Sales tax in the United States is a percentage-based tax applied to certain goods and services at the point of sale. This tax is mandated and overseen at the state level, generating revenue for government functions.
Consumers pay this consumption tax when making purchases, and businesses are tasked with remitting it to the government.
How State Tax Is Determined
State sales taxes are typically implemented at the state level, though some municipalities or counties may also impose them. For instance, while Alaska lacks a state sales tax, many Alaskan localities enforce sales taxes ranging from 1% to 7%.
Several states, such as Delaware, Montana, New Hampshire, and Oregon, do not collect state sales taxes. Across the U.S., sales tax rates vary from 0% in these states to 7.25% in California, with Indiana, Mississippi, Rhode Island, and Tennessee closely trailing at 7%.
Certain goods and services are exempt from sales tax in most states, including items like food, clothing, medicine, newspapers, and utilities, with exemption categories differing by state.
There are instances where online sales may incur sales tax based on the seller’s nexus in a state. Nexus, for tax purposes, typically refers to a physical presence like a warehouse or office in the state. To capture tax on online sales, some states have enacted “Amazon laws,” altering the nexus definition.
Despite lacking a physical presence in a state, select online sellers, including Amazon, might have a significant enough connection to necessitate paying sales tax in specific states.
Sales Tax Calculation and Formula
Calculating sales tax is straightforward once you’re acquainted with state tax rates and collection guidelines in the relevant state(s) of transaction. Businesses must accurately determine applicable tax rates to remit the correct tax amount.
To calculate sales tax on an item or service:
- Know the retail price and tax percentage.
- Convert the tax percentage to a decimal by dividing by 100.
- Multiply the retail price by the decimal to find the tax amount.
The final price of the item is the sum of the tax amount and the original item price prior to tax.
Examples of Sales Tax Calculations
Consider this scenario: Joe W. buys a $75 chair in Wisconsin, where the tax rate is 5%. The tax calculation would be:
- 5 ÷ 100 = 0.05
- 0.05 × $75 = $3.75
$3.75 is the sales tax on Joe’s chair purchase, making the final price $78.75.
In another case, Janis B. spends $1,200 on a laptop in California with a 7.25% sales tax. The tax breakdown would look like this:
- 7.25 ÷ 100 = 0.0725
- 0.0725 × $1,200 = $87
The laptop’s final price would be $1,287 after adding the $87 sales tax.
What states don’t have sales tax?
States like Delaware, Montana, New Hampshire, and Oregon do not levy any state sales taxes. Although Alaska lacks state sales taxes, local jurisdictions within the state may still enforce taxes.
What states have the highest and the lowest sales tax?
The state with the highest sales tax rate is California at 7.25%, with Indiana, Mississippi, Rhode Island, and Tennessee following closely at 7%. Conversely, Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose state sales taxes as of Jan. 1, 2023, though local taxes may apply.
What is nexus?
Regarding sales tax, “nexus” denotes a business’s presence in a state, traditionally interpreted as a physical establishment. Some states, however, consider a “constitutionally significant connection” as sufficient, even without a physical presence.
What is value-added tax?
Value-added tax (VAT) systems impose consumption taxes at each value-adding stage in the supply chain. Unlike sales tax applied at the final purchase, VAT is calculated based on a product’s value minus previously taxed material costs.
The Bottom Line
Understanding sales tax, a crucial factor in retail transactions, involves calculating the tax as a percentage of the product’s retail price. Consumers and businesses should be familiar with tax rates and requirements to ensure accurate remittance and pricing.