What Is Sales Tax?
“Sales Tax” is a tax that is charged on goods sold to end customers, the final user of that product. The sales tax is a set percentage of the sale price of the goods sold, and individual states set their own sales tax percentages. Most states use sales taxes to generate revenue to pay for the state’s operations, but some charge no sales tax at all. These are Alaska, Delaware, Montana, New Hampshire, and Oregon. Many cities also impose a sales tax, so the actual amount of sales tax you pay for a purchase will vary quite a bit if you travel.
Who Collects Sales Taxes?
Sales taxes are collected by businesses at the time they sell goods or services. Most states require the businesses to remit the amount collected either monthly, quarterly, or yearly. Different levels of government (city, state, and national) have different rules for when sales taxes need to be remitted back to the government. If you are a new business owner, your state’s revenue office sets the time frame based on how long the company has been in business and how much tax they expect to collect throughout the year. Sales taxes are required on all cash transactions, credit sales, installment sales, lay-away sales, and sales involving trade-ins or exchange of property. (For those of you thinking you might want to own your own company one day, accounting for and paying sales taxes can be one of the most confusing parts of starting a retail business.)
As a consumer, you may notice that sales tax is almost always added to your receipt as a separate line item, but businesses are not required to charge sales tax separately. In theory, businesses could simply pay the government out-of-pocket for the tax they owe on the products they’ve sold, but it is much easier for them to determine the amount they owe if they charge and account for product sales and taxes separately.
Sales Tax Vs Use Tax
Sometimes when a product is sold, the buyer is responsible for paying the taxes. This tax is called a Use Tax. Use taxes are generally applied to transactions where no sales tax was charged at the point of sale. Think about this example. Let’s say you live in Oregon where there is no sales tax and you purchase a $1000 desk from a manufacturer in Kalama, Washington. You would pay the price for the desk and would be responsible for paying the use tax of 6.5% tax for the state of Washington and 1.4% tax for the city of Kalama. It is your responsibility to self-assess and report your use tax liability to your state Department of Revenue.
What Purchases Are Exempt From Sales Tax?
Even in states and cities with sales taxes, not every purchase is subject to a sales tax.
Most states have certain tax exemptions for groceries, usually taxing groceries at a lower rate or assessing no tax at all. While most groceries do get a tax break, “junk food” (with high fat and/or sugar content) and “prepared foods” (such as roasted chicken that is ready to eat) are still taxed at the full rate.
Sales taxes only need to be paid for residents of that state, so if you are purchasing a good or service from a different state, you may be exempt from that state’s sales tax. You also see this if you travel internationally. Airports that have international flights often have “duty free” shops. These are stores whose goods are exempt from paying national taxes based on the requirement that the goods are sold to travelers who are taking them out of the country. (Remember that if your purchase is exempt from paying sales tax, you may still be required to pay a Use Tax in your home state.)
In every day practice, you likely would be required to fill out a “sales tax return” with that state’s government.
Goods and services sold to not-for-profit organizations are generally sales tax-exempt. The organization has to be registered as a Not-for-Profit organization, and it has to request an Exemption Certificate from whichever government would normally be collecting that tax.
Goods for Resale
If you purchase goods and intend to re-sell them, you are also tax-exempt on that purchase. This comes into play most often with small businesses who buy merchandise from wholesalers. Like non-profit organizations, resellers are also required to obtain an Exemption Certificate for their purchases.
Sales Tax Holidays
Some states have “sales tax holidays” where sales taxes are suspended either entirely, or for certain classes of goods. For example, Texas has a sales tax holiday in August each year for clothing, footwear, school supplies, and backpacks (that cost less than $100). The intention is to help families purchase needed supplies as they prepare to send their children back to school.