not a separate overhead. When the return is filed and paid:

Account	Debit	Credit
Use tax payable	$700
Cash		$700

Some teams post the accrual to a separate use tax expense account instead of grossing up the purchase. That is simpler to track but it distorts unit costs and makes asset records wrong, so most controllers prefer the gross up. Whichever you choose, apply it consistently, and see GL coding in accounts payable for how to structure the accounts so the accrual is easy to pull at filing time.

Sales tax vs use tax: what actually differs

	Sales tax	Use tax
Who remits it	The seller collects and remits	The buyer self-assesses and remits
When it applies	Seller has nexus and the sale is taxable	Taxable purchase where no sales tax was charged
Rate	Rate at the point of sale or delivery	Combined rate where the item is used
Where it appears	A line on the vendor invoice	Nowhere on the invoice, you have to know
Who usually catches errors	The vendor's tax team	A state auditor, years later

That last row is why this matters to AP rather than to the tax department alone. Sales tax errors are somebody else's problem. Use tax errors are yours, and they compound quietly.

Why auditors target use tax accruals

Use tax is one of the most productive areas in a state sales and use tax audit, for a structural reason: the taxpayer is the only party who could have caught the error, and most AP processes have no step where anyone looks. Auditors typically pull a sample of untaxed invoices, test taxability, extrapolate the error rate across the period, and assess tax plus interest and penalties on the projected amount. A small percentage error applied to several years of untaxed purchases turns into a real number quickly.

The defensible position is not perfection. It is a documented, consistently applied process: a screening step at invoice entry, a written taxability decision for recurring vendors, a rate source you can point to, and a monthly reconciliation. Teams that already run structured accounts payable internal controls usually find use tax screening slots in without much new work, and the same evidence trail supports both. If your obligations span several states, it pays to have somewhere that tracks which requirements apply to each entity and who owns them rather than keeping the map in one person's head.

Building the check into your AP process

The practical failure mode is that use tax review depends on one experienced person noticing. When they are on vacation or they leave, the accrual quietly stops. Three habits fix that.

Flag at the vendor, not the invoice. Most untaxed purchases come from a stable set of vendors. Mark those vendors in your vendor master so every invoice from them gets reviewed, rather than relying on someone spotting a missing tax line on a busy day.

Code the accrual at the line level. A single invoice often mixes taxable and exempt lines. If your system codes only at the invoice header, the split becomes a manual journal entry later, which is exactly where errors and omissions live. Coding each line to its own GL account as the invoice is processed keeps the taxable base correct at the source. An electronic accounts payable system that captures line items and codes them individually makes this routine instead of exceptional.

Reconcile before you file, not after. Tie the use tax payable account to the period's accruals every month. A balance that does not tie is a signal something was posted wrong, and it is far cheaper to find it then than during an accounts payable audit.

Common mistakes worth checking this quarter

Applying one blended rate across locations in different jurisdictions.
Assuming that because a large vendor usually charges tax, this particular invoice had it. Check the line.
Treating SaaS and digital goods as automatically exempt. Many states tax them, and the rules have moved fast.
Ignoring freight and installation charges that your state includes in the taxable base.
Forgetting inventory withdrawn for internal use after being bought on a resale certificate.
Accruing use tax where the vendor did charge tax, which quietly overpays and is rarely refunded.

The bottom line

Use tax accrual is not complicated in concept. It is a screening step, a rate lookup, a journal entry, and a monthly reconciliation. What makes it expensive is that nothing in a normal AP workflow forces anyone to look, so the omission accumulates silently until an auditor samples it. Put the check where the invoice is already being handled, flag the vendors that reliably bill without tax, code the taxable lines individually, and reconcile the liability before you file. State rules differ enough that a specific position on a specific purchase is worth confirming with your tax advisor, but the process above is what keeps that conversation short.