In the U.S. there is no national sales tax. However, across the U.S. various states have indirect taxes and these can be imposed by each state or local jurisdictions within each state. These taxes, however, are subject to the constitutional restrictions of the federal government.
In the U.S., GST has been abolished and replaced by a sales and use tax since September 2018. It is not levied as an additional tax. Of the 50 states, 45 impose sales tax on the sale and lease of goods and some services. The only states that do not have a statewide sales and use tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. Though, within some of these states, some areas do impose some taxes.
There is no standard tax rate across the various states and sales tax and use tax varies from 2.9% to 7.25%. Additionally, local governments in 36 states also have sales taxes or use taxes that range between 1% and 5%.
How is sales tax calculated?
The applicable sales tax rate for each state is multiplied onto the purchase price of the goods and services. These taxes are collected at the time of the sale by the seller. The sellers then file a return and the taxes collected are remitted to the state or city they are imposed in. If the purchaser has an exemption certificate, then he is exempt from paying the GST, but the goods cannot be purchased for personal use.
What are indirect taxes?
Sales taxes are one form of indirect taxes. Depending on the state, taxpayers can also be subject to property taxes, excise taxes, license responsibilities, telecommunication taxes, and unclaimed property reporting declarations.
Transactions and services requiring sales or use tax to be charged
Businesses that sell tangible personal property, certain services, and digital music, books, and films can be subject to sales tax. Sales and use tax are also applicable to rental properties, motor vehicles, and raw materials in most states. In some states, restaurant meals are taxed, whereas some foods to be prepared at home aren’t. In most states, prescription medications are tax exempt.
Some states charge sales tax on almost all services, while others limit them to some. These can include personal services like pet grooming and beauty care, business services like consulting and advertising; and services to personal property like maintenance and lawn mowing. Some services that are often exempt include educational services and medical care, but all these depending on the state.
Registering for GST
Depending on the state and local authority, every person or entity engaged in business must register for a sales tax license. The requirements for what type of business needs to register in every state can vary. In some states, economic thresholds are set and businesses must register according to their annual volumes of sales or number of transactions.
What happens with an out-of-state or overseas company?
Unless a company has a substantial nexus in a state, they may voluntarily register for the collection of sales tax and use tax.
When are sales tax and use tax returns submitted?
Depending on state requirements, these may be submitted annually, every six months, quarterly, or monthly. This may also vary on the sales volumes of a business and the tax amounts collected. Most businesses usually file them every month.
Sales and use tax compliance
Even small businesses need to be tax compliant. This means you will have to get a seller’s permit, a resale certificate, and understand under which circumstances your business is required to collect sales tax. You will also need to know which of your long-distance customers need to pay sales tax.
Learn how to calculate the sales tax rate and find the final cost for all your transactions no matter which city in the United States you are selling goods in. All you need to look up the sales tax rate are the city and zip code. Once you have the sales tax rate, you can calculate the total cost of the product or service for the area you are providing it in.