When Americans file their yearly tax returns, they pay income tax on their earnings. Other taxes they usually pay are property taxes, capital gains, and estate taxes. However, each year Americans also pay sales tax and other types of local taxes to their states, counties, or cities on various products they purchase.
These taxes are usually collected at the purchase point of the goods, and business owners then pay them to the relevant authorities. In most states, the total revenue from these types of taxes accounts for a larger share of total revenue than individual or property tax.
Except for a few states that levy no sales tax, Americans pay between 2.9% and 7.25% on purchases of services and goods.
Difference between state and local sales tax
State revenues are usually based on a few state taxes including income, property, and sales tax. Some have opted out of levying some of the major types of taxes but have imposed others.
In some states, people pay both state and local sales tax. Even though some states have very low sales taxes when local taxes are added to products, their average tax surpasses 10%. One example is Louisiana. It has a 5% state sales tax but also levies local sales tax. In Tennessee, sales tax and local taxes combined cost consumers as much as 9.44%.
Even though New Hampshire has no sales tax, they have the highest per capita corporate tax. Delaware draws shoppers from bordering states with its no sales tax policy, but relies on a 40% corporate taxes, mostly from out-of-state companies.
Examples of items subject to sales tax include clothing, furniture, toys, and artwork. Also, they are imposed on some services, labor services for property construction, property sales, rentals, and real estate transactions.
Even though most states exclude sales on essentials like groceries, medicines, and certain medical devices, it is still considered a regressive tax by many. This is because people with lower incomes spend a large part of their budget on these taxes.
When customers buy goods online, if they are from the same state as the business, they pay the applicable state tax. However, if the customer is in another state, the tax applicable is usually the one in the customer’s state, unless the state policy where the goods are sent from has an origin-based taxation policy.
In most states, some products also have excise taxes. These are paid when the goods are purchased by consumers and are usually imposed on gas. Cigarettes and alcoholic drinks are also taxed by extra amounts and these are often called “sin taxes” because they are imposed to try and deter people from buying them.
Excise taxes are also collected by the federal government for gasoline and diesel fuel. All excise taxes are added to the sales taxes on the purchase price.
These taxes are usually charged on expensive cars, jewelry, and other luxury items.
Certain services are taxed with a user fee and these include airline tickets, hotel rooms, licenses, car rentals, toll roads, and utilities. In some states, cellphone usage is taxed with as many as 6 taxes, adding 20% to the monthly payment.
Social Security tax is paid by both employees and employers, and this is only one of two payroll taxes. Employees and employers each pay 6.2% of the total wages, a total contribution of 12.4%. Both employers and employees also must pay 1.45% of the employee’s wages toward Medicare. Employees that earn more than $200,000 annually contribute another 0.9%.
Calculating sales tax
When businesses buy goods for resale, they can use a resale certificate to avoid paying sales tax. Resale certificates can be obtained online from the Homepage of the Department of Revenue. However, business owners cannot get resale exemption when making purchases for their personal use, for business equipment and office supplies, for business rentals, or free business gifts.
The U.S. tax system is complex, and business owners need to understand the basics of sales and local taxes. Finding and calculating the sales tax rates for any city in the U.S. is made easier with the TRUiC Sales Tax Calculator. It is a valuable tool for businesses to work out sales tax, whether they are selling something locally or online to another state.