Description of Sales Tax by State in the United States
In general, a sales tax can be described as a form of levy that a state or a government agency collects from the sale of specific products and services. Additionally, this form of taxation is collected by the seller of a good or a service directly from the customer when a purchase occurs. However, it is called use tax when a customer pays a levy directly to a government agency for purchased products or services from a different state and used in another.
Sales Tax Within American States
Within America, purchased or leased products and services are usually affixed with sales tax. Each state or territory within the country has its own sales tax legislation, which determines the tax rate and limit within the particular jurisdiction. However, there is no federal sales tax policy or law in the United States. Therefore, each state or territory is solely responsible for the collection of sales taxes. Additionally, a state or territory gives local government authorities power to collect additional sales tax within a particular threshold. Amongst all the states and territories within America, 5 five states do not charge sales tax within their jurisdiction. These states are Oregon, Delaware, New Hampshire, Alaska, and Montana. The State of California currently has a base sales tax rate of 7.25%, which is the highest in the country. The base sales taxes for each state, territory, and the District of Columbia are shown in the table below.
Base Sales Tax Rate
How Sales Tax is Determined
Sales tax is mathematically determined by the multiplication of tax rates and the cost of an item or a service. It is usually collected by the seller at the point of purchase. The buyer that has not paid for sales tax at the point of purchase may be liable to pay for use tax. This type of tax is self-determined by the buyer of a product or service.
Although many people confuse sales tax for VAT, these two taxes are different. Therefore, sales taxes are only charged when a transaction is carried out within the retail sector. Additionally, sales tax is also imposed on products that have been sold before. Consequently, a single used item can be affixed with sales tax so long as it will be offered for sale in a retail market.
In general, not all products and services are taxed at the same rate. The type of products and services that are taxed depends on the jurisdiction and the local policy. Also, the rate of sales tax depends on the category of products and services. Nonetheless, within almost all states and territories around the country, products or services, which are sold for the sole purpose of resale or manufacturing processes are completely excluded from the payment of sales tax. Likewise, foodstuff sold in grocery stores, agricultural implements and supplies, prescription drugs, and other types of goods are not affixed with sales taxes.
Sales tax collection, including the levy that goes to local governments, is managed by the state tax collection agency. All sellers of products or services are required to collect sales tax from their customers unless a client can produce a valid tax exemption certificate.
Institutions That are Exempted From Paying Sales Tax
Although most institutions are expected to pay sales tax, certain organizations are excluded from paying sales tax. However, when such organizations indulge in business transactions, they are required to pay sales tax on all transactions.
Immaterial Assets and Properties
In most cases, immaterial assets and properties are not affixed with sales tax. Nonetheless, some states and territories still charge sales tax for immaterial assets and properties. The sales of immaterial properties with copyright may attract sales tax. As a result, many courts have established that the sale and transfer of copyright of immaterial items must be affixed with sales taxation.
Tax-Exempt GoodsThe goods that are sales tax exempt vary in different states. However, goods that are bought for use in manufacturing or goods bought for resale are exempt from sales tax across all states. Moreover, most jurisdictions do not tax food and groceries that need to be cooked or processed before they can be consumed. Other goods that are exempt across all states are prescription medicines and agricultural supplies. Overall, no state imposes a sales tax on all kinds of traded goods. The goal of exempting some goods is to make life easier for residents earning minimum wages and to encourage local manufacturing. Local manufacturing brings income to the state and adds a sales tax on the manufactured goods, as well as employment income. Motor vehicles are also sales tax exempt for a similar reason - they increase productivity.
Sales Tax from SellersIn states where the seller pays the sales tax, they simply transfer that cost to the consumer. The result is they become tax collectors for the state's tax collection agency. To help retailers collect sales taxes effectively, state tax collection agencies have set up online tools those retailers can use to check tax exemption certificates. Moreover, most states require sellers to file their sales taxes electronically. Sellers have to remit the sales taxes they collect monthly, quarterly, or annually if the taxes collected fall below a certain threshold. The sales volume determines how often a business files its sales taxes. However, businesses are required to remit their sales taxes monthly or as often as possible if they exceed a certain threshold.
How is a Sales Tax Calculated?In most states, the sales tax is collected on the net price that the customers pay the retailer. That means if the retailer charges a shipping fee, some states will charge a sales tax on the shipping fee as well. Furthermore, some local governments may add their own sales taxes on top of the state tax. In 35 states, local governments impose sales or use tax that ranges from 1% to 5%. In total, businesses can expect to pay at most 12.25% in sales taxes when you combine state and local taxes.
Sales Tax RegistrationBusinesses must register themselves with a state sales tax agency if they have a nexus in that state. Sales tax applies to local, national, and foreign businesses, as long as they have a nexus in a state. Moreover, a state may require an out-of-state or foreign business to provide a bond or deposit before issuing it with a sales tax certificate. The certificate indicates a business is registered to collect and remit sales tax. Most states allow a business to fill out online forms on the state tax authority's website. Others require the business's local state representative to present the registration documents to the state authority. Often, if a business has multiple physical locations, a sales tax certificate must be applied for each location. Depending on the state, a business can file sales and use tax returns for each location separately or consolidate them if the business locations exceed a certain minimum number.
Sales taxes are paid within all the states and territories of the United States of America. However, each state or territory has its rates of base sales tax. Also, some jurisdictions do not collect sales tax from the sale of products or services.
Other useful articles:
- Sales Tax by State in the United States
- How to Verify Tax Exempt Certificate
- Verify Tax Exempt Resale Certificate by State
- What is a Tax Exempt Status
- VAT Taxes in Europe
- Sales Tax Thresholds by State