State Sales Tax: Understanding the Basics
When we go shopping at a brick-and-mortar store or browse an online retailer, we usually know that we will be paying an extra sum at checkout. This extra amount is known as sales tax – a form of tax levied on the sale or lease of goods and services. Sales tax is one of the most significant sources of revenue for state and local governments. In 2018, state and local governments collected approximately $400 billion in sales tax, dwarfing the federal government’s revenue from corporate tax. This article aims to provide an in-depth understanding of the state sales tax in the United States.
What is State Sales Tax?
State sales tax is a form of consumption tax that is collected by the state government on purchases made within its jurisdiction. Each state specifies its sales tax rate, which usually ranges from 2.9% to 9.5%, and can vary by city or county. For example, in California, the state sales tax is 7.25%, but depending on the city or county, the total tax rate can exceed 10%. In contrast, some states such as Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose state sales tax.
Sales tax is a transaction tax and is calculated as a percentage of the purchase price of the goods or services consumed. Unlike income tax, sales tax is ‘regressive,’ which means that it hits harder for people with lower income. For instance, a 5% sales tax on a $20 item would cost an additional $1, whereas, for a $1000 item, it would cost an extra $50. Due to this regressive nature, low-income households spend a more significant proportion of their income on goods and services, which makes sales tax an essential source of revenue for state and local governments.
Types of Sales Tax
There are two primary types of sales tax systems: origin-based and destination-based.
Origin-Based Sales Tax:
In an origin-based sales tax system, the sales tax is based on the location from where the transaction takes place. For example, if a business is in California and sells goods to a customer in New York, they will charge the California state sales tax rate, and the revenue will go to California, the state from where the transaction originates.
Destination-Based Sales Tax:
In a destination-based sales tax system, the sales tax is based on the location where the goods or services are consumed, or in other words, where the buyer is located. For example, if a business is in California and sells goods to a customer in New York, they will charge the New York state sales tax rate, and the revenue will go to New York, the state where the transaction is taking place.
As of 2021, about half of the states in the US have adopted the destination-based sales tax system, while the other half is still following the origin-based system.
Online Sales Tax
Online sales have been steadily growing over the years, and with the pandemic-induced shift to e-commerce, online sales have skyrocketed. The growth of e-commerce has presented a challenge for states that levy sales tax because many online transactions are interstate, making it difficult to identify the state that is entitled to collect the sales tax.
In 1992, the Supreme Court ruling in Quill Corp v. North Dakota restricted states from imposing sales tax on out-of-state sellers that do not have a physical presence in their state. Due to this ruling, businesses that operate exclusively online can avoid collecting or paying sales tax in states where they do not have a physical presence. This ruling gave online retailers an unfair advantage over brick-and-mortar stores, which relied heavily on sales tax revenue.
In 2018, the Supreme Court overturned the Quill ruling in South Dakota v. Wayfair, Inc. The Wayfair decision allowed states to tax internet retailers irrespective of their physical presence in the state. This ruling gave states a broader authority to levy sales tax on online transactions and paved the way for future legislation on internet sales tax.
Currently, the majority of states require online sellers to collect and remit sales tax on all orders shipped to their states. According to the National Conference of State Legislatures, as of 2021, 43 states and the District of Columbia have adopted economic nexus laws, which require remote sellers to collect and remit sales taxes based on the amount of business they do in each state.
Exemptions to Sales Tax
Not all goods and services are subject to sales tax. States have different rules regarding which items are taxable and which ones are exempt. However, some items that are commonly exempt from sales tax across states include:
– Food for home consumption
– Prescription drugs and medical equipment
– Clothing and footwear, up to a certain price limit
– Goods purchased for resale
– Certain agricultural products
– Services such as healthcare, education, and legal services.
Sales tax exemptions are intended to help low-income households, incentivize certain economic activities, and reduce the tax burden on items or groups of people.
Impacts of State Sales Tax
State sales tax plays a significant role in the revenue collection of state and local governments. However, it also affects consumers and businesses in various ways.
