All Your Sales Tax Questions Answered[2024]

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services. When a retail transaction occurs, the seller is required to collect sales tax from the buyer and remit those tax amounts to the appropriate tax authorities.

Understanding and complying with sales tax rules is crucial for businesses of all sizes. Collecting the right sales tax rates, knowing what is taxable and what isn’t, and remitting the proper amounts helps businesses remain compliant and avoid potentially costly penalties and audits down the road.

This blog post aims to answer some of the most common sales tax questions businesses may have, including:

• What is sales tax and how is it calculated?
• How do sales tax rates vary across the U.S.?
• What is nexus and why is it important?
• How is sales tax handled for online orders, rentals, returns and other situations?
• When do businesses need to charge sales tax on items like services, handmade goods, gift cards and more?
• What’s the difference between sales tax and excise taxes?

Whether you’re a small business just getting started or an established company, having a solid grasp of sales tax basics can save you a lot of headaches. Read on for straightforward answers to your most pressing sales tax questions.

Question 1:What is Sales Tax?

Sales tax is a consumption tax levied on the sale of goods and services. It is a percentage of the retail purchase price that is collected by the seller or retailer.

Unlike income tax which is paid directly by individuals and businesses to the government, sales tax is a pass-through tax. The tax amounts are collected by the seller from the consumer at the time of purchase. The seller then remits the collected sales tax money to the appropriate state and/or local tax authorities on a periodic basis.

Sales tax is imposed by state governments, and in many states there are additional local sales taxes levied by cities, counties, and other municipalities as well. While sales tax rates and rules can vary across different jurisdictions, the fundamental purpose is to tax the consumption and purchase of products and services within that region.

In essence, sales tax is a tax on the transfer of tangible goods or certain services from the seller to the end consumer. It is the responsibility of the seller to calculate, collect, and remit these taxes properly based on applicable sales tax rates and rules in the areas they have sales tax nexus.

Here’s the section on how much sales tax is, including examples of low and high state rates, local taxes added on top of state rates, and a full list of sales tax rates for every U.S. state:

Question 2: How Much is Sales Tax?

Sales tax rates vary significantly across the United States, with a wide range of rates imposed by different states and localities. Some states have relatively low sales tax rates, while others are on the higher end.

At the state level, five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no state sales tax at all. On the low end, states like Missouri (4.225%) and Colorado (2.9%) have modest state sales tax rates below 5%.

In contrast, states such as California (7.25%), Indiana (7%), and Tennessee (7%) are among those with the highest state sales tax rates in the country, at 7% or higher.

However, sales tax doesn’t stop at the state level in many areas. Numerous states allow additional local sales taxes on top of the state rate, imposed by cities, counties, transit authorities and other local jurisdictions. These can easily add several extra percentage points to the overall combined sales tax rate.

Here are the current state sales tax rates across the U.S.:

State	State Sales Tax Rate
Alabama	4%
Alaska	No state sales tax
Arizona	5.6%
Arkansas	6.5%
California	7.25%
Colorado	2.9%
Connecticut	6.35%
Delaware	No state sales tax
Florida	6%
Georgia	4%
Hawaii	4%
Idaho	6%
Illinois	6.25%
Indiana	7%
Iowa	6%
Kansas	6.5%
Kentucky	6%
Louisiana	4.45%
Maine	5.5%
Maryland	6%
Massachusetts	6.25%
Michigan	6%
Minnesota	6.875%
Mississippi	7%
Missouri	4.225%
Montana	No state sales tax
Nebraska	5.5%
Nevada	6.85%
New Hampshire	No state sales tax
New Jersey	6.625%
New Mexico	5.125%
New York	4%
North Carolina	4.75%
North Dakota	5%
Ohio	5.75%
Oklahoma	4.5%
Oregon	No state sales tax
Pennsylvania	6%
Rhode Island	7%
South Carolina	6%
South Dakota	4.5%
Tennessee	7%
Texas	6.25%
Utah	5.95%
Vermont	6%
Virginia	5.3%
Washington	6.5%
West Virginia	6%
Wisconsin	5%
Wyoming	4%
District of Columbia	6%

As you can see, state sales tax rates range from 0% at the low end up to 7.25% at the maximum state rate level before local taxes are added on top.

So while sales tax rates can vary a lot, most states have a significant tax percentage levied on the majority of consumer purchases. When local taxes are added in, combined sales tax rates of 8-10% are common in many areas. This highlights why properly charging, collecting, and remitting sales tax is critical for businesses to ensure compliance.

Question 3: How to Calculate Sales Tax

Calculating sales tax is a straightforward process using this formula:

Sales Tax = Sales Price x Sales Tax Rate

To calculate the sales tax amount:

1) Identify the total sales price/amount for the taxable goods/services before taxes.

