Sales Tax Basics: What It Is & How It Works

If you are a small business owner who sells products or services online in the US, you may be wondering how to handle sales tax. Sales tax is a tax that is added to the price of certain goods and services and collected by the seller from the buyer. 

The seller then remits the tax to the state or local government. Sales tax rates vary by state and locality, and some items may be exempt from sales tax depending on the nature of the product or service or the status of the buyer or seller.

In this blog post, we will explain what sales tax is, how it works, how it varies by state, what types of sales tax exist, and what examples of sales tax are. We hope this information will help you comply with the sales tax laws and regulations in the US and avoid any penalties or interest.

What is sales tax

A sales tax is a tax that is imposed on the sale of tangible personal property and certain services in the US. Tangible personal property is any physical item that can be seen, weighed, measured, felt, or touched, such as clothing, furniture, books, or electronics. Services are activities that are performed for a fee, such as repairs, cleaning, or consulting. However, not all services are subject to sales tax, and some states may have different definitions of what constitutes a service.

Sales tax is usually expressed as a percentage of the sales price. For example, if the sales tax rate is 6% and the sales price is $100, the sales tax amount is $6, and the total amount paid by the buyer is $106. The seller is responsible for collecting the sales tax from the buyer and remitting it to the state or local government.

How does sales tax work?

Sales tax works differently depending on the state and locality where the sale takes place. In general, there are two main factors that determine the sales tax obligation:

• the nexus and 
• the destination

What is a sales tax nexus

The nexus is the connection or presence that a seller has in a state or locality. A seller may have a nexus in a state or locality if they have a physical location, an employee, inventory, an affiliate, or a significant number of sales or transactions there. If a seller has a nexus in a state or locality, they are required to register, collect, and remit sales tax on their taxable sales there.

What is sales tax destination?

The destination is the location where the buyer receives or uses the product or service. In most states, the sales tax rate is based on the destination of the sale, not the origin. This means that the seller must charge the sales tax rate that applies to the buyer’s address, not the seller’s address. 

For example, if a seller in New York sells a product to a buyer in California, the seller must charge the sales tax rate that applies to California, not New York.

However, some states have different rules for online sales, especially for sellers who do not have a nexus in the state. These rules are based on the concept of economic nexus, which means that a seller may have a nexus in a state if they exceed a certain threshold of sales or transactions in that state, regardless of their physical presence. 

For example, if a seller in Texas sells more than $100,000 worth of products or makes more than 200 transactions in California in a year, the seller may have an economic nexus in California and be required to collect and remit sales tax there.

Sales tax varies by state

Sales tax rates and rules vary by state in the US. Each state has its own authority to impose and administer sales tax, and some states may delegate this authority to local governments, such as counties, cities, or districts. As a result, there may be different sales tax rates and exemptions within the same state, depending on the location of the sale.

As of 2021, there are 45 states and the District of Columbia that impose a state-level sales tax, ranging from 2.9% in Colorado to 7.25% in California. Five states do not have a state-level sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. 

However, some local governments in Alaska and Montana may impose a local sales tax, while Delaware imposes a gross receipts tax on the seller instead of a sales tax on the buyer.

In addition to the state-level sales tax, there may be local sales taxes that apply to the same sale. Local sales taxes are imposed by counties, cities, or special districts, such as transit, tourism, or public safety districts. Local sales taxes are usually added to the state sales tax rate, resulting in a combined sales tax rate that varies by location.

For example, in New York City, the combined sales tax rate is 8.875%, which consists of the state sales tax rate of 4%, the city sales tax rate of 4.5%, and the Metropolitan Commuter Transportation District surcharge of 0.375%.

To find out the exact sales tax rate for your location, you can use our sales tax calculator. Just enter your state, county, and city, and the tool will show you the combined state and local sales tax rate for your area.

Types of sales tax

There are two main types of sales tax in the US:

1. sales tax and 
2. use tax. 

Both are based on the same principle of taxing the consumption of tangible personal property and certain services, but they apply to different situations.

Sales tax is the tax that is collected by the seller from the buyer at the point of sale. Sales tax applies to sales that take place within the same state or locality where the seller has a nexus. For example, if a seller in Michigan sells a product to a buyer in Michigan, the seller must collect and remit sales tax to the Michigan Department of Treasury.

