What is Sales Tax?
Sales tax is an amount of money, calculated as a percentage, that is added to the cost of a product or service when purchased by a consumer at a retail location. Forty-five states have state sales tax rates that range from 1.76% (Alaska) to 9.45% (Tennessee). On top of these state sales taxes, there are 38 states that have a local sales tax that is added on top of the state sales tax. Consumers then pay the combined state and local tax rate every time they make a purchase.
Businesses are responsible for collecting and tracking sales tax from consumers and then remitting it to their state, either monthly or quarterly.
States Without Sales Tax
Five states do not charge state sales tax on purchases:
- Alaska (but local municipalities are permitted to charge sales tax)
- Delaware
- New Hampshire
- Montana (but local municipalities are permitted to charge sales tax)
- Oregon
Retail businesses in these states do not need to collect state sales tax. Businesses in all other states do, however.
Collecting Sales Tax
In order to collect sales tax from customers, companies first need to apply for a sales tax permit from their state’s department of taxation. Some states provide permits at no charge, while others charge a fee. A list of state contacts is provided here.
Remitting Collected Tax Monies
Businesses collect sales tax with each purchase and then transfer that money to their state on a monthly or quarterly basis. Failing to remit sales tax payments in a timely manner can result in large penalties.
What is Taxed?
Products and services subject to sales tax vary by state. In many states, groceries and prescriptions are exempt from sales tax. In some, clothing is also exempt. Other types of goods that are not subject to sales tax include:
- Items purchased for resale to consumers. The assumption is that retail consumers will pay sales tax once the items are sold.
- Items purchased as raw materials. Products purchased that will be used as components of a handmade or manufactured product are not subject to sales tax.
- Items purchased by a nonprofit. Nonprofit organizations do not pay sales tax.
Sales tax is an additional cost the consumer bears but that businesses are responsible for collecting and forwarding to their state’s taxation authority on a regular basis.