Gavin Howe
Sales tax laws in the United States vary widely, with forty-five states currently imposing a sales tax. These laws determine what goods are subject to tax, with some states taxing groceries, feminine hygiene products, and diapers, while others do not. Sales tax is calculated by multiplying the purchase price by the applicable tax rate, which also varies by state and locality. While customers pay sales tax, it is collected by businesses that sell the goods, who must then report the tax to the state. States with a consumer sales tax require the buyer to bear the legal burden of the tax, while seller privilege tax states place the responsibility on the seller. This guide will explore the various sales tax laws and their implications for both buyers and sellers.
| Characteristics | Values |
|---|---|
| Type of tax | Sales tax, use tax, consumer excise tax, retail transaction tax, retailer's occupation tax, vendor privilege tax, commercial activity tax |
| Who pays the tax | In most states, the buyer bears the legal burden of the tax. In some states, the seller bears the burden and may pass the tax along to the buyer. In other states, the liability is shared. |
| Who collects the tax | The seller collects the tax at the time of the sale. If the seller does not collect the tax, the buyer must self-assess and pay the tax. |
| Who receives the tax | The tax is remitted to the state. |
| What is taxed | Taxable transfers of goods or services. In some states, this includes groceries, feminine hygiene products, and diapers. In other states, these items are not taxed. |
| What is not taxed | Transfers of real property. However, some states impose a real estate transfer or documentary tax on such transfers. |
| How is the tax calculated | The tax rate is multiplied by the taxable transaction value. |
| Tax rates | Rates vary by state and locality within a state. California currently has the highest state sales tax at 7.25%. Many localities may charge a higher local sales tax than this, ranging from 1% to 10%. |
| Exemptions | Some states do not impose sales tax, including Alaska, Delaware, Montana, New Hampshire, and Oregon. |
| Online sales | In the 2018 case of South Dakota v. Wayfair, Inc., the U.S. Supreme Court ruled that states can require out-of-state sellers to collect and remit sales tax, regardless of whether they have a physical presence in the state. |
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What You'll Learn
Consumer sales tax
Sales tax is a tax levied on the sale of certain goods and services. It is paid by the consumer at the time of purchase, but collected by the seller, who must then report the tax to the relevant tax authority. In the US, sales tax is determined at the state and local government level, with forty-five states currently imposing sales tax.
The specifics of sales tax laws vary between states. For example, in West Virginia, sales tax is administered by the West Virginia State Tax Department, and the current rate is 6%. On top of this, local sales taxes can add between 0% and 1% to the total sales tax rate. In New York, the state levy is 4%, and counties are authorised to collect an additional 3% sales tax, with the option to levy a higher rate if approved by the New York State Legislature. In California, the state sales tax is 7.25%, but localities may charge a higher local sales tax, ranging from 1% to 10%.
In some states, sales tax is imposed on the seller, who then seeks reimbursement from the buyer. In other states, the tax is imposed on the buyer, and the seller is required to collect it. The tax is calculated by multiplying the purchase price by the applicable tax rate.
Federal laws also play a role in sales tax collection. For example, the US Supreme Court ruled in 2018 that states could require out-of-state sellers to collect and remit sales tax, regardless of whether they have a physical presence in the state. Additionally, Section 105 of federal law states that no person shall be exempt from liability for the payment or collection of sales tax levied by a state or local taxing authority, even if the sale occurs within a federal area.
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Retail transaction taxes
Sales tax is placed on goods at the time of purchase, and it is calculated by multiplying the purchase price by the applicable tax rate. The federal government does not administer sales tax; instead, it is determined by state and local governments. Currently, 45 states impose a sales tax, with varying rates. For example, California has a 7.25% state sales tax, while localities within the state may charge between 1% and 10%.
Retail sales tax is a type of sales tax imposed on the retail sale of certain tangible personal property and services. It is the principal tax source in Washington, where it includes both state and local components. Retail sales are defined as business sales to households, excluding transactions between businesses or households. Examples of retail sales include the sale of newly constructed homes to families, retail recreational services, and digital products.
Businesses making retail sales are responsible for collecting sales tax from their customers and remitting it to the state. In some cases, businesses must pay retail sales tax on purchases for their own use, such as supplies or equipment, that will not be resold. Additionally, certain marketplace facilitators and remote sellers are required to collect and submit retail sales tax on sales made into specific states.
The Streamlined Sales and Use Tax Agreement (SSUTA) is a cooperative effort to simplify and standardize sales and use tax structures for businesses selling in multiple states. Under SSUTA, retailers must collect local sales tax based on the location where the customer receives the merchandise or service, known as "destination-based sales tax."
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Tax on online sales
Sales tax is determined by state and local governments, with forty-five states currently imposing a sales tax. The federal government does not administer sales tax.
In 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that states have the power to require out-of-state sellers to collect and remit sales tax, regardless of whether they have a physical presence in the state. This ruling expanded the reach of sales tax collection, and many states have since passed similar laws.
Online sales tax, or internet sales tax, is a colloquial term for when a sales tax is applied to online remote sellers. It is a sales and use tax collected and remitted on remote sales, many of which are conducted online. The ruling in South Dakota v. Wayfair, Inc. has had a significant impact on online sales tax, as it granted states the authority to tax remote sales where the seller lacks a physical presence in the state. Now, all 45 states with sales taxes have adopted collection and remittance obligations for remote sellers, and 40 have implemented marketplace facilitator regimes.
