Sales Tax Laws: An Overview

Sales tax laws play a vital role in the United State's economy, shaping consumer behavior, funding public services, and supporting local governments. Every year, businesses and consumers grapple with the complexities of sales tax regulations, striving to fulfill their obligations accurately and on time. Sales tax rates vary across states and localities, adding to the complexity of compliance. As of 2022, the average combined state and local sales tax rate in the United States stood at around 8.5%. However, the rates can range from very little sales tax in some states, such as Alaska and Wyoming, to rates exceeding 9% in certain localities, including Louisiana, Tennessee, and Arkansas.

Understanding these laws' scope and impact is crucial for businesses and individuals to ensure compliance and avoid potential penalties. In this article, we thoroughly examine sales tax laws in the United States, highlighting the obligations faced by taxpayers and providing insights into the magnitude of these tax responsibilities. 

State-Level Sales Tax

Most states impose a sales tax on the retail sale of goods and some services. Each state's legislation determines the sales tax rates and regulations. These rates vary from state to state and typically range from 2% to 10%, although there are some outliers and exceptions.

States define what goods and services are subject to sales tax within their jurisdiction. Generally, physical goods are taxable, while services may or may not be taxable depending on the state. 

Local Sales Tax

In addition to state-level sales tax, local governments may impose their own sales tax. These taxes are typically added to the state tax and can vary within a state. It's essential to consider both state and local taxes when calculating the total sales tax rate. 

Local tax rates are typically expressed as a percentage and added to the state sales tax rate. For example, if the state sales tax rate is 5% and the local sales tax rate is 2%, a purchase would have a combined sales tax rate of 7%.

These tax revenues fund local government services, such as infrastructure projects, public safety, education, or transportation initiatives. 

Due to the variability of local sales tax rates, it's essential to know the specific rates applicable to the location of the purchase. Rates can vary significantly even within close proximity, as neighboring cities or counties may have different tax rates.

Online Sales Tax

Online sales tax laws in the United States have evolved, particularly following the 2018 Supreme Court case South Dakota v. Wayfair, Inc. This case changed the landscape of online sales tax by allowing states to require online retailers to collect and remit sales tax, even if they do not have a physical presence in the state.

The taxability of goods and services in online sales follows the same principles as in physical retail sales. Each state defines its own rules regarding taxable items, exemptions, and special rates. Online sellers must determine the taxability of their products or services in each jurisdiction where they have economic nexus and collect sales tax accordingly. 

Complying with online sales tax laws can be complex, particularly for businesses operating in multiple states. Online sellers should consult the tax authorities of the relevant states or seek professional advice to understand and meet their obligations under online sales tax laws. 

Use Tax

Use tax is a complementary tax imposed on the use, storage, or consumption of taxable goods and services purchased from out-of-state sellers where sales tax was not collected at the time of purchase. Use tax ensures that consumers who make purchases outside their state of residence and do not pay sales tax are still subject to a similar tax to maintain fairness and protect in-state businesses. This commonly occurs when the seller is not required to collect sales tax due to the absence of physical presence nexus or the seller’s failure to collect tax properly. 

Consumer Responsibility

The consumer's responsibility, not the seller, is to report and pay use tax to their state's tax authority. Use tax is typically self-assessed by the consumer or on their income tax return or through a separate use tax return if provided by the state. 

Taxable Nexus

Taxable nexus refers to the connection between a business and a taxing jurisdiction that establishes whether the company must collect and remit sales tax. A business with a physical presence in the state generally has nexus and must collect sales tax. However, with the growth of e-commerce, states have also implemented economic nexus laws, which require businesses to collect sales tax based on their sales revenue or transaction volume in a particular state, regardless of physical presence. 

Nexus Thresholds

The economic thresholds can vary by state. They may be based on the total sales revenue generated from sales in the state or the number of transactions conducted within the state. Standard thresholds include a specific dollar amount of sales revenue (e.g., $100,000) or a certain number of separate transactions (e.g., 200 transactions) within a calendar year.

Multistate Nexus

A business can have nexus in multiple states simultaneously. This can occur if the company meets the economic nexus thresholds or has a physical presence in numerous states. In such cases, the business is responsible for complying with the sales tax laws of each state where Nexus is established.

