Sales Tax

Definition
Other Similar Taxes
How to Calculate
How it Works
What are the pros and cons of having a sales tax?
Streamline Sales Tax Proposition (SSTP)
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Definition

A sales tax is charged at the time of purchase for specific goods and services. In the United States, many State and Local governments have passed laws to tax retail sales. The amount of this tax varies and is usually based on a percentage of the sale amount known as the sales tax rate.

Almost every state in the US has a state-wide sales tax, except for Alaska, Delaware, Hawaii, Montana, New Hampshire, Oregon, and New Mexico. Instead, some of these states have statewide gross receipts taxes, excise taxes, municipal sales taxes, or only tax large tourist destinations. There are also special sales taxes for specific products, such as gasoline, cigarettes, and alcohol.

In many areas, a tax jurisdiction was created for a special purpose that isn’t defined by the usual municipality boundaries. These are Special District Sales Taxes. Examples of these include Stadium, Fire/Police Protection, and Hospital Districts.

You will often have more than one taxing jurisdiction for any given location. A retailer must add the amount of tax from each jurisdiction to arrive at a Combined Sales Tax Rate.

Sales tax rate is not determined based off of zip code alone, because zip codes tend to cross municipal boundaries. For example, two different locations can share the same zip code, but have different sales tax rates.

Other Similar Taxes

Excise Tax

An excise tax is charged on good or sales produced within the country. Technically, it is charged to the business or producer rather than the consumer. Hawaii is the only state that uses excise rather than sales taxes, which applies to almost every conceivable type of transaction and services. Unlike other states, Hawaii applies excise tax to rent, medical services, and perishable foods. They also tax on their taxes, with an additional 0.5% surcharge in the city and county of Honolulu.

Gross Receipts Tax

A gross receipts tax is a tax on the gross revenues of a business or company. It is similar to a sales tax, but it is imposed on the producer rather than the consumer. Delaware and New Mexico and a few states use these taxes, however in some cases, retailers are allowed to collect this tax directly from the consumer as if it were a sales tax.

Use Tax

A use tax is a type of excise tax, and usually shares the same rate as the sales tax on the purchased goods. This tax applies when sales tax has not been charged, and the most common items subject to use tax are those purchased over the Internet or out-of-state.

Transaction Privilege Tax

The State of Arizona imposed a transaction privilege tax (TPT), which refers to a gross receipts tax. This tax acts as Arizona’s sales tax, but it instead taxes the seller rather than the purchaser. However, the seller is allowed to pass the tax charge onto the purchaser, but the seller is liable to the state for the tax.

How to Calculate

As a retailer you probably sell merchandise to the public. Let's say you sell an item costing $1.00 and your combined local sales tax rate is 5%. 5% actually equals 0.05. Multiply 0.05 to the sales amount of 1.00 to get the tax of 0.05. Add this tax to the sales amount and you get a Total Sales Amount of $1.05. The actual calculation is shown below.

Item Price 1.00 Item Price 1.00

Local sales tax rate x 0.05 Tax + 0.05

Tax 0.05 Total Sales Amount 1.05

How it Works

Once a consumer has paid sales tax on a product or service, the business collects this tax money, claiming responsibility for it, and then pays the state and/or the federal government at a certain time. When it comes to mail and Internet buying, a tax is charged to residents of whatever state contains the merchandise. Businesses that drop-ship, or have several facilities in a variety of states, may have a list of several locales that are taxed.

What are the pros and cons of having a sales tax?

Pros

Sales taxes are easy to “nickel-and-dime,” meaning that only a small amount of money is involved.

People find sales tax to be optional in some sense. If an item or service has sales tax, and if someone doesn’t want to pay the tax, they don’t have to buy the item.

Some states exempt prescriptions, ordinary clothing, and food from sales tax, therefore, giving those with low income, a slight advantage.

Sales tax can also encourage or discourage the consumption of certain items, by increasing or decreasing.

Cons

Sales tax is a regressive tax, meaning that the lower your income is, the more you end up paying. The reason for this is that sales taxes are not determined on income, and even the poor must consume a certain number of goods and services.

Sales taxes are a hassle for businesses, because they are the ones responsible for keeping track of them. Then, they have to pay the government, so they act as the middle link between the consumer and the state.

Some states place a sales tax on clothing and other basic necessities – even unprepared food – therefore placing those of lower income at a disadvantage.

Some states end up losing money in revenue, compared to the states that do not have a sales tax. In order to compensate for this, the gross receipts tax is obtained from revenue increase, and is added to various job retailers.

Streamline Sales Tax Proposition (SSTP)

The purpose of this proposition is to simplify and modernize sales and use tax collection, and encourages those selling over the Internet and by mail order to collect the sales tax, especially those who operate in several states. This proposition was made in order to make local stores and remote sellers operate by the same rules and regulations in the same competitive environment. While many states have joined in this cause out of unity, some have backed out or refused to conform to the SSTP, viewing it as burdensome and complex.