Sales Tax

What is sales tax?

Sales tax is a government-imposed tax on the sale of goods and services. It is typically assessed at the point of sale, collected by the retailer, and then paid to the government.

Sales tax liability

Businesses may be liable for sales taxes if they have a presence in the taxing area, which can include a physical location, an employee, or an affiliate.

Types of sales and similar taxes

  1. Manufacturers' Sales Tax: Imposed on manufacturers and producers selling tangible personal property.
  2. Wholesale Sales Tax: Applied to the wholesale sales of tangible personal property prepared for shipment to end users and consumers.
  3. Retail Sales Tax: Levied on retail sales of tangible personal property to end users/industrial users.
  4. Gross Receipts Tax: Applied to all business sales, criticised for its "cascading" effect where an item is taxed multiple times.
  5. Excise Tax: Levied on specific products like gasoline or alcohol, usually on the producer or wholesaler.
  6. Use Tax: Directly imposed on consumers for goods purchased without sales tax, often from an out-of-state seller.
  7. Securities Turnover Excise Tax: Applied to the trading of securities.
  8. Value Added Tax (VAT): Applied to all sales and restricts the need for a resale certificate, taxing the value added at each production stage.
  9. FairTax: A proposed federal sales tax to replace the federal income tax in the United States.
  10. Turnover Tax: Similar to a sales tax, it is applied as an indirect tax to intermediate and possibly capital items.

Example of Sales Tax in the USA

Scenario: Purchasing Electronics in California

Product: A laptop priced at $1,000

Location: Los Angeles, California

Sales Tax Rates:

  • State Sales Tax: 7.25%
  • County Sales Tax: 0.25%
  • City Sales Tax: 1.00%
  • Special District Tax: 0.75%

Total Sales Tax Rate: 9.25%

Calculating Sales Tax:

  1. State Sales Tax: 7.25% of $1,000 = $72.50
  2. County Sales Tax: 0.25% of $1,000 = $2.50
  3. City Sales Tax: 1.00% of $1,000 = $10.00
  4. Special District Tax: 0.75% of $1,000 = $7.50

Total Sales Tax: $72.50 + $2.50 + $10.00 + $7.50 = $92.50

Total Cost:

  • Price of Laptop: $1,000
  • Total Sales Tax: $92.50
  • Total Cost: $1,092.50

Breakdown

When a customer buys a laptop in Los Angeles, California, they pay a total sales tax rate of 9.25%. The breakdown includes state, county, city, and special district taxes. For a $1,000 laptop, the sales tax amounts to $92.50, making the total cost $1,092.50.

Know more about Inkle Sales Tax. 

Nexus and sales tax

Nexus is defined as a business presence in a state, which can be physical, like an office or warehouse, or indirect, like having an employee or affiliate. This determines whether a business owes sales taxes. For instance, New York’s "Amazon laws" require internet businesses to pay sales taxes even without a physical presence in the state.

Similar reading: What do you need to know about the U.S. tax code?

Sales tax variations by state in the US

Four U.S. states do not have a sales tax: Delaware, New Hampshire, Montana, and Oregon. Alaska does not have a statewide sales tax but allows local governments to levy their own.

In short

  • Sales Tax: A consumption tax on goods and services, charged as a percentage of the retail cost.
  • Municipal and State Levies: Sales tax can be imposed by both municipal and state governments.
  • No Sales Tax States: Delaware, New Hampshire, Montana, and Oregon, with Alaska having local sales taxes.
  • Global Variations: Many countries use a VAT instead of a sales tax.

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