What is a Sales Tax

What is a Sales Tax (And Which States Have One)?

“What is a sales tax” sounds like a pretty simple question. If you’re like most US consumers, sales tax is the separate fee above and beyond your total purchase price that’s added automatically when you swipe your card at the register.

(And no, the purpose of it isn’t just to confuse foreign visitors.)

Sales tax gets a lot more confusing when you’re the one selling those items. Are you required to charge sales tax to everyone who buys from you? Does it vary by state? Do you charge different amounts for in-person sales than for online transactions? Are digital products handled the same way as the sale of physical goods?

Never fear – Quaderno is here. Let’s clear up some common misconceptions about sales tax, including where and how it’s charged in the US

What is a Sales Tax?

At the most basic level, sales tax is a percentage fee placed on the “sales or lease of goods and services in the United States.”

Unfortunately, applying this general rule is hardly straightforward. Here’s why:

  • Some US states don’t charge a statewide sales tax, but they may allow cities and counties to charge local taxes.
  • Not all goods are subject to tax upon purchase. For example, although the sale of gift cards is not subject to sales tax, purchases made with the cards may be charged sales tax.
  • Some organizations are exempt from sales tax – typically if they’re purchasing goods that’ll be transformed to create other goods. For instance, restaurants don’t typically pay tax on the ingredients they buy, even if they pay tax on other non-consumable goods.
  • Most US states apply sales tax to at least some services, but even in these cases, not all services are subject to consumption tax. Those that are offered alongside the sale of physical goods – such as printing – are most likely to be taxed in states that allow for sales taxation of services. Other services, including medical or dental services, are rarely subject to sales tax.

Confused yet? It gets worse when you take the impact of the internet into account.

How US eCommerce Sellers Pay Sales Tax

In June 2018, the Supreme Court closed a major loophole for consumers, ruling that retailers may be required to collect sales tax on online purchases – even if they don’t have a physical state tax nexus in consumers’ states.

To date, at least 21 states have passed “economic nexus” laws requiring that sellers collect internet consumption tax in states where they don’t maintain a presence. However, standards are uneven from state to state. In Michigan, for example, only retailers with sales exceeding $100,000 or 200 transactions with Michigan consumers are required to collect sales tax.

STATESALESTRANSACTIONSIN EFFECT ON
Alabama$250,000October 1, 2018
Arkansas$100,000200July 1, 2019
Arizona$200,000October 1, 2019
California$500,000April 1, 2019
Colorado$100,000December 1, 2018
Connecticut$250,000200December 1, 2018
Georgia$250,000200January 1, 2019
Hawaii$100,000200July 1, 2018
Iowa$100,000January 1, 2019
Idaho$100,000June 1, 2019
Illinois$100,000200October 1, 2018
Indiana$100,000200October 1, 2018
Kansas$00October 1, 2019
Kentucky$100,000200October 1, 2018
Louisiana$100,000200January 1, 2019
Massachusetts$100,000October 1, 2017
Maine$100,000200July 1, 2018
Maryland$100,000200October 1, 2018
Michigan$100,000200September 30, 2018
Minnesota$100,000200October 1, 2018
Mississippi$250,000September 1, 2018
North Carolina$100,000200November 1, 2018
North Dakota$100,000October 1, 2018
Nebraska$100,000200January 1, 2019
New Jersey$100,000200November 1, 2018
New Mexico$100,000July 1, 2019
Nevada$100,000200November 1, 2018
New York$500,000100January 15, 2019
Ohio$100,000200August 1, 2019
Oklahoma$100,000November 1, 2019
Pennsylvania$100,000July 1, 2019
Rhode Island$100,000200July 1, 2019
South Carolina$100,000November 1, 2018
South Dakota$100,000200November 1, 2018
Tennessee$500,000July 1, 2019
Texas$500,000October 1, 2019
Utah$100,000200January 1, 2019
Virginia$100,000200July 1, 2019
Vermont$100,000200July 1, 2018
Washington$100,000October 1, 2018
Washington DC$100,000200January 1, 2019
Wisconsin$100,000200October 1, 2018
West Virginia$100,000200January 1, 2019
Wyoming$100,000200February 1, 2019
* Both conditions at the same time 

Given how complicated tax requirements can be, it’s best to work with a partner that understands the ins and outs of them. Let Quaderno calculate the right tax for you every time, in every situation. Get started with a free trial today.

Resources

* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or accountant.