Sales taxes, which translates to sales tax, are levied on goods and services collected by merchants from their customers.
Who pays the sales tax (Sales Taxes)?
Consumers pay sales tax. The money to pay the sales tax does not come from the merchants’ pockets. The merchants collect it, keep it safe and send it to the respective state or city on a required date. It is also known as a pass-through tax.
Is sales tax federal?
No. Sales tax is state, municipal, and/or county sales tax. It is not paid to the federal government like payroll or income tax.
Do all states have sales taxes?
Most states have a sales tax, but five states do not, except in specific cases. These states are New Hampshire, Oregon, Montana, Alaska, and Delaware.
Do all products and services have sales taxes?
No, not all products and services have sales taxes; this is something that varies from state to state or even from city to city.
How do you know what has a sales tax and what does not?
For this, you can visit the state page right here.
How do I know how much sales tax to charge?
Sales tax rates are set by the state, county, and city. There are more than 12,000 tax jurisdictions in the United States. Just check the information on the State Department of Revenue website; you can find the sales tax rate set there.
Who receives the sales tax money?
In most cases, all sales taxes are paid directly to the state. But, in some states, merchants must also collect and remit a local sales tax paid to the city or county.
What do most merchants do after collecting sales taxes?
As mentioned above, they must keep it safe, remit it to the respective state or city monthly or quarterly, and file a sales tax return each time.
What happens if sales taxes are not paid?
Failure to pay sales tax carries severe penalties from the states, up to 25% of the amount owed. In case of non-payment of sales tax, the states seize the assets of the company and/or the owner(s) and put them up for auction to collect the debt, along with the penalty. If it is an extreme case, the owner(s) will be prosecuted and sent to jail. Even if the business is permanently closed or declared bankrupt, paying the sales tax will remain with the owner until it is delivered.
Do sales tax rates vary from state to state and even from one county or city to another?
Yes, the rates vary from state to state, county to county, and even city to city in the same county. This brings us to the question, how is the sales tax applied in these cases when selling to a customer in another city? To answer the question, let’s follow an example.
We have a company dedicated to selling computers through e-commerce in Florida. We sell a PC to a customer in Orlando, and we charge 6.5% tax based on the sale amount. We will then have to pass the tax amount to the state. However, if the customer we sell to is in the city of Kissimmee since the sales tax is 7%, this is the percentage we will charge and then pay to the state.
However, if that company in Florida were to sell to a customer in California, there would be no need to collect sales tax because there is no Physical Nexus Presence in California.
But, in the second half of 2018, the states won a federal court case that allowed them to legislate on the Economic Nexus and the nexus related to the marketplace you are selling in; now, the question is, Why?
A perfect portion of states’ revenue comes from sales tax, and in 2018, the state of Texas estimated that it stopped collecting $1 billion in sales tax due to e-commerce. This is because companies with no physical presence made sales to customers in that state and, due to the lack of Physical Nexus Presence, were not collecting sales tax, so it was cheaper for customers to buy a product coming from another state-.
From this problem presented to the states, there was a change in legislation, and they were able to create what is known as Economic Nexus; now, how does this work, and how can it affect customers? Even if you have no presence in a state, you will be forever obligated to collect sales tax from customers in that state after reaching a specific sales value.
Eventually, when your operations total a few hundred thousand dollars, you will have a presence in all states, collect sales tax, and file monthly, quarterly, or semi-annually for each state.
Now, what happens if you sell on marketplaces like Amazon or eBay? The change to state law has made marketplaces have nexus in most states, so when your company has a product on Amazon, a sale is generated to a customer in California, even if you don’t have a Nexus. Amazon collects sales tax on the sale and is responsible for sending payment to that state.
There is also the possibility that your company uses Amazon’s fulfillment service. In that case, they will distribute your product to warehouses in ten states, so your company will also have an obligation to those states.
To avoid fraud, some states have required Amazon to collect sales tax from end consumers and then pass it directly to the state in those states where this agreement exists, which makes the process easier for sellers.
Are there tools that facilitate the process of collecting sales taxes?
Yes, some tools facilitate this process; one of them is called TaxJar.