Nexus and Online Marketplaces

The rise of online marketplaces, like Amazon, eBay, and Etsy, has added complexity to the nexus landscape. Some states have enacted marketplace facilitator laws, shifting the responsibility of collecting and remitting sales tax from the individual sellers to the marketplace itself. In these instances, the marketplace may have nexus on behalf of the sellers, and individual sellers may not need to establish nexus separately.

Exemptions from Sales Tax

Certain goods and services may be exempt from sales tax in some states. While the specific exemptions available depend on the laws of each jurisdiction, the following list covers some common categories of exemptions that may exist:

Necessities

Many states exempt certain essential goods considered necessities from sales tax. This includes groceries, prescription drugs, medical equipment, and other health-care-related products. The scope of these exemptions can vary, so it's essential to review the specific laws of each jurisdiction.

Education Materials

Some states provide exemptions for certain educational materials, such as textbooks, school supplies, or educational software. These exemptions aim to reduce the tax burden on families and students. 

Nonprofit Organizations

Many states exempt sales tax made by qualified nonprofit organizations, such as charitable, religious, or educational institutions. These exemptions are designed to support the work of nonprofit organizations and encourage charitable activities. 

Renewable Energy

Some states offer exemptions or reduced tax rates for products related to renewable energy, such as solar panels, wind turbines, or energy-efficient appliances. These exemptions aim to promote sustainable practices and encourage the adoption of clean energy technologies.

Manufacturing and Production

Certain states provide exemptions or reduced tax rates for equipment, machinery, and supplies used in the manufacturing or production processes. These exemptions are intended to support the growth of the manufacturing sector and stimulate economic development. 

Filing and Remittance

Businesses that are required to collect sales tax must register with the appropriate state tax authority and obtain a sales tax permit. They are responsible for collecting the tax from customers at the time of sale, keeping records of the transactions, and filing periodic sales tax returns. The frequency of filing and remittance varies by state.

It’s important for businesses to consistently file sales tax returns and remit payments by the specified deadlines. Late filing or payment can result in penalties and interest charges. It’s crucial to stay updated on any changes to sales tax rates, exemptions, or filing requirements to ensure ongoing compliance.

What Happens If I Don’t Pay Sales Tax?

The answer to this question lies within your jurisdiction and may differ depending on your unique circumstances. However, some potential outcomes remain consistent in jurisdictions across the United States.

Penalties and Interest

The tax authority may impose penalties and interest on the unpaid sales tax amount. The penalties can be a percentage of the tax owed and may increase if the tax remains unpaid. Interest charges can also accrue on the outstanding tax balance.

Audits and Assessments

Nonpayment of sales tax can raise red flags and increase the likelihood of being audited by the tax authority. The tax authority examines the business's financial records and sales transactions during an audit to ensure compliance. If an unpaid sales tax is discovered, the tax authority can assess the outstanding amount, penalties, and interest. 

Legal Action

In extreme nonpayment or persistent noncompliance cases, the tax authority may pursue legal action against the business. This can involve litigation and court proceedings to recover unpaid taxes, penalties, and interest. Legal action can result in further financial liabilities and damage the business's reputation.

License Suspension or Revocation

In some jurisdictions, a business's failure to pay sales tax can lead to suspension or revocation of their business licenses. This can effectively shut down the business's operations until the outstanding taxes are paid and compliance is achieved.

Do I Need a Tax Attorney if I Didn’t Pay Sales Tax?

If the unpaid sales tax is a minor oversight or a small amount, it may be possible to resolve the matter directly with the tax authority without legal representation. In such cases, reaching out to the tax authority and working with their representatives to rectify the situation could be sufficient.

However, suppose there are complexities or disputes surrounding the unpaid sales tax, such as disagreement about the taxability of specific transactions. In that case, the applicability of exceptions, or other legal issues, consulting a tax attorney can be beneficial. Additionally, if the tax authority has initiated an audit or has taken legal action against you or your business for nonpayment of sales tax, it is highly recommended to seek the assistance of a tax attorney.

It's essential to consult with a tax attorney knowledgeable in sales tax laws and experienced in dealing with the tax authority in your jurisdiction. To find a tax attorney to meet your needs, visit our directory of qualified tax lawyers. Our team has thoroughly vetted each featured lawyer to ensure you receive the highest quality representation for your circumstances.