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What Is Sales Tax
Sales tax refers to the tax applicable on goods and services that you buy at retail.
The sales tax is levied on most products and services that are purchased for final consumption except for some exceptions.
For example, if you purchase a TV for $1,000, the retailer will add the applicable sales tax on top of the $1,000.
If the sales tax is 8%, you’ll need to pay a total of $1,080.
What’s particular about sales tax is that it is usually charged at the point of sale by the vendor.
The vendor will collect the sales tax from the client and remit that to the government at some point in time.
How Does Sales Tax Work
Sales taxes are generally charged at the point of sale where goods or services are sold to end users for final consumption.
For example, if a retailer sells clothes to its customers, it must charge sales taxes on the clothing items sold at the point of sale.
Sales taxes will not be charged to companies that are producing goods and services that are not destined for final use.
For instance, a furniture manufacturer selling furniture to distributors will not charge sales taxes as the distributors will have resale certificates stating that they are not the end users.
Ultimately, when the furniture is sold to an end customer, the retailer must charge that customer sales tax as it’s destined for final use.
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How Sales Tax Are Calculated
Typically, sales taxes are charged based on a percentage of the goods or services sold.
For example, if the sales tax in a particular jurisdiction is 7%, then the customers will have to pay 7% taxes on top of the sales price.
If the goods purchased are for $100, the total amount the customer will be required to pay will be $107.
The vendor will keep $100 and remit the sales taxes to the government.
Some goods are exempt from sales taxes.
For example, many jurisdictions exempt food and groceries from sales taxes.
A person buying groceries will therefore not pay any sales taxes at the point of sale.
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Registering For Sales Taxes
Individuals and companies doing business must consider their obligation to collect sales taxes.
If you do business in a particular state or jurisdiction, then you’ll need to register for sales taxes with the local government.
For example, in California, retailers engaged in business must register with the California Department of Tax and Fee Administration (CDTFA), collect sales taxes, and remit it to the government.
In Texas, sales taxes apply on all retail sales, leases, and rentals of most goods, as well as taxable services.
A company doing business in Texas will need to register with the Texas government.
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Sales Tax Nexus
Every company must ensure that it complies with the sales tax rules and regulations.
In the United States, businesses that transact outside of their local state must assess whether or not they should collect sales tax in the other states where they operate.
The more a company has nexus with a state, then it is likely that the company will be legally required to collect sales taxes and remit them to the government.
For example, a company doing business only in New York will need to collect sales taxes and remit them to the New York government.
However, if the company expands its business and does business in California as well, then it must charge sales taxes to its California clients and remit them to the government.
The nexus is generally considered to have a physical presence in the state, such as an office, employees, or a business affiliate.
However, every state defines the minimum requirements for a company to be considered to have nexus and thereby collect sales taxes.
Sales Tax Example
Let’s look at an example of how sales taxes are charged.
Let’s assume that you operate a business in a state where you are required to charge your clients sales taxes.
The state may require that you collect 6=5% in sales tax along with a 2% county tax and 1% city tax.
As a result, you must collect a total of 8% in sales taxes.
A client purchases $1,000 of taxable goods from you, at the point of sale, you will charge $1,080.
The breakdown will be as follows:
- $1,000 for your goods
- $50 for the state
- $20 for the county
- $10 for the city
What Is Sales Tax FAQ
What is a sales tax?
A sales tax is a tax charged on certain goods and services, collected by the vendor, and remitted to the government.
Typically, the sales tax is charged and collected at the point of purchase.
Some goods and services may be exempt from sales tax depending on the jurisdiction, such as food, education, and medicine.
What’s the difference between sales tax and use tax?
The main difference between sales tax and use tax is that sales tax is charged at the point of sale for in-state transactions, whereas use tax is a sales tax on purchases made outside of your state of residence.
For example, if you purchase goods in your home state, you’ll pay sales taxes to the retailer at the point of sale.
However, if you travel to another state and purchase something your home state would have charged sales taxes on, you’ll need to pay use taxes.
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Takeaways
So there you have it folks!
What is a sales tax?
In a nutshell, sales tax is a type of tax that is imposed on most retail sales of tangible property and certain services at the point of sale.
Although some goods and services may be exempt from sales taxes, most companies will need to register for sales taxes and collect them from their customers.
The sales tax is typically charged as a percentage of the purchase price and must be remitted to the government after it is collected.
Companies and individuals doing business in a state with sufficient nexus will be obligated to register for sales taxes in such a state.
Now that you know what are sales taxes and how they work, good luck with your research!
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