Sales Tax 101

WHAT IS SALES TAX?

Sales Tax is a tax on goods and services collected by merchants from their customers. If you are a merchant and you sell things, you are required by law to collect sales tax. This is a general description with many exceptions and rules around the taxability of goods and services from state to state.

WHO PAYS SALES TAX?

Consumers pay sales tax. Merchants do not pay sales tax out of their own pockets. Merchants are simply required to collect it, hold it secure and send it to the State or city by a required date. It’s commonly referred to as a pass through tax.

IS SALES TAX A FEDERAL TAX?

No. Sales tax is a State, city and/or county tax. It is never paid to the Federal government like payroll or income tax.

DOES EVERY STATE HAVE A SALES TAX?

No. Five states, New Hampshire, Oregon, Montana, Alaska and Delaware (the NOMAD states) don’t have sales tax. But even these states have exceptions requiring merchants to collect sales tax on specific goods or services such as a food & lodging tax in New Hampshire or local city taxes in Alaska.

ARE ALL GOODS AND SERVICES TAXABLE:

No. The taxability of goods and services varies from state to state or in some cases, city to city.

HOW DO YOU KNOW WHAT’S TAXABLE AND WHAT’S NOT?

States publish lists of taxable and non-taxable goods and services on their websites. For a complete list of state websites click HERE.

HOW DO I KNOW HOW MUCH SALES TAX TO CHARGE?

Sales Tax rates are set by the State, county and city and there are over 12,000 tax jurisdictions in the US. The final and definitive answer is always the sales tax rate posted on State Department of Revenue website. Rates posted on the web are often not up-to-date and incorrect. It’s always the merchant’s responsibility to charge the correct sales tax rate.

WHO GETS THE SALES TAX MONEY?

In most instances, all sales tax gets paid directly to the State. However, in a few States, merchants are also required to collect and remit a local sales tax to the city or county.

AFTER MERCHANTS COLLECT SALES TAX, WHAT THEN?

Merchants are required to hold it secure and every month or quarter they must fill out a sales tax return and pay it to the state.

WHAT IF YOU FORGET TO PAY OR SPEND THE MONEY AND CAN’T PAY?

States have severe penalties for missing tax payments, as high as 25% of what you owe. If sales tax goes unpaid, states will seize the assets of the business or owner and auction them off to pay the debt. In extreme cases owners will be prosecuted and sent to jail. Even if the business closes, sales tax is a personal liability that will follow the owner until paid.