Dealing with Sales Tax in the US

Dealing with Sales Tax in the US

Published: 07/10/19

Taxes are daunting for sure, sales tax on the other hand is like the captain of taxes for the entrepreneurs. The rules are different in each state which makes things more complicated. But the most confusion is related to whether your business is compliant with the sales tax or not.

If you are doing business anywhere in the United States, then you are liable for paying local sales taxes. And for that, it doesn’t matter if your business is located within the US or outside it. If your end consumers live in any of the US territories, then you have to pay sales tax.

For your ease and understanding, we have managed, collected, and filed some of the brief information that will come in handy.

 

What is Sales Tax?

It’s a transparent way to collect tax revenues from businesses. Sales taxes are easy to understand and simple as compared to income tax rates. 

After all, a consumer can see the tax deducted on the receipts. 

Besides in 39 states, consumers pay local sales taxes which can be substantial so the local rate is high as compared to other states. 

Sales tax is different from income tax. State sales tax change on a dime. It can get confusing from there if you are not aware of the tax rates in different states. 

 

US Sales Tax doesn’t come under Federal Domain

Unlike VAT that has the same rates all across the European Union, US sales taxes are subjected to state and local laws. For that matter, it is really important that you are working with an experienced tax preparation firm because every local jurisdiction has its own tax rules.

Moreover, it is not easy to work amid hundreds of tax jurisdictions while complying with all of them. If you are not taking care of your bookkeeping and accounting on a professional basis, then you might find it really difficult to deal with sales taxes.

 

The Determination of the Sales Tax Nexus

To put it in simple words, the nexus of a business tells its tax liability in a particular location. For instance, if you have your sales operations (nexus) in Dallas, then you are under obligation to file and pay Texas sales tax.

 

Information as an Entrepreneur One Must Know

Sales are unavoidable, as a business owner you are eligible to pay these taxes to the state government. So, if it’s your first time filing for the sales tax here’s what you will need to know.

 

  1. Your Business Location

This one is a no-brainer; you have to pay the sales tax of the state where your business is physically located. There are no federal sales in the US but every business has to pay income taxes.

A statewide sales tax is collected in the 45 US states and the District of Columbia. Except for Alaska, Delaware, Montana, New Hampshire, and Oregon – they don’t have any state sales tax. But Alaska does charge the local sales tax.

 

  1. Your Offered Products and Services

Every state sets different tax slabs on different commodities. For instance, a business dealing in digital services is not taxed as a venture offering physical services. In a similar manner, digital subscriptions, digital items, physical commodities— everything is taxed at a different tariff.

Again, you need to work with tax preparation experts that are aware of the sales tax rate on different commodities in a particular state.

 

  1. Your Method of Selling

Some states also devise different sales taxes for different modes of business. For instance, a brick-and-mortar store might have to pay a different sales tax than a venture that is operating virtually or from a home office.

Especially online selling and purchasing are different. Most states (almost 38 including Columbia) work on the legislation that requires the “marketplace facilitators” too.

 

  1. Your Sales Volume

In order to protect small businesses from getting crushed under overwhelming tax compliances, many states offer a threshold to define that tax nexus. For instance, a business with not more than, say, $50,000 worth of sales per fiscal year is not classified as a nexus venture and thus can get around the sales taxes.

 

Local Sales Tax Rates in Your State 

For an easier understanding, we have divided sales tax rates into four primary categories;

  • Tax-free states
  • Combined state and local sales tax rates (highest and lowest)
  • State sales tax rates (highest and lowest)
  • Local sales tax rates 

 

  1. Sales Tax-Free Zones in the US

Businesses located in Alaska, Delaware, Montana, New Hampshire, and Oregon are the lucky candidates. These states do not have sales tax! 

But there are other states that do charge local sales taxes. Now, remember, each state’s tax rate is different. 

However, Alaska allows its cities to levy a sales tax. 

 

  1. The Highest Average Sales Tax Rates (combined)

States earn from the revenue paid in form of taxes. Low income indicated a high sales tax. A lack of tax deductions can also play a crucial role in increasing the sales tax rate. 

Therefore following are the 5 states with the highest average combined state and local tax rates. 

    • Tennessee – 9.55% 
    • Louisiana – 9.52% 
    • Arkansas – 9.51% 
    • Washington – 9.23% 
    • Alabama – 9.22% 

 

  1. Lowest Average Sales Tax Rates (combined) 

Some states earn a significant income due to their natural resource taxes. There are 5 states with the lowest average combined state and local tax rates. 

    • Alaska – 1.76% 
    • Hawaii – 4.44%
    • Wyoming – 5.33% 
    • Wisconsin – 5.43% 
    • Maine – 5.50% 

 

  1. Highest State Sales Tax Rates 

The following states are incorporated with the highest sales tax rates starting with; 

    • California – 7.25% 
    • Indiana – 7%
    • Mississippi – 7%
    • Rhode Island – 7% 

 

  1. Lowest Non-Zero State Level Sales Tax 

Besides Wyoming at 5.3% there are 4 other states competing lower than it; 

    • Georgia – 4% 
    • New York – 4% 
    • Alabama – 4% 
    • Hawaii  – 4% 

However, the state does collect mandatory taxes distributed to local governments. Since April 2019l, there have been no changes in state sales tax. 