What is use tax

Use tax is the tax that is paid by the buyer to the state or local government where the product or service is used, stored, or consumed. Use tax applies to sales that take place outside the state or locality where the buyer is located, or to sales where the seller does not collect sales tax. For example, if a buyer in Michigan buys a product from an online seller who does not have a nexus in Michigan, the buyer must pay use tax to the Michigan Department of Treasury.

The purpose of use tax is to prevent tax evasion and ensure fair competition among sellers. Use tax also helps fund public services and programs that benefit the residents of the state or locality. Use tax rates are usually the same as sales tax rates, and use tax exemptions are usually the same as sales tax exemptions.

Examples of sales tax

To illustrate how sales tax works in practice, here are some examples of sales tax calculations for different scenarios:

1. Example 1: A seller in Michigan sells a product for $100 to a buyer in Michigan. The sales tax rate in Michigan is 6%. The seller must collect $6 in sales tax from the buyer and remit it to the Michigan Department of Treasury. The total amount paid by the buyer is $106.
2. Example 2: A seller in Michigan sells a product for $100 to a buyer in California. The sales tax rate in California is 7.25%. The seller does not have a nexus in California and does not collect sales tax from the buyer. The buyer must pay $7.25 in use tax to the California Department of Tax and Fee Administration. The total amount paid by the buyer is $107.25.
3. Example 3: A seller in New York sells a product for $100 to a buyer in New York City. The combined sales tax rate in New York City is 8.875%. The seller must collect $8.88 in sales tax from the buyer and remit it to the New York State Department of Taxation and Finance. The total amount paid by the buyer is $108.88.
4. Example 4: A seller in Texas sells a product for $100 to a buyer in Texas. The sales tax rate in Texas is 6.25%. The seller has a nexus in Texas and collects sales tax from the buyer. However, the product is exempt from sales tax in Texas because it is used for agricultural production. The seller must provide a valid exemption certificate to the buyer and keep a copy for their records. The total amount paid by the buyer is $100.

List of US taxable items, goods and services

1. Clothing and footwear

Most states tax clothing and footwear that are worn on the human body, unless they are sold by a nonprofit organization, used as protective equipment, or part of a uniform. Some states have exemptions for clothing and footwear below a certain price threshold or during specific periods, such as back-to-school sales tax holidays.

2. Furniture and appliances

Most states tax furniture and appliances that are used in a home or office, unless they are sold by a nonprofit organization, used in industrial processing, or rented or leased. Some states have exemptions for energy-efficient appliances, furniture, and appliances used by disabled people.

3. Books, magazines, and newspapers 

Most states tax books, magazines, and newspapers that are sold on tangible media, such as paper or CDs. However, some states have exemptions for textbooks, religious publications, or newspapers that are printed and distributed at least once a week.

4. Software and digital products

Most states tax software and digital products that are sold on tangible media, such as CDs or flash drives, or downloaded from the internet, such as music, movies, or games. However, some states have exemptions for custom software, educational software, or software and digital products sold to businesses for resale or use in production.

5. Prepared food and beverages

Most states tax food and beverages that are sold for immediate consumption on or off the premises where they are sold, such as restaurant meals, catering, bakery items, or vending machine snacks. However, some states have exemptions for groceries, prescription drugs, dietary supplements, or food and beverages sold by a nonprofit organization or a school.

6. Personal and professional services 

Some states tax services that are performed for the purpose of enhancing the appearance, health, or well-being of a person, such as haircuts, manicures, massages, or fitness classes. Some states also provide tax services that are performed for the purpose of providing advice, guidance, or assistance, such as accounting, legal, consulting, or advertising services. However, some states have exemptions for medical services, educational services, or services performed by a nonprofit organization or a government entity.

How to apply for US sales tax permit (step by step approach)

To apply for a US sales tax permit, you need to follow certain rules and procedures that vary by state and locality. However, in general, these are the steps to register with a state to collect sales tax:

1. Gather vital information like your employer identification number (EIN), business name, address, type, and structure, contact details, bank account information, and estimated sales volume.
2. Visit your state’s Department of Revenue website to create an account, or log in to access the online registration application.
3. Fill out the online application form with the required information, and submit it electronically. Alternatively, you may download and print a paper form and mail it to the address provided by the state. You may need to pay a registration fee, which varies by state and locality.
4. Receive your sales tax permit or confirmation by mail or email. You may also receive a sales tax rate chart, a sales tax return form, and instructions on how to file and remit sales tax. Keep your sales tax permit in a safe place and display it at your place of business if required by the state.
5. Update your sales tax settings on your online store or point of sale system to reflect the states and localities where you are registered to collect sales tax. You may need to use sales tax software or services to help you calculate, collect, and file the correct amount of sales tax from your customers.

