Sales Tax

Sales tax is a tax imposed on buyers as a percentage of a sales price. It is collected by sellers and remitted to the state agencies. Despite many similarities to European VAT, there are some differences too:

  • It is collected by states and municipalities and not the federal government.

  • The rate is significantly lower.

  • Many services and essential products are not subject to sales tax.

Alaska, Montana, Delaware, Oregon and New Hampshire don't have sales tax at all. Alaska, however, allows municipalities charge sales tax up to 7.5%. When selling in multiple states the sales tax is calculated based on the state of consumption. For example, a California company sells T-shirts online and someone in Texas buys it. The sales tax will be collected and paid in Texas. Similarly with services, it is the state where the service is performed where the tax is paid. In the age of online trade this can create huge confusions for businesses. Luckily, unless a business has other significant presence in a state, it is only responsible for collecting sales tax and paying on behalf of its customers if their total sales exceed the state’s threshold for nexus, typically $100,000 in sales or 200 transactions in that state during a year. Most states allow up to 90 days from the date the nexus is met to register for sales tax collection. The best strategy is to ask customers for a billing address and sort customers by states and cities. Once the sales in a specific state approach the threshold, check if the specific product or service the business offers is subject to sales tax in that state. If the business offers different products, the combined sales count towards the threshold.

Use Tax

While use tax and sales tax are often used interchangeably, there is a key difference between them. When the seller does not collect sales tax from a taxable product for whatever reason, such as not having a nexus in the state, the buyer is still responsible to pay it. The buyer will calculate the tax amount and report it as a use tax in his or her individual tax return. Simply put, when the seller collects it, it's called sales tax, if the buyer reports it on his or her tax return it's called use tax.

Please look at the rates per state below:

Alabama - 4.0%

Alaska - 0% (local rates may apply)

Arizona - 5.6%

Arkansas - 6.5%

California - 7.25% (local rates may apply)

Colorado - 2.9% (local rates may apply)

Connecticut - 6.35%

Delaware - 0%

District of Columbia - 6.0%

Florida - 6.0%

Georgia - 4.0%

Hawaii - 4.0%

Idaho - 6.0%

Illinois - 6.25% (local rates may apply)

Indiana - 7.0%

Iowa - 6.0%

Kansas - 6.5%

Kentucky - 6.0%

Louisiana - 4.45% (local rates may apply)

Maine - 5.5%

Maryland - 6.0%

Massachusetts - 6.25%

Michigan - 6.0%

Minnesota - 6.875%

Mississippi - 7.0%

Missouri - 4.225%

Montana - 0%

Nebraska - 5.5%

Nevada - 6.85%

New Hampshire - 0%

New Jersey - 6.625%

New Mexico - 5.125%

New York - 4.0% (local rates may apply)

North Carolina - 4.75%

North Dakota - 5.0%

Ohio - 5.75%

Oklahoma - 4.5%

Oregon - 0%

Pennsylvania - 6.0%

Rhode Island - 7.0%

South Carolina - 6.0%

South Dakota - 4.5%

Tennessee - 7.0%

Texas - 6.25%

Utah - 4.85%

Vermont - 6.0%

Virginia - 5.3%

Washington - 6.5% (local rates may apply)

West Virginia - 6.0%

Wisconsin - 5.0%