Did you know that most US states have remote seller nexus laws? Or that even local jurisdictions can impose sales tax, over the state rates? Sales tax regulations change frequently, making it essential to stay informed to ensure compliance. In this sales tax guide, we introduce sales tax basics, the idea of a nexus, and the process for calculating rates and sales tax amounts.
Introduction to US Sales Tax
Sales tax is an important part of the US tax system, impacting businesses and consumers. This section provides an overview on what sales tax is, how it is collected, and how the system varies across states.
What is US Sales Tax?
US sales tax is a consumption tax levied on the retail sale of goods and services to end customers. Businesses (sellers) in the US collect this tax from the customers and remit it to the appropriate tax authority.
In the US, sales tax decisions are taken at the state level, not at the federal level. Each state determines the base state sales tax rate. It can further authorize counties in the state to collect sales tax at their local rates. The sales tax acts as a source of revenue for the state government to fund new projects and meet the operational expenses.
Who Collects Sales Tax?
Businesses are responsible for collecting and remitting sales tax to the appropriate tax authority, typically the state government.
The state government retains a portion of the sales tax collections to meet its funding requirements and distributes the rest to local jurisdictions.
How Does the US Sales Tax System Work?
Each state sets its own rules and rates for sales tax. Local jurisdictions often add their own taxes with state authorization. However, five states—New Hampshire, Oregon, Montana, Alaska, and Delaware—do not impose state-level sales tax.
Where to Find Reliable Information on State Rules
You can find up-to-date reliable information on state rules in the respective revenue department websites. An interactive map with links to the revenue department of all US states can be found here. Always rely on government sources for reliable data.
Sales Tax Nexus and Its Implications
In this section, we aim to help you understand sales tax nexus, its implications, and the most common types of sales tax nexus.
What is the Sales Tax Nexus?
Sales tax nexus is a legal term indicating a business’s connection to a state, requiring it to collect and remit sales tax there. That means, when a business is legally required to collect sales tax in a state, a sales tax nexus exists.
After a sales tax nexus is established, a business must collect and remit sales tax and comply with state’s sales tax laws. Non-compliance can attract monetary penalties.
Types of Nexus: Physical, Economic, and More
Physical Nexus
A physical presence in a state—such as an office, warehouse, store, assembling unit or employees—creates what is known as a physical nexus. Definitions vary by state, so check the respective Department of Revenue (DOR) guidelines.
Economic Nexus
An economic nexus is established when an out-of-state (remote) seller, without a physical presence in the state, meets certain sales thresholds. Some common thresholds include $100,000 in revenue or 200 separate transactions annually, but they vary from state to state.
Affiliate Nexus
An affiliate nexus exists when:
- A remote seller relies on an in-state agent/affiliate to complete a sale.
- An in-state agent/affiliate has common ownership in the remote seller’s business.
Definitions differ by state, so review state-specific rules.
Click-Through Nexus
A click-through nexus is established between the remote seller and state when the seller pays commission to an in-state agent for click-through orders and the minimum threshold is met. Click-through advertising does not fall under click-through nexus as it does not guarantee a successful order.
States such as Tennessee and Rhode Island have click-through nexus rules.
Marketplace Nexus
Most states have a marketplace nexus rule. Under this, marketplace facilitators, like Amazon, Etsy, and Shopify, are required to collect and remit sales tax on behalf of the marketplace sellers.
How to Determine and Calculate Nexus
The sales tax nexus rules vary from state to state. Identify which nexus rules apply to the state where you operate your business from the official Department of Revenue (DOR) websites. You may review your business activity against the nexus rules to determine if a sales tax nexus exists.
In case of a multi-state business, you can seek professional advice in determining the sales tax nexus.
What Happens if I Have a Sales Tax Nexus?
Once a sales tax nexus has been established, your business becomes liable to collect and remit sales tax to the state government. You must also comply with the state’s sales tax laws. Non-compliance can invite monetary penalties and audits.
Sales Tax Rates and Calculations
Manually calculating sales tax can become tedious, especially when dealing with a high volume of transactions. However, understanding the fundamentals helps make things simpler. In this section, we explore how sales tax rates are determined and how to calculate sales tax using these rates with examples.
How Much is Sales Tax in the USA? How Do I Figure Out Sales Tax?
Sales tax rates vary by state and local jurisdiction. You can look up the sales tax rate at the official Department of Revenue (DOR) websites. Some states such as Minnesota offer their own sales tax calculator. You can calculate the sales tax rate naturally as follows:
Effective sales tax rate = State sales tax rate + Local sales tax rate
How to Calculate US Sales Tax
Sales tax in the US is calculated as a percentage of the product price. The effective sales tax rate for a transaction is the combined sales tax rate, which adds the local sales tax rate over the base state tax rate.
Sales tax amount = Effective sales tax rate x Product price
For example, James owns a shop in Anderson County in Texas. He sells a product for $100. The sales tax rate in Texas state is 6.25% and in Anderson County is an additional 0.5%. The effective tax rate is 6.75% (6.25% + 0.5%). The sales tax amount he should collect is $6.75.
You can find the state-wise sales tax rates for 2024 here. You can refer to the state’s revenue department website to find out local sales tax rates.
Frequently Asked Questions (FAQs)
Q. What is the difference between sales tax and VAT?
Sales tax is levied on the final sale of goods and services to the end consumers. Value Added Tax (VAT) is the tax levied on every stage of the value chain.
Q. How do I calculate my sales tax nexus?
Determining sales tax nexus varies by state. You can check state-specific nexus thresholds in the official state DOR pages.
Q. What are the consequences of non-compliance with sales tax laws?
Non-compliance with sales tax laws, such as missing deadlines, can invite penalties and interest on tax dues. Non-compliance in the form of failure to collect and remit sales tax willfully is considered a criminal offense with a potential jail sentence in states such as New York.
Q. Can I appeal a sales tax audit?
Yes, you can appeal within 30 days of the sales tax audit in most states. However, you should check for state-specific rules.
Q. What states have the highest sales tax rates?
As of 2024, California has the highest sales tax rates at the state level, at 7.25%, followed by Indiana, Rhode Island, Mississippi, and Tennessee at 7%.
Conclusion
US sales tax is a consumption tax levied on the retail sale of goods and services to the end customers. Each state determines its sales tax rates and nexus rules. Sales tax rates can be found on the official DOR websites and can be calculated like the examples demonstrated in this sales tax guide.
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Citations
- Walczak, J. (2024, July 25). 2024 Sales tax rates: State & Local sales tax by state. Tax Foundation. https://taxfoundation.org/data/all/state/2024-sales-taxes/
- Federation of Tax Administrators. (2023, August 24). FTA members - Federation of Tax Administrators. https://taxadmin.org/fta-members/
- Texas Comptroller of Public Accounts. (n.d.). Sales and use tax. https://comptroller.texas.gov/taxes/sales
- Texas Comptroller of Public Accounts. (n.d.). County sales and use tax. https://comptroller.texas.gov/taxes/sales/county.php
If you're interested in diving deeper into US sales tax and its implications for international companies, join us for our upcoming webinar, "Understanding US Sales Tax for International Companies". Register today to secure your spot: https://zoom.us/webinar/register/WN_LZqTXXQBTZanog8KPfYl-Q
Sam Suechting
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