Sales Tax Definition

Business owners are responsible for collecting sales tax from their customers when they sell goods or services. But sales taxes vary by state, local governments, and the goods and services being sold. Let’s get an overview of sales tax in the U.S.

What is sales tax?

Sales taxes are taxes the government (whether it’s state, county, city government, or another entity) levies on the consumer for goods and services. They’re usually collected at the “point of sale” (the place where the goods/services are sold) by a retailer, who then is responsible for passing on the taxes to the government.

In most cases, sales taxes are only supposed to be applied to the “end user,” the person that will ultimately consume or use the goods/services. The businesses involved in the manufacturing of goods to sell to a retailer or some other entity in the production process must often get a resale certificate from the government to show that they’re not the end user.

Sales Tax vs. Use Tax

Sales tax and use tax are closely related. A use tax is a tax on the use, storage, or consumption of a taxable product or service for which a sales tax hasn’t been paid. You’ll ordinarily have either sales tax or use tax on a purchase, but not both.

Usually, a use tax is applied in situations where someone buys something from another state. For example, if your state would normally apply a sales tax to a product you’re buying, but you’re buying it from a state that has no sales tax, your state may apply a use tax to the item.

What is a nexus?

With so much online commerce, it’s become increasingly difficult for state governments and retailers to determine what sales taxes to charge and where. Different states take different approaches to the issue, which further complicates things.

Whether a business owes sales tax to a government often depends on whether the business has a sales tax “nexus” there. Having a sales tax nexus used to be limited to having a physical presence in a government’s jurisdiction, such as an office or warehouse. But that’s changed.

A 2018 U.S. Supreme Court decision did away with the physical presence requirement for a sales tax nexus. Now governments can use other criteria to determine if a business has a nexus within its borders, such as making a certain amount of sales or transactions in the area.

Because the criteria for determining a nexus varies so wildly, online retailers need to do substantial research and/or consult a tax professional to know what their obligations are.

Sales Tax Rates

For a business owner to meet their sales tax obligations, they must first know what rates apply to them. All but five states charge a state sales tax, but often local governments are allowed to levy their own sales tax regardless of what the state sales tax rate is.

For example, your state’s sales tax may be 4%, but your county government adds 2% and your city adds 1%, leaving your customers with a 7% sales tax.

Other entities besides states, counties, and cities can charge sales tax. You might have to pay sales tax to various special tax districts like school districts, fire districts, and others. You could also be located in a special-purpose tax district that uses sales tax to raise money for transportation, emergency services, crime control, etc.

Hopefully, you can determine what your total sales tax rate is by going to the Department of Revenue website for your state. Don’t forget that a business with multiple locations may have different sales tax obligations to meet.

How to Remit Sales Tax

As with all things related to sales tax, how to turn over the sales tax to the government will vary by location. Your first step would probably be to see if your region requires a sales tax license and, if so, to get one ASAP. Your state’s revenue office would be a good place to start.

Determine what items you’re required to collect sales tax on. Sometimes basic items like food are exempt from sales tax, while other items that aren’t considered necessary for survival, such as tobacco and alcohol, might incur excise taxes.

Do some research and consult your state and local tax authorities to determine how to calculate sales taxes and how to pay them. You’ll need to know how often to submit sales tax, which also varies by region. For example, one region might ask for you to submit taxes quarterly, but another might ask you to submit them more often if you make over a certain amount in sales.

Failure to Remit Sales Tax

Not turning over the sales tax you’ve collected on time can mean serious penalties. Depending on your location and the circumstances, you could face fines, criminal charges, or even jail time.

Make sure you stay on top of all your sales tax obligations. If you get any notices about failure to remit, respond immediately to correct the situation.

Summary

Sales tax: Sales taxes are taxes state and local governments levy on the consumer for goods and services. Retailers collect sales taxes and remit them to the government. 

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