A Full Guide to Sales Tax

A Full Guide to Sales Tax: Understanding the Basics, Rates and Rules

As a consumer or business owner, you may have come across the term “sales tax” at some point. Sales tax refers to the percentage of tax added to a product or service at the point of sale. This guide aims to provide a thorough understanding of sales tax, including the basics, different rates, and rules, and updates on the topic as provided by government resources.

What is Sales Tax?

In simple terms, sales tax is a tax levied by the government on the sale of goods and services. This tax is added to the price of the product or service at the time of sale and paid by the buyer. The seller is responsible for collecting and remitting the tax to the state or local government.

Sales tax is used to fund government programs and services, such as education, public safety, and infrastructure. It is a significant source of revenue for most states in the United States.

Sales tax is not a federal tax, but rather, it is imposed by state and local governments. This means that the rules, rates, and exemptions vary from state to state and city to city.

Different Rates of Sales Tax

Sales tax rates vary from state to state and city to city. Some states and cities have a single rate, while others apply different rates to different products or services.

According to the National Conference of State Legislatures, as of January 2021, five states do not impose state-level sales tax. These states are Alaska, Delaware, Montana, New Hampshire, and Oregon. However, some of these states do allow for local sales taxes.

Most states impose sales tax on tangible personal property, such as clothing, electronics, and furniture. In some states, sales tax also applies to certain services, such as hotel accommodation, rental cars, and dining out.

The sales tax rate is usually expressed as a percentage of the sale price. For example, if the sales tax rate is 6%, and the sale price is $100, the sales tax would be $6, and the total price paid would be $106.

Some states have uniform sales tax rates, while others allow local governments to impose their own sales tax rates. These rates can vary within the same state. For example, in California, the state sales tax rate is 7.25%, but some cities and counties can add up to an additional 3.5%.

Different Rules for Sales Tax

Besides different rates, sales tax also has different rules in different states. In some states, certain products or services are exempt from sales tax, while in others, additional taxes can be applied.

Some states, like New York, offer sales tax holidays during specific periods of the year. During these holidays, specific products, such as clothing or school supplies, can be purchased tax-free.

Sales tax rules also depend on the type of sale. For example, sales tax on online purchases has been the subject of much debate in recent years. According to the Supreme Court’s decision in South Dakota v. Wayfair, Inc. in 2018, states can require online sellers to collect sales tax, even if they have no physical presence in the state. This decision has significantly impacted e-commerce businesses, as they must now keep track of sales tax rates in different states and remit the taxes accordingly.

Additionally, sales tax rules can be complicated for small businesses. They must keep accurate records of sales and remit the taxes to the state or local government, which can be time-consuming and confusing. This has led to calls for simplifying sales tax rules for small businesses.

Updates and Resources

Sales tax is an ever-changing landscape, with frequent updates and changes to rules and rates. Staying informed about these updates is crucial for businesses and consumers.

One of the best resources for sales tax updates is the National Conference of State Legislatures (NCSL). The organization tracks sales tax rates and rules in all 50 states and provides comprehensive resources for businesses and individuals.

Another valuable resource is the Internal Revenue Service (IRS). The IRS provides information on sales tax for businesses, including how to register for a sales tax permit and how to calculate and remit sales tax.

The U.S. Small Business Administration (SBA) also offers valuable resources for small businesses regarding sales tax. The organization provides information on how to comply with sales tax rules and how to calculate and remit sales tax.

Conclusion

Sales tax is a complex topic, with different rules and rates in different states and cities. Understanding the basics of sales tax is essential for both consumers and business owners.

Knowing the sales tax rate in your state or city can help you make informed purchasing decisions and avoid overpaying on taxes. For businesses, complying with sales tax rules and keeping accurate records is crucial to avoid penalties and fines.

Resources such as the NCSL, IRS, and SBA provide valuable information on sales tax and can help businesses stay up-to-date with changes in rules and rates. By staying informed about sales tax, businesses and consumers can navigate the sales tax landscape more effectively.

Sales taxes are imposed on the purchase of items, as a percentage of the cost of that item. For example, in states that have a sales tax of six percent, taxpayers would pay that sales tax rate on all taxable items purchased in that state. There are however, some items exempt form the sales tax, depending on the tax jurisdiction. In some states, items considered a necessity for survival, such as food, are not taxed. In other states, clothing may not be taxed. Each state is able to make those determinations as there is no federal law that dictates which items should and should not be taxed in each state. Currently, there is no federal sales tax imposed on most items. There are some federal excise taxes, such as those imposed on cigarettes, gasoline and fuel.

Background: 

Sales taxes are imposed at differing rates in each tax jurisdiction. In fact, each tax jurisdiction may apply differing types of sales taxes. In each case, sales taxes are considered to be regressive. Regressive taxes are those that tax items as a percentage of the sale price. In that way, those with lower salaries, pay a higher percentage of their salary towards that tax. In order to be progressive, a sales tax would have to be imposed as a percentage of a taxpayers income, which would nearly impossible. For that reason, many people argue for an elimination of the sales tax, in favor or a progressive income tax, which could more easily be implemented.

Types:

There are several types of sales taxes and each tax jurisdiction can make determinations as to which types of sales taxes they wish to impose. In fact, each jurisdiction is able to determine the rate of taxes imposes on taxpayers.

There is an excise tax which is imposed on certain items that the government wishes to discourage the use, or purchase of. For example, many states impose a large excise tax on cigarettes. A pack of cigarettes may be taxed on the federal level, the state level, and the local level. So an individual buying a pack of cigarettes in one state, may only be taxed 7 cents in their tax jurisdiction. Added to the federal tax, the excise tax on that pack of cigarettes would be around one dollar and seven cents. In other states, taxes make up almost seventy percent of the cost of a pack of cigarettes.

The same is true for alcohol purchases. Alcohol is taxed as a measure of volume, as opposed to a percentage of price. In both cases, the government wishes to discourage consumption of these products. There is also a use tax which is imposed on purchases made outside of the taxpayers jurisdiction. However, they are only required to pay the use tax on that item, if the item is taxed in their state. For example, a New Jersey resident that buys clothes online, does not have to pay a use tax, because there is no clothing sales tax in New Jersey. Some states expect taxpayers to honestly report any purchases made out of state.

While other states impose a use tax as a percentage of the each taxpayers salary, assuming a certain amount of out of state purchases. Currently, there has been a push towards the Value Added tax, which would be a federal sales tax. The tax would apply across the country and would be added to the taxes already imposed on purchases.