How to report, file and remit US sales tax (step by step approach)

To report, file and remit US sales tax, you need to follow certain rules and procedures that vary by state and locality. However, in general, these are the steps to comply with your sales tax obligations:

1. Track and record your sales transactions for each state and locality where you are registered to collect sales tax. You may need to use sales tax software or service like AtomicTax to help you generate sales tax reports and summaries for each filing period.
2. Determine the due dates and frequency for filing and remitting sales tax for each state and locality where you do business. You may need to file monthly, quarterly, or annually, depending on your sales volume and the state’s requirements. You may also need to file electronically or by mail, depending on the state’s preferences.
3. Create a sales tax report by figuring out how much sales tax you collected from buyers in each state and locality and how much sales tax you owe to each jurisdiction. You may need to deduct any sales tax exemptions, credits, or discounts that apply to your sales. You may also need to itemize your sales by county, city, or district, or by reporting location, depending on the state’s requirements.
4. Log into your state’s tax filing website and report your sales tax information. You may need to fill out an online form or upload a file with the required data. Alternatively, you may mail a paper form with the required information to the address provided by the state.
5. Remit the correct amount of sales tax to each state and locality where you do business. You may need to pay online using your bank account or credit card, or mail a check or money order to the address provided by the state. You may also need to include a payment voucher or coupon with your payment, depending on the state’s requirements.

Common sales tax filing due dates in the US

Sales tax filing due dates are the deadlines for submitting your sales tax returns and payments to the state or local government. Filing due dates vary by state and locality, as well as by the frequency and method of filing. 

Generally, there are three main filing frequencies: monthly, quarterly, and annually. Monthly filers must file their sales tax returns and payments every month, quarterly filers must file every three months, and annual filers must file once a year. Some states may also have semiannual or seasonal filing frequencies for certain types of sellers.

The specific filing due dates for each state and locality depend on their tax calendar and rules. Some states use a fixed date, such as the 20th of the month, while others use a variable date, such as the last day of the month. 

Some states may also adjust the filing due date if it falls on a weekend or a holiday. For example, if the filing due date is the 20th of the month and it falls on a Saturday, the due date may be extended to the next business day, which is Monday.

How to calculate sales tax (methods and examples)

Sales tax is calculated by multiplying the sales price of an item or service by the sales tax rate. The sales tax rate is usually expressed as a percentage, such as 6.5%, but it can also be converted to a decimal, such as 0.065, for easier calculation. 

The sales tax rate may vary by state and locality, as well as by the type of item or service. Some items or services may be exempt from sales tax or subject to a reduced or increased sales tax rate, depending on the state and locality’s rules.

Methods of calculating sales tax

There are two main methods to calculate sales tax:

1. the tax-inclusive method and 
2. the tax-exclusive method

The tax-inclusive method is used when the sales price already includes the sales tax and you want to find out the original price before tax and the sales tax amount. 

The tax-exclusive method is used when the sales price does not include the sales tax and you want to find out the sales tax amount and the total price after tax.

Examples of how to calculate sales tax using both methods

Example 1: You buy a shirt for $25 in a state where the sales tax rate is 6%. The sales price does not include the sales tax. How much is the sales tax and the total price after tax?

This is an example of the tax-exclusive method. To find the sales tax amount, multiply the sales price by the sales tax rate:

Sales tax = sales price x sales tax rate Sales tax = 25 x 0.06 Sales tax = 1.5

To find the total price after tax, add the sales tax amount to the sales price:

Total price = sales price + sales tax Total price = 25 + 1.5 Total price = 26.5

The sales tax is $1.5, and the total price is $26.5.

Example 2: You buy a book for $10.80 in a state where the sales tax rate is 8%. The sales price already includes the sales tax. How much is the original price before tax and the sales tax amount?

This is an example of the tax-inclusive method. To find the original price before tax, divide the sales price by 1 plus the sales tax rate:

Original price = sales price / (1 + sales tax rate) Original price = 10.8 / (1 + 0.08) Original price = 10.8 / 1.08 Original price = 10

To find the sales tax amount, subtract the original price from the sales price:

Sales tax = sales price – original price Sales tax = 10.8 – 10 Sales tax = 0.8

The original price is $10, and the sales tax is $0.8.

