What is a Sales Tax?

By Fawn Farley , last updated August 18, 2011

Sales tax is a tax on goods and services which the end user must pay. In the United States, forty-five states impose a state sales tax. Within the state, counties and cities can add on another percentage of sales tax. These taxes go from the buyer of goods back to the city or state to be used for a variety of purposes. Sales taxes are exempt on certain commodities, such as those deemed necessary like food.

Sales taxes are in the category of consumption taxes, along with excise tax, which is an indirect sales tax on specific goods like gasoline, cigarettes, and alcohol. These taxes are not factored into profits for the seller. On the contrary, they are remitted to the state come tax time. However, if items are purchased to be resold, the reseller is not required to pay tax on that item. This means that the manufacturer is not required to remit a sales tax to the government for the sold item. Taxes are paid by the end user.

The Federal government does not impose a mandatory sales tax. Each state is responsible for its own sales tax policy. The four states that impose no sales tax include Oregon, Alaska, Delaware, and Montana. New Hampshire has no overall state sales tax, but does have a tax on prepared food, which includes restaurant tax. The percentage of the purchase that is taxed varies by state and ranges from less than 1 to more than 10 percent.

Varying widely by state, there are many items that are exempt from taxation. Food for preparation and consumption at home (as opposed to food bought in a restaurant) is generally not taxed, as is the case with prescription medication. A handful of states do not have sales tax on clothing. Goods purchased for the manufacturing of other goods are often not taxed. Oftentimes, charitable and religious organization are exempt from paying taxes.

Taxes collected from sold goods are considered by some states to belong to the state. In most states, sales taxes are collected quarterly. Sellers of taxable goods often must register with the state as sellers. Sales and sales taxes generally need to be reported on a monthly basis. While some states combine local and state taxes, these often need to be filed separately. Resellers must present an exemption certificate at time of sale as proof that they are exempt from paying sales tax.

A topic of some debate in the tax world is that of interstate taxes over the Internet. With the increasing commerce of Internet sales, state sales taxes are generally not imposed on the buyer, sometimes only if they are purchasing from within the state of the seller. Currently only five states (Connecticut, Illinois, New York, North Carolina, and Rhode Island) require Internet sellers to collect tax on items sold.

Because sales tax varies so much from state to state, and even within that state, it is a good idea to learn the sales tax of your state and town, as well as destination locations. These tax tables can easily be found on the Internet.

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