2) Determine the combined sales tax rate that applies based on the delivery address or point-of-sale location. This includes all applicable state, county, city and other local sales tax rates.

3) Convert the combined sales tax rate to a decimal by dividing by 100 (e.g. 8% = 0.08).

4) Multiply the sales price/amount by the decimal sales tax rate.

For example, let’s calculate sales tax on a $250 purchase with a combined state and local sales tax rate of 8.25%:

Sales Price: $250

Combined Sales Tax Rate: 8.25%
Converted to decimal: 0.0825

Sales Tax = Sales Price x Sales Tax Rate
= $250 x 0.0825
= $20.63

So on a $250 sale with an 8.25% tax rate, the calculated sales tax amount is $20.63.

The total amount due from the customer is the original sales price plus the calculated sales tax:

$250 Sales Price

• $20.63 Sales Tax
  = $270.63 Total Amount Due

Always be sure to look up the exact combined sales tax rate at the delivery destination, as rates can vary from city to city. However, using this simple formula makes it easy to calculate the sales tax collection amount for any taxable transaction.

Question 4: What is Nexus?

Nexus refers to the level of tax connection that a business has with a particular state. It determines whether that business is required to collect and remit sales tax in that state.

There are several common factors that can create sales tax nexus in a state, including:

• Having a physical presence like a store, office, warehouse or other place of business
• Having employees, contractors or other staff working in the state
• Storing inventory or other property in the state
• Making a certain amount of sales/revenue from buyers in the state
• Affiliate marketing relationships, delivery routes or other connection points

Essentially, nexus exists when a business has a notable presence or sales activity in a particular tax jurisdiction beyond just shipping goods there. The level of activity deemed to trigger nexus can vary from state to state.

If a business has nexus in a state, it is considered an in-state seller from a tax perspective. This requires the business to register for sales tax permits, collect applicable state and local sales taxes on all taxable sales, file periodic sales tax returns, and remit the collected taxes to that state.

Conversely, out-of-state sellers without nexus in a particular state are not required to collect that state’s sales tax on sales made to buyers there.

So nexus rules are a critical factor in determining where a business has sales tax obligations. Proper determination of nexus in the various states you sell to enables compliance and avoids missed tax collections or overpayments.

Here’s the section explaining the difference between excise tax and sales tax:

Question 5: Is Excise Tax the Same as Sales Tax?

No, excise tax and sales tax are two separate types of tax levied for different purposes. While they can both apply to certain purchases, they are distinct taxes imposed under different rules and regulations.

Sales tax is a percentage tax levied broadly on the retail sale of most goods and certain services within a state or municipality. The seller is responsible for collecting the buyer’s sales tax at the purchase point.

In contrast, excise taxes are taxes imposed on the sale or production of specific goods and products. Unlike the broad application of sales tax, excise taxes target particular commodities or industries.

Common examples of excise taxes in the U.S. include:

• Taxes on gasoline and other fuel
• “Sin taxes” on tobacco products, alcohol, and cannabis in some states
• Taxes on air travel and certain transportation services
• Taxes on truck purchases, heavy vehicle usage, and truck weight fees

Excise taxes can be based on the retail price like sales tax, but are more commonly charged at a fixed rate per unit or volume of the taxed good or service.

So while sales tax applies to most end-consumer purchases in a state, excise taxes are selective taxes focused on specific products, goods, and industries deemed to have negative societal impacts or to raise revenue from particular activities.

Consumers end up paying both sales tax and applicable excise taxes on purchases of excise-taxed items like gasoline or cigarettes. But the two tax streams are separately maintained, with different rules for calculation, collection, and remittance to tax authorities.

Question 6: Do You Get Sales Tax Back on Returns?

Yes, when you return an item that you previously paid sales tax on, the retailer is required to refund you not only the original purchase price but also the sales tax amount that was charged.

When you make a retail purchase, the sales tax collected by the retailer is essentially just passing through their hands. That tax money is owed to the appropriate state and local tax authorities, not kept as income by the retailer.

So if you return an item, the retailer needs to refund you the full amount you paid, including any sales tax, in order to avoid improperly keeping tax money that no longer corresponds to a legitimate sale.

The portion of the refund representing the sales tax amount goes back to the retailer’s sales tax payable account. This reduces the total sales tax liability they will remit to the state when they file their next sales tax return.

From the state’s perspective, the initial sales tax payment from the customer essentially gets voided out by the return and refund. The tax money simply gets cycled back from the retailer to offset what they previously collected and paid in.