What is sales tax exemption and how does it work?

A sales tax exemption is a legal provision that allows certain buyers, sellers, products, or services to be free from sales tax or to pay a reduced sales tax rate. A sales tax exemption can be based on the type of product or service, the intended use of the product or service, or the status of the buyer or seller. 

For example, some states exempt groceries, prescription drugs, or clothing from sales tax or charge a lower sales tax rate for them. Some states also exempt products or services that are used for industrial processing, agricultural production, or educational purposes. 

Additionally, some states exempt buyers or sellers that are nonprofit organizations, government agencies, or religious institutions.

To claim a sales tax exemption, a buyer must provide a valid exemption certificate to the seller at the time of purchase. An exemption certificate is a document that proves that the buyer is eligible for the exemption and that the seller is authorized to not collect sales tax. 

The seller must keep a copy of the exemption certificate for their records and report the exempt sales on their sales tax return. The buyer must also keep a copy of the exemption certificate and any supporting documents for their records and report the exempt purchases on their use tax return, if applicable.

Sales tax exemptions vary by state and locality, and each jurisdiction has its own rules and requirements for granting and claiming exemptions. Therefore, it is important for buyers and sellers to check the sales tax websites or publications of the states and localities where they do business, or contact a tax professional, to find out the specific exemptions that apply to them.

What is sales tax discount and how does it work?

A sales tax discount is an incentive that some states offer to sellers who collect and remit sales tax on time. A sales tax discount is a percentage of the sales tax amount that the seller can deduct from their sales tax payment to the state or local government. 

For example, if a seller collects $1,000 in sales tax and the state offers a 2% sales tax discount for timely filing and payment, the seller can pay $980 in sales tax and keep $20 as a discount.

A sales tax discount is a way for the state or local government to reward sellers for complying with the sales tax laws and regulations and to encourage them to file and pay sales tax electronically. A sales tax discount can also help sellers offset some of the costs and burdens of collecting and remitting sales tax, such as administrative expenses, accounting fees, or bank charges.

Not all states offer sales tax discounts, and the rates and conditions of the discounts vary by state and locality. 

Some states may limit the amount of the discount, cap the frequency of the discount, or require certain criteria to qualify for the discount, such as filing and paying online, using a certified service provider, or having a good compliance history. 

Therefore, it is important for sellers to check the sales tax websites or publications of the states and localities where they do business, or contact a tax professional, to find out the specific discounts that apply to them.

What is sales tax interest and how does it work?

Sales tax interest is a penalty that some states charge to sellers who fail to collect, file, or remit sales tax on time. Sales tax interest is a percentage of the sales tax amount that the seller owes to the state or local government, calculated from the due date of the sales tax payment to the date of the actual payment. 

For example, if a seller owes $1,000 in sales tax and the state charges a 10% annual interest rate for late payment, and the seller pays the sales tax one month after the due date, the seller will have to pay $1,008.33 in sales tax, which includes $8.33 in interest.

Sales tax interest is a way for the state or local government to discourage sellers from delaying or avoiding their sales tax obligations and to compensate for the lost revenue and opportunity cost of the late payment. 

Sales tax interest can also help the state or local government cover some of the costs and damages of enforcing and collecting the sales tax, such as audit expenses, legal fees, or collection charges.

All states charge sales tax interest, but the rates and methods of the interest vary by state and locality. Some states may use a fixed interest rate, while others may use a variable interest rate based on the market or the prime rate. 

Some states may compound the interest daily, monthly, or quarterly, while others may charge a simple interest rate. Some states may also waive or reduce the interest under certain circumstances, such as reasonable cause, hardship, or voluntary disclosure. 

Common US sales tax penalties

If you are a seller who collects and remits sales tax in the US, you need to comply with the sales tax laws and regulations of the states and localities where you do business. Otherwise, you may face penalties for failing to file, pay, or report sales tax on time or accurately. 

Sales tax penalties are additional charges that the state or local government imposes on you for violating the sales tax rules. Sales tax penalties can be civil or criminal, depending on the severity and intention of the violation.

