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Posted by Tiffany Gaskin

Understanding Sales Tax

Understanding Sales Tax

The government expects you to pay sales tax when you sell goods and services. The tax is imposed on goods and services, collected at the point of sale by the retailer, and paid to the government. A business that pays sales tax in a certain jurisdiction has a connection: the physical location, an employee, an affiliate, or other presence. However, the process is affected by the jurisdiction laws.

How does sales tax work?

Sales taxes are a percentage of the total amount for the goods or services rendered. The retailer calculates the tax, collects it at the time of purchase, and remits it to the local or state government on a scheduled date. The federal government has no hand in sales taxes, but state and local governments run it. As a result, sales taxes are imposed in forty-five states and the District of Columbia but not set in five states. Plus, only 38 states pay sales taxes to the local government, which burdens the customers as they also pay state sales taxes. 

However, not every product or service is affected by sales taxes. For example, some states do not issue sales taxes on groceries or prescription drugs. While other states also exclude clothing and medical devices from goods subject to sales taxes. Another opportunity for customers to seize is the sales tax holiday, where customers can buy goods and services sales tax-free. In some states, the sales tax holiday happens several times each year, which often corresponds with the start of the year’s academic calendar. 

Types of Sales Tax

The government has many ways of collecting sales taxes based on state laws. For example, some sales taxes are collected at the point of sale, some are added to the price, while others increase according to the production level. Here are some examples of how different sales taxes appear.

General Sales

The general sales tax is the percentage of tax added to goods and services paid at the point of sales by the customer. The retailer collects the tax and remits it to the government. These taxes include basic merchandise, restaurant bills, clothing, and point-of-sales purchases. 

Retail Transaction

A retailer transaction is when the retailer sells a product or service directly to the customer. The retailer is not the producer meaning the product has passed through many stops and transactions before reaching the retailer. The journey of the product or service makes it tax-free for customers since it has been bought and sold before—for example, a man’s necktie. The tie was manufactured and sold in bulk to the wholesaler, who in turn sold it to a different retailer at piece price and in smaller quantities. Finally, the customer purchases the tie from the retailer at another price. So sales taxes are applied to the product at their highest price point.

Vendor Privileges

Some states allow sellers to remit taxes directly. The act is referred to as seller or vendor privilege. The vendor privilege means the tax is collected directly from the seller instead of placing it on the customers. In such states, the vendor adds the tax in price or at the transaction. Either way, the customer is responsible for paying the taxes even though the seller is supposed to.

Value-Added/Gross Receipts/Wholesale

VAT stands for value-added tax, which increases according to the production stage. A tax percentage is imposed on the producer, wholesaler, retailer, and consumer. Value-added tax is used to substitute progressive tax in most countries and is applied to consumers who use more goods. The tax burden model is a combination of wholesale tax and gross receipts. Gross receipts are placed on a company’s entire sales, while wholesale tax is a percentage tax imposed on selling to retailers.



Tiffany Gaskin
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