Ultimate Sales Tax Guide: Decoding the Intricacies
A sales tax is a consumption tax imposed by the government on the sale of goods and services. Typically, it’s collected at the point of sale by the retailer, and then passed on to the government.
A business may be liable for sales taxes in a given jurisdiction if it has a nexus there, which can be a physical location, employee presence, or even an affiliate, depending on the local legislation.
Key Insights:
- Sales Tax Definition: A consumption tax applied on goods and services.
- Charging Mechanism: Charged as a percentage of the retail cost at the point of purchase.
- Variations in Tax Rates: Local and municipal taxes can add to the state sales tax.
- U.S. States Without Sales Tax: Four states—Delaware, New Hampshire, Montana, and Oregon—do not have sales tax; Alaska has no statewide but allows local taxes.
- Global Perspective: Many countries outside the U.S. use a value-added tax (VAT) instead of sales tax.
Understanding Sales Tax
Retail sales taxes are charged to the end user of goods or services. Multiple stages of manufacturing can make documentation crucial to prove who is ultimately liable for sales tax.
Example: A sheep farmer selling wool to a yarn manufacturer would not pay sales tax if they present a resale certificate. The yarn then gets sold to a garment manufacturer with another resale certificate. Finally, the garment manufacturer sells socks to a retailer, who then charges the customer sales tax.
Different jurisdictions can charge varying levels of sales tax, altering the purchase price across locations. Sales taxes are closely related to use taxes, which apply to purchases from outside a jurisdiction.
Use taxes are generally set at the same rate as sales taxes but are harder to enforce. Example: If a Georgia resident buys a car in Florida, they must pay Georgia’s local sales tax.
Nexus in Sales Tax
A ’nexus’ usually indicates a company’s physical presence but can extend beyond a simple office or warehouse. For instance, having an affiliate that directs traffic to your site for commission also creates a nexus.
Example: New York has enacted ‘Amazon laws,’ requiring internet retailers like Amazon to pay sales taxes regardless of physical presence.
Excise Taxes and Exemptions
While general sales taxes take a percentage of the price, some items like food may be exempt. Special items like clothes may be taxed beyond certain thresholds, e.g., no sales tax on clothes purchases below $200.
Certain goods also face special excise taxes. Example: New York City charges an excise tax of $1.50 per cigarette pack, adding to the state’s $4.35 excise tax.
Sales Tax vs. VAT
Sales Tax is collected once whereas VAT is collected at every production level.
Value-Added Tax
The U.S. stands unique among developed countries by primarily using sales tax instead of VAT. Many countries have VAT schemes, taxing at each production stage, effectively avoiding double taxation.
Specific State Sales Tax Examples
- California: Statewide sales tax of 7.25%, additional local taxes can apply.
- Lowest Average Sales Taxes: Hawai‘i (4.44%), Wyoming (5.36%), and Alaska (1.76%). Four states forbid sales tax entirely.
- Highest Average Sales Taxes: Louisiana (9.55%), followed by Tennessee, Arkansas, and Washington.
Bottom Line
Sales tax is a common, percentage-based tax on finished products at the point of sale in the U.S. The use of VAT in other countries showcases different approaches to taxation.
Related Terms: Value-Added Tax (VAT), Consumption Tax, Use Tax, Excise Tax.
References
- Congressional Research Service. “Amazon Laws and the Taxation of Internet Sales: Constitutional Analysis”, Pages 6 and 7.
- New York State Department of Taxation and Finance. “Presumption Applicable to Definition of Sales Tax Vendor.”
- AARP. “States with Highest and Lowest Sales Tax Rates”.
- New York State Department of Taxation and Finance. “Cigarette and Tobacco Products Tax”.
- Organisation for Economic Co-operation and Development. “Consumption Tax Trends 2018”, Page 18.
- California Department of Tax and Fee Administration. “Know Your Sales and Use Tax Rate”.
