What is a sales tax?
A sales tax is the percentage of the price of goods or services that is added to the final cost of the item when purchased by an individual at a retail location. The purpose of the sales tax is to fund community development for purposes such as schools, roads and fire departments.
In the United States, each state determines this fee for itself. In the United States, 45 states impose a sales tax, with percentages ranging from 2.9% (Colorado) to 7.25% (California). 38 states also include an additional local sales tax on purchases. Retail businesses in the following five states do not levy state sales tax. They are sometimes known together as the “NOMAD” states:
Montana (imposes local sales tax rates)
Alaska (imposes local sales tax rates)
Non-taxable products or services
Which products or services are subject to sales tax varies by state. For example, groceries and health-related items such as prescriptions are excused from sales tax. Other scenarios where sales taxes are exempt include:
Handmade items made from raw materials
Goods and services purchased by a nonprofit organization
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Applying sales tax to online transactions
Internet products or services: In 2018, the U.S. Supreme Court imposed a law on specific states to charge sales tax on products over the Internet. Currently, 28 states collect sales tax this way.
Origin-based vs. destination-based: States have different policies about how to determine what sales tax to apply when a purchase is made online.
A destination-based sales tax is imposed at the location where the buyer purchases the item.
An origin-based sales tax is imposed where the seller is located.
Collecting sales tax
Before opening your business, make sure to register and obtain a sales tax permit from your state’s tax department. Note that if you plan to do business in different U.S. states, you must apply for a permit in each of those locations. Displaying the sales tax on your products to your customers is also advisable so that they aren't surprised by the final price. A simple way to do this is by using Wix's online store builder which has a built-in sales tax calculator.
Tracking your collected taxes
It’s required by law to keep a clear and detailed record of all transactions including the following:
The amount of state sales tax collected on any purchases.
A copy of the receipts or invoices that you provided to customers for each sale.
Any refunds or credits related to returned purchases.
The location from where you physically made the sale or sent the deliveries.
A daily record of all purchases.
Submitting collected sales tax and risks
Once businesses collect and track sales tax from consumers, they are required to submit the information to their state’s tax authorities on a monthly or quarterly basis. Failing to obtain a sales tax permit in some states is a criminal offense. Moreover, if your business fails to collect sales tax, you will be forced to pay all uncollected taxes out of pocket and may face additional penalties.
Keep in mind that every state and locality differs when it comes to sales tax. For more information, contact your state and local tax departments for additional questions on how to properly collect sales taxes for your business.