Home Tax What to Know About US Sales Tax

What to Know About US Sales Tax

What to Know About US Sales Tax

Sales tax is a tax charged on the sale of goods and services. Different regions have different sales tax rates, and it’s a critical aspect of any retail business that should never be underestimated. The United States first introduced sales tax to fund the Civil War, but now it’s a critical source of revenue for both the federal and state governments. For any business owner, understanding the nuances of sales tax is paramount to ensuring compliance and avoiding penalties.

Rates and Jurisdictions

Sales tax rates vary from state to state, ranging from 0% to more than 10%. Across the United States, there are upwards of 10,000 different sales tax jurisdictions, including state, county, city, and municipal levels. Each of these jurisdictions has unique tax rates and rules, which means that businesses must navigate an intricate web of regulations to comply.

In some states, the tax rates are uniform, meaning that the same rate applies across the state. Examples of such states are Michigan, Rhode Island, and Louisiana. In addition, a few states have no sales tax at all. These states include Alaska, Oregon, New Hampshire, Montana, and Delaware.

Most states use origin-based or destination-based sales tax sourcing to determine which rate to apply to a transaction. Origin-based sourcing means that the location where the product or service is sold from determines the tax rate. Destination-based sourcing means that the location where the product or service is delivered to is what determines the tax rate. The specific rules and regulations governing sales tax rates and sourcing vary by state and jurisdiction.

Nexus and Economic Nexus

In the United States, a business must have “”nexus”” in a state to be required to collect sales tax. Nexus is the legal connection between a business and a state that creates a sufficient connection for the state to require the business to collect sales tax. If a business has nexus in a state, they are required to collect state and local sales tax from customers in that state.

The concept of “”economic nexus”” has been introduced in the last few years. Economic nexus means that a business can be required to collect sales tax in a state simply by having a certain amount of sales within the state’s borders. This has become much more common as states look for new sources of revenue.

The Wayfair Decision

The Wayfair decision was a landmark case that has fundamentally changed the sales tax landscape. Prior to this Supreme Court decision in 2018, states could only require businesses to collect sales tax if they had a physical presence in the state. This physical presence requirement had been established by the Supreme Court in previous cases.

In Wayfair, the Supreme Court ruled that a business could be required to collect sales tax in a state even if they didn’t have a physical presence in the state. This ruling was based on the fact that the internet has made it much easier for businesses to sell products and services into other states, creating an unfair advantage for out-of-state businesses that didn’t collect sales tax.

Since the Wayfair decision, many states have introduced economic nexus laws that are based on the amount of sales a business has in a state. As a result, many more businesses are now required to collect sales tax in a larger number of states.

Exemptions and Exclusions

Not all transactions are subject to sales tax. Some items, like food, prescription drugs, and medical devices, are often exempt from sales tax. Similarly, some types of transactions, like services and intangible goods, are excluded from sales tax altogether.

Different states have different rules regarding what is exempt and excluded from sales tax, so it’s important to check a state’s specific regulations to understand any exemptions and exclusions that may apply.

Sales Tax Compliance

Sales tax compliance can be quite complex for businesses. In addition to understanding the various rates and regulations governing sales tax, businesses must also register with each state where they have nexus, collect and remit sales tax, file returns and pay any sales tax due.

There are several software solutions available to help businesses manage sales tax compliance, which can automate many of the functions involved in collecting and remitting sales tax. These solutions can greatly simplify the sales tax compliance process, but it’s important to carefully evaluate any software to ensure that it meets the specific needs of your business.

The Consequences of Non-Compliance

The consequences of non-compliance with sales tax regulations can be severe. Businesses that fail to collect and remit sales tax can face significant fines and penalties. In addition, states may seek to recover any unpaid sales tax, and may even pursue legal action against the business.

Many states have established voluntary disclosure programs that allow businesses to come forward and correct any past sales tax non-compliance without facing penalties. These programs can be a good option for businesses that have made errors in sales tax collection or that have become aware of non-compliance issues.

Conclusion

Sales tax compliance is a critical aspect of retail business operation in the United States. While it can be complex and difficult to navigate, with the rise of economic nexus, it’s more important than ever to properly comply to avoid fines, penalties, and legal action. Understanding the nuances of sales tax rates, nexus, exemptions, and exclusions can accommodate retailers to avoid the harsh consequences of non-compliance and establish a successful business strategy.


In the United States, sales taxes are imposed at the point of purchase, as a percentage of the purchase price. For example, an item that cost ten dollars may be taxed at a rate of 6 percent, or sixty cents. Those making purchases are aware ahead of time, what the tax burden will be, as the percentage of tax imposed is the same, regardless of the price of the item.

While sales tax are imposed as a percentage of the purchase price, some items are tax exempt. In many tax jurisdictions, necessities, such as certain foods, are exempt from the sales tax.

In most states, the sales tax is collected by they seller, who then forwards the tax monies to the government. However, there are some exceptions. For example, the buyer is responsible for an additional sales tax which applies to good purchased outside of the tax jurisdiction, but then used in their tax jurisdiction. For example, an individual that purchases clothes from one state, to be used on their state of residence, is responsible for an additional tax on those items, to be paid at the end of the year in most jurisdictions.

Sales taxes are levied on most goods and services in the United Sates, depending on the jurisdiction. In addition, the percentage of sales tax levied in each jurisdiction varies. Sales taxes do not take the income of an individual into consideration and they are considered a regressive tax, because those with a lower income payer a higher amount, when taken as a percentage of their salary.