• Civil penalties: these are monetary fines that are calculated as a percentage of the sales tax amount that you owe or overpaid. Civil penalties are usually imposed for negligence, error, or delay in filing, paying, or reporting sales tax.
  
  For example, if you file your sales tax return late, you may have to pay a penalty of 5% of the sales tax due for each month or part of a month that the return is late, up to a maximum of 25%. If you pay your sales tax late, you may have to pay a penalty of 10% of the sales tax due, plus interest. If you report your sales tax incorrectly, you may have to pay a penalty of 20% of the sales tax underpayment, plus interest.
• Criminal penalties: these are legal sanctions that may include imprisonment, probation, or community service, in addition to monetary fines. Criminal penalties are usually imposed for fraud, evasion, or willful failure to file, pay, or report sales tax.
  
  For example, if you knowingly fail to file a sales tax return, you may be guilty of a misdemeanor and face up to a year in jail, a fine of up to $10,000, or both. If you intentionally evade or underreport sales tax, you may be guilty of a felony and face up to five years in prison, a fine of up to $100,000, or both.

Sales tax penalties vary by state and locality, and each jurisdiction has its own authority to determine the amount, rate, and method of the penalties. 

What is sales tax refund and how does it work in the US?

A sales tax refund is a reimbursement that you can claim from the state or local government if you paid too much or paid sales tax in error on a purchase. A sales tax refund can also be claimed by a business that overpaid sales tax, paid sales tax in error, or collected, reported, and remitted sales tax but then repaid it to their customers. A sales tax refund can be claimed as a credit against your future sales tax liability or as a cash refund.

Who is eligible for a sales tax refund?

You are eligible if:

1. You paid sales tax on an item that qualifies for an exemption, such as clothing, food, or prescription drugs, depending on the state and locality’s rules.
2. You paid sales tax on an item that you returned, exchanged, or cancelled within the refund period, and you have a receipt or proof of purchase.
3. You paid sales tax on an item that you shipped or delivered to another state or locality that has a lower sales tax rate or no sales tax, and you have proof of delivery.
4. You are a business that pays sales tax on inputs or supplies that you use for manufacturing, processing, or exporting goods that are exempt or zero-rated for sales tax purposes, and you have a proof of use.
5. You are a business that paid sales tax on goods or services that you resold to your customers and collected sales tax from them, and you have a proof of resale.
6. You are a business that collected sales tax from your customers but then refunded or credited them for returns, exchanges, cancellations, or discounts, and you have a proof of refund or credit.

How to apply for sales tax refund

To claim a sales tax refund, you need to follow certain rules and procedures that vary by state and locality. However, in general, these are the steps to apply for a sales tax refund:

1. Gather the necessary information and documents, such as your sales tax permit number, sales tax return form, sales tax invoices, receipts, proofs of purchase, delivery, use, resale, refund, or credit, and any other supporting documents.
2. Visit your state’s Department of Revenue website and find the section for sales and use tax refunds to create an account or log in to access the online application.
3. Fill out the online application form with the required information, and upload the supporting documents. Alternatively, you may download and print a paper form and mail it to the address provided by the state. You may need to pay a processing fee, which varies by state and locality.
4. Receive your sales tax refund or confirmation by mail or email. You may also receive a notice of adjustment, denial, or audit, depending on the state’s review of your refund claim.

What documents are required to claim sales tax refund?

The documents and procedures required to apply for a sales tax refund vary by state, but generally, you will need to provide:

1. A completed refund application form, which can be obtained from the state or local tax authority’s website or office
2. A copy of the original sales receipt or invoice showing the amount of sales tax paid and the date of purchase
3. A copy of the exemption certificate or other proof of eligibility for the refund, such as a resale certificate, a tax-exempt organization certificate, or a letter from the state or local tax authority
4. A detailed explanation of the reason for requesting the refund, such as an error in the tax calculation, a change in the use of the purchased item, or a cancellation of the sale
5. Any other supporting documents or information requested by the state or local tax authority

Depending on the state or local tax authority, you may be able to submit your refund application online, by mail, or in person. You should also check the deadline for filing the refund claim.

Sales tax refund filing deadline and due date

The deadline for filing a refund claim may range from 30 days to four years from the date of purchase. Some states may also charge a processing fee or interest on the refund amount.

