Sales taxes are taxes imposed by state and local governments on the value of local sales transactions. Currently there is no national sales tax, and some state and local governments do not impose sales tax. Sales taxes provide local governments with revenue, but they also impose burdens on many sellers. They raise the price of goods and services.
Sales Taxes and Use Taxes
The tax on a transaction between an in-state seller and an in-state buyer is called sales tax. If the seller is located out-of-state, the same tax is referred to as use tax. In both cases, the tax is imposed on the buyer by the state where the goods are delivered or the services are performed. The difference is that if the seller is located in the buyer's state, the seller must collect the tax from the buyer and forward it to state tax authorities. If the seller is located in a state other than the buyer's state, the buyer must file a use tax return and pay the tax directly to state tax authorities. Similar principles apply to local sales and use taxes.
The Seller's Legal Obligations
If the seller has no business operations in the buyer's state or locality other than a minimal presence, such as a website visible in the buyer's state, tax authorities have no legal authority to force the seller to collect sales tax. On the other hand, if the seller maintains a permanent local establishment such as a retail sales outlet, the government does have this authority. The seller's obligations may be unclear if, for example, it maintains no local establishment but dispatches salespeople to the buyer's area to solicit orders.
Sales Tax Rates Vary Widely
In Alaska, Delaware, Montana, New Hampshire, and Oregon, there are no state or local sales taxes. By contrast, several states impose a sales tax of seven percent on top of local tax rates. As a result, sales tax rates in certain areas, such as Los Angeles, approach 10 percent of the value of the sale. Some localities impose even higher sales taxes for the use of facilities commonly used by out-of-state tourists, such as airports.
Items That Are Exempt from Sales Tax
State laws vary with regard to what types of transactions are exempt from sales tax. Even if the buyer is exempt from sales tax, however, an in-state seller may have to provide the state with documentation to prove the exemption. Typically, wholesale purchases are exempt from sales tax unless the buyer is the end user. Sales transactions by registered nonprofit organizations may be exempt, as long as the transaction furthers the organization's nonprofit purpose. Some states also exempt essential items like food and medicine.
A Tax Lawyer Can Help
The law surrounding state and local sales taxes is complicated. Plus, the facts of each case are unique. This article provides a brief, general introduction to the topic. For more detailed, specific information, please contact a tax lawyer.