What is Sales Tax?

Sales tax is a consumption tax imposed by the government on the sale of goods and services at the point of purchase. It is typically charged as a percentage of the retail cost, and the responsibility of collecting and remitting the sales tax falls on businesses that have some form of connection to the jurisdiction. In the United States, there is no federal sales tax; instead, each state makes its own sales tax laws, with rates varying from 2.9% to 7.25% at the state level. Local governments in 35 states also impose additional sales or use taxes ranging from 1% to 5%.

Sales taxes are different from value-added taxes (VAT), which are collected throughout the production process of a good. While sales taxes are more common in the US, many countries outside the US, such as those in the European Union, have adopted VAT schemes. Some countries, like Antigua and Barbuda, St. Kitts and Nevis, United Arab Emirates, Vanuatu, Brunei, Bahrain, the Bahamas, Bermuda, Cayman Islands, Monaco, Kuwait, Qatar, Somalia, and Western Sahara, have no sales tax.

In the US, sales taxes are governed at the state level, and four states do not have any sales taxes, while Alaska has no statewide sales tax. Sales taxes are closely related to use taxes, which apply to items from outside their jurisdiction. These taxes are generally set at the same rate as sales taxes but are difficult to enforce, except when applied to large purchases of tangible goods.

A business may be liable for sales taxes in a given jurisdiction if it has a presence there, such as a brick-and-mortar location, an employee, or an affiliate, depending on the laws in that jurisdiction. The seller collects the sales tax at the time of the sale and remits it to the state. In cases where items are sold at retail more than once, such as used cars, the sales tax can be charged on the same item indefinitely.