What is value added tax

A value-added tax (VAT) is a type of consumption tax that is levied on the value added to goods and services at each stage of the production and distribution chain. Unlike a sales tax, which is only charged at the final point of sale, a VAT is charged at every intermediate stage where value is added, such as manufacturing, wholesaling, and retailing.

The VAT rate is applied to the difference between the seller’s purchase price and selling price, which represents the value added by the seller. The seller collects the VAT from the buyer and remits it to the government, after deducting the VAT paid on its own purchases from other sellers.

What is excise tax

An excise tax is a tax imposed on specific goods or services that are considered to be harmful, luxurious, or socially undesirable. Excise taxes are usually levied on a per-unit basis, such as per gallon, per pack, or per item, rather than on the value of the transaction.

Excise taxes are often used to discourage the consumption or production of certain goods or services, such as alcohol, tobacco, gasoline, or gambling, or to raise revenue for specific purposes, such as environmental protection, health care, or transportation.

The rates and bases of excise taxes vary widely by state and locality, and some states may offer exemptions or refunds for certain taxpayers or purposes.

Which state pays no sales tax?

There are five states that do not impose any statewide sales tax on goods and services: Alaska, Delaware, Montana, New Hampshire, and Oregon.

However, this does not mean that these states are completely free from sales tax. Some of these states may have other types of taxes that apply to certain transactions, such as excise taxes, gross receipts taxes, or use taxes. 

Moreover, some of these states may allow local governments to impose their own sales taxes, which can vary by jurisdiction and product.

1. Alaska: Alaska does not have a statewide sales tax, but it allows local governments, such as cities, boroughs, and municipalities, to levy sales taxes on various goods and services. The local sales tax rates range from 0% to 7%, depending on the location and the type of transaction. Some localities may also charge special sales taxes on items such as alcohol, tobacco, fuel, or tourism.
2. Delaware: Delaware does not have a statewide sales tax, nor does it allow local governments to impose sales taxes. However, Delaware does impose a gross receipts tax on certain businesses, which is a tax on the total revenue of the business, regardless of the source or cost of the goods or services sold. The gross receipts tax rates vary by the type of business activity, ranging from 0.0945% to 2.0736%. The gross receipts tax is paid by the seller, who may or may not pass it on to the buyer.
3. Montana: Montana does not have a statewide sales tax, nor does it allow local governments to impose general sales taxes. However, Montana does impose selective sales taxes on certain goods and services, such as lodging, rental vehicles, telecommunication services, and tobacco products. The selective sales tax rates vary by the type of product or service, ranging from 3% to 50%. Montana also allows some resort communities and districts to impose a local option sales tax of up to 3% on certain goods and services sold within their boundaries.
4. New Hampshire: New Hampshire does not have a statewide sales tax, nor does it allow local governments to impose sales taxes. However, New Hampshire does impose a meals and rooms tax of 9% on the sale of prepared food, beverages, and lodging. New Hampshire also imposes a tax of 9% on the rental of motor vehicles and a tax of 7% on the sale of certain telecommunication services.
5. Oregon: Oregon does not have a statewide sales tax, nor does it allow local governments to impose general sales taxes. However, Oregon does impose selective sales taxes on certain goods and services, such as marijuana, alcohol, tobacco, and transient lodging. The selective sales tax rates vary by the type of product or service, ranging from 10% to 17%. Oregon also imposes a statewide transit tax of 0.1% on the wages of employees and the net earnings of self-employed individuals.

Which US state has lowest sales tax?

The US state that has the lowest sales tax rate is Colorado, which has a state sales tax rate of 2.9%. However, this does not necessarily mean that Colorado has the lowest sales tax burden, because local governments in Colorado can also impose their own sales taxes, which can add up to the state rate. The average local sales tax rate in Colorado is 4.89%, making the average combined sales tax rate in Colorado 7.79%.

The US state that has the lowest average combined sales tax rate, taking into account both state and local sales taxes, is Hawaii, which has a state sales tax rate of 4% and an average local sales tax rate of 0.44%, resulting in an average combined sales tax rate of 4.44%.

However, Hawaii’s sales tax base is broader than most states, meaning that it applies to more goods and services, including some business-to-business transactions. Therefore, the effective sales tax rate in Hawaii may be higher than the nominal rate.

Other US states that have low sales tax rates include 

1. Wyoming (4% state rate, 5.44% average combined rate), 
2. Wisconsin (5% state rate, 5.43% average combined rate), 
3. Maine (5.5% state rate, 5.5% average combined rate), and
4. Virginia (4.3% state rate, 5.65% average combined rate).