Impact on Consumers:
As mentioned earlier, sales tax is regressive, and low-income households are the most affected. The sales tax disproportionately impacts low-income households because they spend a more significant proportion of their income on goods and services, compared to high-income households. Sales tax also affects consumers’ purchasing power, as it increases the price of goods and services, leading to reduced consumption.
Impact on Businesses:
Sales tax can significantly affect businesses’ profitability, as it increases the final price of goods and services, making them less competitive than those located in states with lower tax rates. Businesses are also burdened with the responsibility of collecting and remitting sales taxes, which increases their compliance costs. Moreover, the complexities of sales tax compliance increase as businesses expand across state borders, creating additional tax liabilities.
Conclusion
In conclusion, state sales tax is a form of consumption tax levied on the sale or lease of goods and services, collected by the state government, and is one of the main sources of revenue for state and local governments. Sales tax can be origin-based or destination-based, and not all goods and services are subject to sales tax. The advent of e-commerce has raised challenges for state sales tax, and the Supreme Court’s Wayfair decision has provided states with broader authority to levy sales tax on online transactions.
Overall, the state sales tax has significant implications for consumers, businesses, and governments. While it generates significant revenue for state and local governments, its regressive nature disproportionately affects low-income households. Businesses are burdened with sales tax compliance, which can create an additional tax liability as they expand across state borders. It is crucial to understand the basics of the state sales tax to make informed decisions when it comes to tax planning.
Sales Tax Rates By State
(Total Including Maximum Local Surtax)
Alabama: 10%
Alaska: 7%
Arizona: 10.60%
Arkansas: 9.25%
California: 9.75%
Colorado: 8%
Connecticut: 6.35%
Delaware: 0%
Florida: 7.50%
Georgia: 8%
Hawaii: 4.71%
Idaho: 6%
Illinois: 11.50%
Indiana: 9%
Iowa: 7%
Kansas: 8.65%
Kentucky: 6%
Louisiana: 10%
Maine: 5%
Maryland: 6%
Massachusetts: 6.25%
Michigan: 6%
Minnesota: 7.88%
Mississippi: 9%
Missouri: 9.24%
Montana: 3%
Nebraska: 7%
Nevada: 8.10%
New Hampshire: 0%
New Jersey: 7%
New Mexico: 8.56%
New York: 8.88%
North Carolina: 7.25%
North Dakota: 7%
Ohio: 7.75%
Oklahoma: 8.50%
Oregon: 5%
Pennsylvania: 8%
Rhode Island: 7%
South Carolina: 9%
South Dakota: 6%
Tennessee: 9.75%
Texas: 8.25%
Utah: 8.35%
Vermont: 7%
Virginia: 5%
Washington: 9.50%
West Virginia: 6%
Wisconsin: 5.60%
Wyoming: 7%
State Sales Tax Defined:
Sales tax in the United States is government-enforced and issued levies that are typically viewed as an added cost, placed onto the price of goods or services.
The sales tax in the United States is a form of consumption tax, which is delivered as a percentage and placed on the purchase of goods, such as clothing.
The sales tax is collected by local government departments to help fund and deliver public goods to the underlying community. Each state in America contains different rules for applying a sales tax. Some state laws are more advantageous to the taxpayer for certain purchases or transactions. This policy and interpretative contrast is crucial to understand especially if the taxpayer is planning to run a business in a particular state.
Not all goods purchased are met with a sales tax. Typically items that are viewed as necessities, such as food, are not administered with an additional taxation.
The sales tax is collected by the merchant of the store or retail shop in which the goods were purchased. Typically, only consumers are charged a sales tax; the levy does not apply to resellers or manufacturers of the goods.
As is common with most local laws or taxation models, the percentage of the sales tax as well as the presence of a sales tax, will differentiate based on state interpretation. For instance, sales taxes are levied by every state except: Alaska, Delaware, Montana, New Hampshire and Oregon. Furthermore, the presence of a sales tax and the attached percentage rate may fluctuate at the county or municipal level.