So while retailers keep the original merchandise revenue on any non-returned sales, the sales tax amounts only temporarily pass through their accounting before being properly remitted or credited back if refunds occur.

Question 7: Is There Sales Tax on Gift Cards?

When it comes to gift cards, most states require sales tax to be paid at the time the gift card is purchased, not when it is later redeemed to buy goods or services.

From a tax perspective, the purchase of a gift card is treated similarly to buying an item for final use or consumption. So when you buy a $50 gift card, for example, sales tax is charged on that $50 value just as it would be for any other $50 retail purchase.

The thought process is that the cash value loaded onto the gift card will eventually be used by the recipient to make final taxable purchases anyway. So states aim to capture the tax upfront.

A few exceptions do exist where sales tax is charged when the gift card is redeemed rather than at purchase. But in the majority of states, the sales tax is paid and collected in that initial gift card transaction.

Question 8: Does Gross Sales Include Tax?

No, gross sales or revenue figures typically do not include collected sales tax amounts. Only the actual sale amount itself counts toward the gross revenue number.

Sales tax is considered a pass-through tax that the seller collects from the buyer, but does not retain or count as its own revenue. The sales tax monies collected belong to and must be remitted to the applicable state and local tax authorities.

For example, if a retailer sells a $100 item and collects $6 in sales tax from the buyer based on a 6% rate, the $100 would be counted as the gross revenue. The additional $6 sales tax collected is essentially just monies being held in trust before being paid to the government.

On income statements and accounting records, sales tax amounts are recorded separately from the sales revenue line. The tax collections hit a distinct sales tax payable liability account to ensure proper reporting and payment to the tax jurisdictions.

So when calculating gross receipts, net revenues, profits and other financial metrics, businesses always exclude the collected sales tax amounts. Those tax monies are not actual revenues belonging to the company.

The key distinction is that gross sales and revenue figures represent the income earned by the business itself through sales activities. Any sales tax collected from customers belongs to the government, not the seller, so it cannot be counted as part of the seller’s own revenue stream.

Question 9: Is Sales Tax Based on Shipping Address?

Yes, generally the sales tax rate that applies to a transaction is based on the shipping destination of the sale, not the seller’s location.

For orders shipped to a residential or business address, online retailers and mail-order sellers must charge sales tax according to the combined state and local rates in effect at that delivery address. The seller’s location and home state are irrelevant.

The logic is that the sale occurs and the product is consumed at the buyer’s location. So that jurisdiction has the right to impose sales taxes on purchases delivered into their borders.

For example, if an online retailer based in Oregon (which has no state sales tax) sells to a customer in Chicago, the retailer must still charge the combined Illinois state rate of 6.25% plus any applicable local taxes for the Chicago destination, such as Chicago’s 1.25% city tax.

There are some exceptions for products that will be shipped out-of-state shortly after delivery. But in most cases, the destination receiving address dictates the applicable sales tax rate that must be charged at checkout.

Question 10: Do Contractors Charge Sales Tax on Labor?

Generally, contractors do not charge sales tax on labor services for repair work, construction projects, or installation jobs. However, they do have to pay sales tax on any materials purchased for a job.

The labor portion of a contractor’s bill, representing their time, skills, and hourly wages, is considered a non-taxable service under most state laws. Whether it’s a plumber fixing a leaky pipe, an electrician installing new wiring, or a contractor renovating a kitchen, the labor charges are exempt from sales tax.

However, any materials the contractor purchases to complete the work, such as pipes, wires, lumber, drywall, flooring, etc., are taxable retail goods. The contractor must pay sales tax on those materials at the time of purchase from the supplier.

The materials portion is then typically separated out and listed as a line item on the final invoice to the customer. While no additional sales tax is charged on those materials, the tax paid up-front is included in the overall cost passed along to the customer.

There are some exceptions where labor services related to construction contracts for real property may be subject to sales tax in certain states. But in most cases, contractors are considered the consumer of materials which are taxable, while their skills and labor services are tax-exempt.

Conclusion

As this overview makes clear, sales tax can be a complicated area with many nuances that businesses must understand to maintain compliance. From determining nexus to calculating the proper rates, charging tax on the right items like rentals and services, handling exemptions for items like labor, and properly recording taxes for accounting purposes – there are numerous sales tax considerations.

Properly collecting, reporting and remitting the appropriate sales taxes is essential for avoiding penalties, audits and other potential liability down the road. While complex, following these laws carefully can save businesses hefty costs and headaches.

For most companies making taxable sales, investing in sales tax software or working with a sales tax expert is highly recommended to ensure all bases are covered. But understanding sales tax fundamentals like those covered here provides a crucial foundation for maintaining proper compliance as a seller.

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