Us sales tax FAQs

Do all US states charge sales tax?

No, not all US states charge sales tax. There are five states that do not have any statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, some local governments in these states may impose their own sales taxes, and some states may have other types of taxes that apply to certain transactions, such as excise taxes, gross receipts taxes, or use taxes.

What is the sales tax in California?

The sales tax in California is 7.25%, which is the highest state sales tax rate in the US. However, this is not the final sales tax rate that you pay, because local governments in California can also impose their own sales taxes, which can add up to the state rate. The average local sales tax rate in California is 2.5%, making the average combined sales tax rate in California 9.75%.

Can I claim an exemption from sales tax if I am not a resident of the US?

It depends on the state and the type of purchase. Some states may allow non-residents to claim an exemption from sales tax if they meet certain criteria, such as purchasing goods for export, purchasing goods for resale, or purchasing goods for use in another state. However, some states may not offer any exemptions for non-residents or may require them to provide proof of eligibility, such as a foreign passport, a customs declaration, or a resale certificate. Therefore, you should check the sales tax websites or publications of the states where you make purchases, or contact a tax professional, to find out the specific exemptions that apply to you.

What is the difference between a sales tax permit and a resale certificate?

A sales tax permit is a document that allows you to collect and remit sales tax to the state or local government. A sales tax permit is required for sellers who have a nexus, or a physical or economic presence, in a state or locality that imposes sales tax. A sales tax permit is also known as a sales tax license, a sales tax registration, or a seller’s permit.

A resale certificate is a document that allows you to buy goods or services without paying sales tax if you intend to resell them to your customers and collect sales tax from them. A resale certificate is required for buyers who are registered to collect and remit sales tax in the state or locality where they make purchases. A resale certificate is also known as a resale exemption certificate, a resale number, or a tax-exempt number.

Can I get a refund for overpaid sales tax?

Yes, you can get a refund of overpaid sales tax if you paid too much or paid in error sales tax on a purchase. You can claim a sales tax refund from the state or local government that collected the tax by following their rules and procedures. You will need to provide a refund application form, a copy of the original sales receipt or invoice, a proof of eligibility for the refund, and any other supporting documents. You can also claim a sales tax refund as a credit against your future sales tax liability or as a cash refund.

What is the statute of limitations for sales tax refunds?

The statute of limitations for sales tax refunds is the time limit for filing a sales tax refund claim. The statute of limitations varies by state and locality, and it may range from 30 days to four years from the date of purchase. If you file your refund claim after the statute of limitations expires, you may lose your right to claim the refund. Therefore, you should file your refund claim as soon as possible, check the sales tax websites or publications of the states and localities where you paid sales tax, or contact a tax professional to find out the specific statute of limitations that apply to you.

How do I handle sales tax refunds in the event of an audit?

If you are audited by the state or local tax authority, you may need to provide evidence of your sales tax refund claim, such as the refund application form, the original sales receipt or invoice, the proof of eligibility for the refund, and any other supporting documents. You may also need to explain the reason for requesting the refund, such as an error in the tax calculation, a change in the use of the purchased item, or a cancellation of the sale. You should keep your sales tax refund records for at least three years, or longer if required by the state or locality, and cooperate with the auditor during the audit process.

Can I claim a sales tax refund if I am not registered to collect and remit sales tax?

It depends on the state and the type of purchase. Some states may allow you to claim a sales tax refund if you are not registered to collect and remit sales tax, but you paid sales tax on purchases that qualify for exemption or refund. 

However, some states may not allow you to claim a sales tax refund if you are not registered to collect and remit sales tax, or they may require you to register first before claiming the refund. Therefore, you should check the sales tax websites or publications of the states where you paid sales tax, or contact a tax professional, to find out the specific rules and requirements that apply to you.

Conclusion

To wrap up, we’ve covered a lot about what sales tax is in the US, from discussing how it works to what a nexus is and the different ways you can establish a nexus.

We explored how businesses can apply for sales tax and how to report, file, and pay the taxes. We also talked about the list of items that are subject to sales tax in the US, among many other things.

Our goal is to empower you with the knowledge you need to handle sales tax confidently and compliantly if you sell online to customers in the US. If you have more questions or need help, remember that we, as professionals, are there for support. Cheers to your success!