Sales Tax
A sales tax is a consumption tax imposed by a government on the sale of goods and services. It is typically collected by the retailer at the point of sale and remitted to the government. Sales taxes vary by jurisdiction and can include state, county, and municipal components.
Key points
- Charged as a percentage of the retail price at purchase.
- Usually applies only to the end user; intermediate businesses often use resale certificates to avoid paying tax on goods meant for resale.
- Local governments can add their own sales taxes on top of state rates.
- Many countries use a value-added tax (VAT) instead of a conventional sales tax.
How sales taxes work
Conventional sales taxes are designed to fall on the final consumer. Businesses in the supply chain typically avoid paying sales tax on inputs by documenting that purchases are for resale. For example:
* A sheep farmer sells wool to a yarn manufacturer. The manufacturer provides a resale certificate to avoid sales tax.
* The yarn manufacturer sells to a garment maker, who also uses a resale certificate.
* The garment maker sells finished goods to a retailer, who charges the customer sales tax at the point of sale.
Explore More Resources
Different jurisdictions can layer taxes (state + county + city). An item’s final tax rate depends on the combined rates where the purchase occurs. Some items may be exempt or tax‑exempt up to a threshold (e.g., certain food items or clothing under a specified dollar amount in some states).
Use taxes
Use taxes apply to purchases made outside a buyer’s home jurisdiction that would have been taxable if bought locally. They are generally set at the same rate as the corresponding sales tax. Use taxes are hard to enforce except for large purchases (e.g., vehicles) where registration or reporting triggers the tax.
Explore More Resources
Nexus
“Nexus” determines whether a business must collect sales tax in a jurisdiction. Nexus typically requires some form of presence, but definitions vary and include:
* Physical locations (stores, warehouses)
* Employees or agents in the state
* Affiliates or referral arrangements that create economic ties
E-commerce has complicated nexus rules; many states have enacted laws and thresholds that require remote sellers to collect sales tax.
Explore More Resources
Excise taxes
Excise taxes are special taxes on specific goods or services (e.g., fuel, tobacco, alcohol). These are often imposed as a per‑unit amount or a percentage and are typically passed on to consumers within the purchase price. “Sin taxes” on cigarettes and alcohol are common examples.
Sales tax vs. VAT
A sales tax is charged once at the final sale to the end user. A value‑added tax (VAT), used in many countries, is collected at each production stage based on the value added. VAT is designed to avoid tax‑on‑tax (cascading taxes) by allowing businesses to deduct taxes paid on inputs.
Explore More Resources
Sales tax in the U.S.
Sales tax systems in the U.S. are state-driven and vary widely:
* California’s statewide sales tax is 7.25%; local jurisdictions may add additional rates.
* Five states do not impose a statewide sales tax on consumers: Alaska (local taxes possible), Delaware, Montana, New Hampshire, and Oregon.
* States with relatively low average sales-tax rates (examples) include Colorado, Alabama, Georgia, New York, and Wyoming.
* Some states have high combined rates when state and local taxes are included; for example, certain jurisdictions can push combined rates well above state base rates.
Conclusion
Sales taxes are a major source of revenue for state and local governments and are applied at the point of sale for end consumers. Rules on exemptions, nexus, use taxes, and local add‑ons make compliance complex for businesses, especially those operating across multiple jurisdictions. Understanding the differences between sales tax and VAT is important for businesses that operate internationally or import/export goods.