What Is Sales Tax?

When most people think of taxes, they visualize income tax. At the same time, governments all over the world also impose sales taxes to generate revenue. In the United States, the Tax Foundation estimates that the average American spends about $1,000 to $2,000 annually on state sales taxes. Also, many American city and county governments impose additional taxes, which consumers must pay on top of the state tax.

Most consumers have grown so accustomed to paying sales taxes that they rarely question the extra charge on their receipts. Even so, sales taxes may account for tens or even hundreds of thousands of dollars over a lifetime.

Each consumer’s spending on sales tax will vary according to the amount spent and the local tax rate. Rates vary considerably by jurisdiction. Anybody who purchases taxed goods and services should take time to understand what is being paid. In some cases, consumers can plan where and when to buy to save money on sales taxes.

What Is a Sales Tax?

Sales tax refers to a consumption tax levied on a consumer’s purchases of goods and services, typically at the point of sale. Analysts call this an indirect tax because consumers generally remit it to a retailer. In turn, the entity that collects the tax pays the government.

Governments often exempt nonprofits, businesses and government organizations from paying for this consumer tax. For example, a retail store can purchase inventory and supplies without paying sales tax. In turn, the store must charge its customers sales tax and then turn around and pay the government.

Are Sales Taxes Fair?

Retailers calculate the sales tax based on the price of nonexempt purchases. The more people spend, the more taxes they will pay. At first glance, this kind of tax may seem fair. In theory, people who can afford to spend more can also afford to pay higher sales taxes.

Still, everybody needs to purchase necessities such as groceries and prescription medicine. Critics call sales tax a regressive tax because poorer people must pay a larger share of their income for the same amount of goods or services.

To solve this problem, local and state tax rules generally exempt some necessary purchases to prevent imposing a burden. Some places also have sales tax holidays. For example, a sales tax holiday may occur before school starts to give everybody a chance to buy back-to-school clothes and supplies.

What Makes Sales Tax Complicated?

On the surface, sales tax appears simple. Governments collect a certain percentage from the retail price of most purchases. Still, these tax rates vary considerably, sometimes even between two sides of a county line or city limits sign.

For example, the state might charge 3%, the county 2%, and the city 1%, making the full charge twice as much as the state’s rate. Driving past a county line or city limit sign to an area with lower taxes might offer some consumers a chance to save hundreds of dollars on a large purchase, such as a new car.

Many retail businesses also struggle with the complexity and variety of sales tax rules in various cities, states and countries. The growth of e-commerce makes handling taxes even harder. Many online sellers operate in one location but sell to customers elsewhere. For instance, Amazon sells products to customers all over the United States and in many other countries.

For some customer locations, the company must charge and remit local taxes. Amazon and companies like it must also respect diverse sales tax holidays and sales tax exemption rules. The tangle of rules and the importance of avoiding noncompliance penalties have made tax solution providers more popular. For instance, Sovos keeps up with global sales tax regulations and offers products and services to help its clients accurately charge, report on and file sales taxes.






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