The specific laws and rates of sales tax vary across states and localities. For example, California has the highest state sales tax rate in the country at 7.25%, while localities within the state may charge a higher local sales tax. In New York, the state sales tax is 4%, but most counties charge a higher rate, with the total sales tax in New York City being 8.875%.
Online retailers should be aware of the laws and regulations in each state they operate in, as they may be required to collect and remit sales tax depending on their physical presence or nexus in the state. This includes having a storefront, office, or warehouse, or inventory stored in a third-party warehouse in the state. Additionally, using a fulfillment house, such as Amazon FBA, can create a nexus for sales tax purposes in the state where the fulfillment house is located.
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Tax on goods vs services
Sales tax laws in the United States vary across different states and localities. Sales tax is imposed on the sale of goods and services, and it is collected by the businesses that sell these goods and services, which must then be reported to the Internal Revenue Service. The federal government does not administer sales tax, and it is currently only Alaska, Delaware, Montana, New Hampshire, and Oregon that do not impose sales tax.
The sales tax rate differs depending on the state and locality, with California having the highest state sales tax at 7.25%. However, localities within California may charge a higher local sales tax, ranging from 1% to 10%. In New York, the state sales tax is 4%, but counties are authorized to collect an additional 3% sales tax, and most do. New York City has a total sales tax of 8.875%, which includes a 0.375% charge in the Metropolitan Commuter Transportation District.
The types of goods and services that are taxed also vary by state. For example, Tennessee, Idaho, and Mississippi tax groceries, feminine hygiene products, and diapers, while Minnesota and Massachusetts do not. Some states, like Indiana, have raised their sales tax rate to offset losses in revenue from other areas, such as property tax reform.
It is important to note that sales tax is not the same as value-added tax, as sales tax is imposed only at the retail level. In cases where items are sold at retail multiple times, such as used cars, sales tax can be charged each time. Additionally, in some states like Illinois, residents must report and pay taxes on online purchases or out-of-state purchases on their state income tax forms.
The laws regarding sales tax continue to evolve, with the U.S. Supreme Court ruling in 2018 that states can require out-of-state sellers to collect and remit sales tax, regardless of whether they have a physical presence in the state. This ruling came about due to the increase in internet sales and the resulting loss of state revenue.
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Tax on businesses vs consumers
Sales tax is placed on goods at the time of purchase. Although customers pay sales tax, it is collected by the businesses that sell the goods, and they must report the tax to the Internal Revenue Service. The federal government does not administer sales tax; instead, it is determined by state and local governments. Currently, 45 states impose a sales tax. The rate at which taxes are passed on to consumers depends on the elasticity of demand in a market. Consumers pay more for the same good, but producers also make less profit per good. For instance, California currently has the highest state sales tax in the country, at 7.25 percent. However, localities may charge a higher local sales tax than this, varying from one percent to as high as ten percent.
In the 2018 case of South Dakota v. Wayfair, Inc., the U.S. Supreme Court ruled that states could require out-of-state sellers to collect and remit sales tax, regardless of whether they met the physical presence test. Many states have since passed similar laws, requiring out-of-state sellers who meet specific sales or transaction thresholds to collect and remit sales tax. For example, Ohio law requires almost every type of business to obtain an Ohio Sales Tax Certificate Number. If someone sells goods on the internet and ships them to someone in the state, they must collect sales tax from the buyer and pay the collected tax to the state on a monthly or quarterly basis.
In states where the tax is on the seller, it is customary for the seller to demand reimbursement from the buyer. Most states allow or require electronic remittance. Sales taxes are imposed only on taxable transfers of goods or services. The tax is computed as the tax rate times the taxable transaction value. Rates vary by state and locality within a state. Not all types of transfers are taxable. The tax may be imposed on sales to consumers and to businesses. Transfers of tangible personal property for cash or the promise to pay cash (sales) are often subject to sales tax, with exceptions. Sales tax does not apply to transfers of real property, although some states impose a real estate transfer or documentary tax on such transfers.
In 2014, Illinois passed legislation requiring sales tax to be collected by "catalogue, mail-order and similar retailers, along with online sellers... if they have sales of $10,000 or more in the prior year." The law went into effect on January 1, 2015, with retailers given an additional month to comply. Indiana has a 7% state sales tax. The tax rate was raised from 6% on April 1, 2008, to offset the loss of revenue from the statewide property tax reform, which was expected to significantly lower property taxes. Untaxed retail items include medications, water, ice, and unprepared, raw staple foods or fruit juices.
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Frequently asked questions
Sales taxes are collected by the businesses that sell the goods, and they must report the tax to the Internal Revenue Service.
Customers pay sales taxes, although the tax is imposed on sellers in some states. In these states, sellers have the option of passing the tax along to their purchasers.
Use tax is imposed on the "use, storage, or other consumption" of goods within a state that would have been subject to sales tax if the transaction had occurred within the state. Use tax is typically imposed after the sale takes place and is often used to tax online purchases.
Sales tax is calculated by multiplying the purchase price by the applicable tax rate. The tax rate varies by state and locality.
Yes, items that are typically exempt from sales tax include medications, water, ice, unprepared raw staple foods or fruit juices, and in some states, groceries, feminine hygiene products, and diapers. Services are also often exempt from sales tax unless specifically taxed by state law.
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