What is Sales Tax? An Ultimate Guide

Are you a newly established ecommerce business owner looking to learn about the ins and outs of the sales tax? Then, understanding what sales is tax and how it works should be your utmost priority.

You’re probably intimidated by the amount of information you have to learn at once. But once you get the hang of it, with the help of TaxHero, you have nothing to worry about.

To easily understand, we have broken down below what you need to know about the topic.

 

What is Sales Tax?

The first thing you need to learn is what sales tax is. In a nutshell, it is a consumption tax collected whenever a purchase of products or goods and services is made. It is also generally added to the sales price and remitted to the state government to be used to fund its programs and projects.

It is essential to understand that the Federal Government does not collect a federal or national sales tax. Instead, it is regulated at the state and local level, including cities, counties, and other special districts. That’s the reason why sales tax varies from one state and territory to another.

 

How Does It Work?

Sales tax is computed based on the percentage of the sales price, with the rate varying from one jurisdiction to another, with some local governments also collecting their own.

Think about it this way: Suppose you are selling apparel online at $50, and a customer from Glendale, California, wants to buy from you. You would have to charge your customer an additional $5.13 for sales tax, with the total order amounting to $55.13, as the minimum combined 2024 sales tax rate in the area is 10.25%.

The breakdown is as follows:

JURISDICTION SALES TAX RATE State California 7.25% County Los Angeles County 2.25% City Glendale 0.75% Combined Sales Tax Rate 10.25%

The combined sales tax rate is the combined state and local (i.e., County, City, District) sales tax rates. Use our sales tax calculator to determine the sales tax rate applicable to a specific address with breakdown by jurisdiction.

You must also understand that the collection and remittance are the sole responsibility of the seller. This means you are responsible for reporting and remitting the collected 10.25% or $5.13 to the California Department of Tax and Fee Administration and in other states where you also have nexus.

 

Which States Collect and Do Not Collect?

To date, a total of 45 states, including the District of Columbia, collect state-wide sales tax. On top of this, most local governments within the states also collect their own, except the following:

• Connecticut
• District of Columbia
• Indiana
• Kentucky
• Maine
• Maryland
• Massachusetts
• Michigan
• New Jersey
• Rhode Island

Meanwhile, the states that do not collect are:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

It is also worth noting that although these states do not have a state-wide sales tax, some local governments within their jurisdiction collect separately, or they just tax certain transactions. For instance, Alaska does not collect state-wide, but they have more than 100 local jurisdictions that collect local sales tax.

 

What are the Sales Tax Rates in each State?

Check out the table below to know what the rates are in each state:

STATE SALES TAX RATE Alabama 4% Alaska 0% Arizona 5.60% Arkansas 6.50% California 7.25% Colorado 2.90% Connecticut 6.35% Delaware 0% District of Columbia 6% Florida 6% Georgia 4% Hawaii 4% Idaho 6% Illinois 6.25% Indiana 7% Iowa 6% Kansas 6.50% Kentucky 6% Louisiana 4.45% Maine 5.50% Maryland 6% Massachusetts 6.25% Michigan 6% Minnesota 6.875% Mississippi 7% Missouri 4.225% Montana 0% Nebraska 5.50% Nevada 6.85% New Hampshire 0% New Jersey 6.625% New Mexico 4.875% New York 4% North Carolina 4.75% North Dakota 5% Ohio 5.75% Oklahoma 4.50% Oregon 0% Pennsylvania 6% Rhode Island 7% South Carolina 6% South Dakota 4.50% Tennessee 7% Texas 6.25% Utah 4.85% Vermont 6% Virginia 4.30% Washington 6.50% West Virginia 6% Wisconsin 5% Wyoming 4%

 

Frequently Asked Questions (FAQs)

I am an online seller. Do I have to collect sales tax on all the sales I make?

Yes, you do. At the minimum, you are required to collect tax on sales made in your home state and in states where you have nexus.

 

What does sales tax holidays mean?

A sales tax holiday is a limited time when states allow a tax-free purchase of specific items. States typically offer this to encourage consumer spending.

 

Are products like food, clothing, SaaS, and shipping taxable?

Although food is generally not taxable, some states impose sales tax on it, especially grocery items bought online. Although clothing is considered a tangible property, some states provide partial exemptions from sales tax, especially those deemed necessary. For SaaS, although non-tangible, some states impose sales tax on electronically-acquired software.

Sales tax on shipping differs by state as some states impose sales tax while others don’t.

 

Do tourists also pay sales tax in the United States?

Yes. Although some countries exempt foreign travelers from it, the US does not. Travelers will have to pay just like ordinary American citizens. However, some states let visitors request refunds on specific products.

 

Looking for help with your business’s needs? TaxHero got you!

We understand that it could be a lot for online businesses, especially the newly established ones, to do their sales taxes. But worry not, for TaxHero’s team of experts and certified public accountants are here to take the stress of doing your taxes off your list so you can focus on building and expanding your business.

You may book a time with our CEO. TaxHero is eager to contribute to your success by helping streamline your sales tax matters.