 

  1. Local Sales Tax Rates 

The five highest local sales tax rates belong to; 

    • Alabama – 5.22%
    • Louisiana – 5.07% 
    • Colorado – 4.75% 
    • New York – 4.52% 
    • Oklahoma – 4.45%

 

Some rankings improved for California, Iowa, Nevada, Utah, and South Dakota. However, Arkansas sales tax rate changed (from 2nd to 3rd) without a shift in local average rate. 

Missouri is now the 12th highest in the local sales tax rate. This shift is traced back to Kansas City. Due to fire protection sales tax, an increase of 0.25% is recorded. 

Dever also recorded an increase in local average sales tax by 0.5% to reduce the city’s carbon emissions. Also in efforts to support the homelessness relief programs. 

 

Comparison Chart to Summarize Sales Tax Rates in States

According to January 1, 2021

State

State Sales Tax Rate

Rank

Avg. Local Sales Tax Rate (a)

Combined Sales Tax Rate

Rank

Max Local Sales Tax Rate

Alabama

4.00% 40 5.22% 9.22% 5 7.50%

Alaska

0.00% 46 1.76% 1.76% 46

7.50%

Arizona

5.60% 28 2.80% 8.40% 11

5.60%

Arkansas

6.50% 9 3.01% 9.51% 3

5.125%

California (b)

7.25% 1 1.43% 8.68% 9

2.50%

Colorado

2.90% 45 4.82% 7.72% 16

8.30%

Connecticut

6.35% 12 0.00% 6.35% 33

0.00%

Delaware

0.00% 46 0.00% 0.00% 47

0.00%

D.C.

6.00% (17) 0.00% 6.00% (38)

0.00%

Florida

6.00% 17 1.08% 7.08% 22

2.50%

Georgia

4.00% 40 3.32% 7.32% 19

4.90%

Hawaii (c)

4.00% 40 0.44% 4.44% 45

0.50%

Idaho

6.00% 17 0.03% 6.03% 37

3.00%

Illinois

6.25% 13 2.57% 8.82% 7

9.75%

Indiana

7.00% 2 0.00% 7.00% 24

0.00%

Iowa

6.00% 17 0.94% 6.94% 28

1.00%

Kansas

6.50% 9 2.19% 8.69% 8

4.00%

Kentucky

6.00% 17 0.00% 6.00% 38

0.00%

Louisiana

4.45% 38 5.07% 9.52% 2

7.00%

Maine

5.50% 29 0.00% 5.50% 42 0.00%

Maryland

6.00% 17 0.00% 6.00% 38

0.00%

Massachusetts 6.25% 13 0.00% 6.25% 35

0.00%

Michigan

6.00% 17 0.00% 6.00% 38 0.00%
Minnesota 6.875% 6 0.59% 7.46% 17

2.00%

Mississippi

7.00% 2 0.07% 7.07% 23 1.00%
Missouri 4.225% 39 4.03% 8.25% 12

5.763%

Montana (d)

0.00% 46 0.00% 0.00% 47 0.00%
Nebraska 5.50% 29 1.44% 6.94% 29

2.50%

Nevada

6.85% 7 1.38% 8.23% 13

1.53%

New Hampshire

0.00% 46 0.00% 0.00% 47 0.00%
New Jersey (e) 6.625% 8 -0.03% 6.60% 30

3.313%

New Mexico (c)

5.125% 32 2.71% 7.83% 15 4.313%
New York 4.00% 40 4.52% 8.52% 10

4.875%

North Carolina

4.75% 35 2.23% 6.98% 26 2.75%
North Dakota 5.00% 33 1.96% 6.96% 27

3.50%

Ohio

5.75% 27 1.48% 7.23% 20 2.25%
Oklahoma 4.50% 36 4.45% 8.95% 6

7.00%

Oregon

0.00% 46 0.00% 0.00% 47 0.00%
Pennsylvania 6.00% 17 0.34% 6.34% 34

2.00%

Rhode Island

7.00% 2 0.00% 7.00% 24 0.00%
South Carolina 6.00% 17 1.46% 7.46% 18

3.00%

South Dakota (c)

4.50% 36 1.90% 6.40% 32

4.50%

Tennessee

7.00% 2 2.55% 9.55% 1 2.75%
Texas 6.25% 13 1.94% 8.19% 14

2.00%

Utah (b)

6.10% 16 1.09% 7.19% 21 2.95%
Vermont 6.00% 17 0.24% 6.24% 36

1.00%

Virginia (b)

5.30% 31 0.43% 5.73% 41 0.70%
Washington 6.50% 9 2.73% 9.23% 4

4.00%

West Virginia

6.00% 17 0.50% 6.50% 31 1.00%
Wisconsin 5.00% 33 0.43% 5.43% 43

1.75%

Wyoming 4.00% 40 1.33% 5.33% 44

2.00%

 

In The Last

Sales tax is just one of the major ingredients of the tax structure. A lot of factors contribute to high and low sales tax. If you are running a small business and want to take care of its bookkeeping, accounting, and tax preparation, then get in touch with My Count Solutions; this online tax preparation firm offers its expertise at very reasonable rates.

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