What is sales tax?

Sales tax is a type of indirect tax levied on the sales of certain goods and services in the US. It’s called an “indirect tax” because it is imposed on the business but paid by the customer. The business collects the tax from the customer and is responsible for sending (remitting) the tax to the appropriate government agency at a set due date.

States and localities use sales tax revenue to pay for projects such as schools, roads, and public safety initiatives. In the US, sales tax is primarily regulated at the state level, and every state has different laws and rules. Certain states refer to sales tax as transaction privilege tax or general excise tax, but the concept remains the same. Sales tax is governed at the state level, which can make maintaining sales tax compliance challenging.

Businesses are required to collect sales tax from customers when they exceed certain thresholds. These thresholds are referred to as “economic nexus thresholds,” and they are either revenue or transaction-based, or both. For example, in the state of Georgia, businesses only need to collect sales tax from customers if they have exceeded $100,000 in revenue or 200 transactions. Certain states only have revenue thresholds or require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. Since sales tax is governed at the state level, these thresholds vary across the US.

What is the sales tax rate in the US?

In most states, there is a statewide sales tax rate, and many states have additional local sales tax rates at the county, municipal, and district levels. A sales tax rate for any particular state would include the statewide sales tax rate plus any local sales tax rates. To put it into perspective, there are more than 11,000 tax jurisdictions in the US, all with different rates and regulations. It’s important to note that five states do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, there could still be local sales tax rates to consider in these states. State sales tax rates are generally between 4% and 11%.

Businesses that are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the buyer’s “ship-to” or other destination-based address. As the business, you are required to charge the sales tax rates where your buyer is located. Most states use this type of sales tax sourcing.

Last updated:
Mar. 19, 2024