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Sales tax is a tax that consumers pay when they purchase anything (usually products, but sometimes services). Sales tax in the United States is a minor proportion of a transaction’s total value (often 4-8 percent). State and local governments, such as counties and cities, establish the rates for sales taxes. Governments use sales tax to fund expenditures on items such as fire stations and street sweeping.
You must calculate the sales tax to charge on each transaction if the products and services are subject to sales tax. You must also collect tax from customers and remit it to your state’s taxing authority by filing a sales tax return.
This article explains sales tax and how to compute sales tax in the United States.
What is Sales Tax?
A sales tax is a type of consumption tax levied by the government on businesses and individuals’ sales of products and services. In a traditional sales tax system, taxes are collected at the moment of purchase and then remitted to the government by the shop. A business’s responsibility is to pay taxes in a given jurisdiction if the company has a nexus there, which can be a physical presence, an employee, an associate, or some other form of presence, depending on the rules country.
Taxes on conventional or retail sales are only levied against the final purchaser of a good or service. The bulk of items in modern economies transit through multiple phases of manufacturing, which are sometimes handled by different businesses, necessitating substantial documentation to establish who is ultimately accountable for sales tax. Consider the following scenario: a sheep farmer sells his wool to a firm that creates yarn. When yarn is for sale, a yarn manufacturer must acquire a sales tax exemption from the government, stating that it is not the ultimate user of the yarn being sold. The yarn manufacturer then sells its product to a garment manufacturer, who must obtain a resale certificate for the goods. Finally, the garment manufacturer sells fuzzy socks to a retail outlet, which will charge the buyer sales tax and the price of the fuzzy socks purchased by the customer.
Distinct jurisdictions impose different sales taxes, which frequently overlap, as is when states, counties, and municipalities all levy their respective sales taxes on top of each other, for example. Sales taxes are closely related to use taxes, which are levied on residents who purchase products from outside their jurisdiction and then use those items within their jurisdiction. These usually are charged at the same rate as sales taxes. Still, because they are difficult to enforce, they are only applied in practice on significant purchases of physical commodities, such as automobiles. For example, if a Georgia citizen purchases a car in Florida, she will be forced to pay the state’s tax, just as if she had purchased the automobile in her home state.
How are sales tax and value-added tax (VAT) different?
Sales tax and value-added tax (VAT) are both examples of indirect taxes. These are taxes collected by the seller at the purchase and then paid or remitted to the government on the buyer’s behalf. Sales tax and value-added tax (VAT) are frequently confused terms among those working in the corporate tax field.
When the retailer completes the final sale in the supply chain, the retailer is responsible for collecting sales tax. In other words, when end consumers purchase products or services, they are responsible for paying tax. When purchasing products or materials that will be resold, firms can provide resale certificates to sellers, relieving them of the need to pay sales tax on their purchases. Sales tax is not collected until the sale is completed to the end consumer, and tax authorities do not get any tax money until the sale is made to the ultimate consumer.
On the other hand, value-added tax (VAT) is collected by all sellers at every point of the supply chain. All taxable sales are subject to VAT, collected by suppliers, manufacturers, distributors, and retailers. Suppliers, producers, distributors, retailers, and end customers are all required to pay VAT on their purchases in the same way. For businesses to claim a credit for the VAT, they spend on purchases on their tax return. They must keep track of and record the VAT they pay on their transactions. Tax jurisdictions get tax money across the whole supply chain rather than simply at the moment of sale to the final consumer when a VAT regime is implemented.
How Sales Tax is Calculated
Adding all of the rates together to determine the total rate is necessary if your state, county, and city levy a sales tax. Once you’ve determined the tax rate you’ll be collecting; you can use the tax formula to figure out how much to charge your customers.
The amount of sales tax you collect is determined by the tax percentage and the amount of money your consumer spends on products or services. For example, a consumer who purchases $1,000 worth of things will be required to pay more tax than a person who buys $100 worth of products.
To compute sales tax, use the following formula:
To calculate the total cost of an item or service, multiply the item’s or service’s cost by the tax rate. The equation is written:
Total sales tax equals the item or service cost multiplied by the tax (decimal form). To calculate the entire cost of an item or service, add the total sales tax to the item or service cost. Always remember to convert the tax into decimal form before entering it.
In decimal form, 8 percent sales tax is represented as 0.08 percent.
When expressed in decimal form, 3.4 percent sales tax becomes 0.034 percent.
Calculate total tax using the following formula: item or service cost x sales tax (in decimal form).
An example of a calculation: $60 (the price of the article) multiplied by.075 (sales tax) equals $4.50 in total sales tax.
As soon as you’ve computed sales tax, remember to add it to the initial cost to obtain the final price. Suppose you purchased an item for $100 and paid $5 in total tax. Your total cost will be $105 in this case.
An illustration of how to calculate sales tax
Consider the following scenario: Your company is based in Cleveland, Ohio. You don’t have a second place of business to operate from. It would be best to collect sales tax at the Cuyahoga County rate of 8.00 percent (state tax of 5.75 percent plus Cuyahoga County rate of 2.25 percent; Cleveland does not have a city sales tax). Cuyahoga County’s rate is 8.00 percent. Before tax is applied, your customer’s bill is $399.00.
Tax = $399 x 0.080 = 0.08
Sales tax is $31.92 for every $100 spent.
Sales tax is an additional $31.92 that you must collect from the customer. Then, make sure to remit the sales tax to the proper authorities. For more information, you should contact the state.
Things to Note When Calculating Sales Tax
- You should be aware that some states in the United States do not impose tax. Delaware, New Hampshire, Montana, Oregon, Alaska, and more states are included.
- Recognize that different states impose different taxes on different types of items. It is possible for a state or district, such as the District of Columbia, to have a general sales tax of 6% but to set the tax rate on alcoholic beverages and prepared foods at 10%. New Hampshire, for example, has no general sales tax. Still, it levies a 9% tax on restaurants, food services, motels, room rentals, and motor vehicle rentals to fund public education and infrastructure.
In Massachusetts, for example, sales tax related to clothes is only calculated when the total bill exceeds $175 in total cost. As a result, if you purchase apparel in Massachusetts for less than $175, the state government will not tax you.
- When computing sales tax, verify with your local state and city governments. On the other hand, most individuals lump it in with state sales tax. If you want to know exactly how much money you’ll have to pay in taxes on a specific item, look up your area’s relevant state and local tax rules.
Most online shopping carts and marketplaces will automatically calculate sales tax on your behalf, which is great news for e-commerce merchants and customers alike. You need to enter the location of the shipment’s origin (your home, warehouse, store, or another place) and the area of the item’s delivery. As a result, the shopping cart calculates the amount of sales tax that your buyer is responsible for and adds it to the final total. If you are not required to collect tax from that buyer, the cart will not include tax in its calculations.
You can also use a sales tax calculator to determine the appropriate amount of tax to charge your customers and clients.
Following the calculation of the total amount of tax, you must add that amount to the purchase price to arrive at the total cost of the item you’re selling, which is the selling price.