What is sales tax? The basics explained

Sales tax is one of the most important sources of income for the gov­ern­ment. A sales tax is set by your tax ju­ris­dic­tion on the sale of goods and services – your local gov­ern­ment may add further local sales tax on top of the state rate. It is charged when the sale is made, collected by the business that made the sale, and then collected by the gov­ern­ment in the form of a tax return. Generally speaking, a fair amount of the sales tax charged by your state, as well as local sales tax, goes towards the general gov­ern­ment funding, but a certain amount will be used for local projects too. Some states don’t charge sales tax, such as Oregon, but other taxes in these states may be com­par­a­tive­ly higher to make up for it. Read on to find out where this money goes, when sales tax is charged, and how to calculate it.

Before we look at exactly what sales tax is, and how to calculate it, here is some helpful vo­cab­u­lary to help you find your feet with the subject.

Sales tax is one of the most important taxes for the gov­ern­ment – because it is one of the most important sources of income, both for the local and statewide gov­ern­ments. In states that have sales tax the sales tax may be used for public pensions, police funding, foster care, en­vi­ron­men­tal projects, trans­porta­tion, education, and foster care, to name just a few. There may also be other projects that get funding from local gov­ern­ment from sales tax, such as parks, libraries, museums, and zoos, for example. Oregon, Alaska, Delaware, Montana, and New Hampshire are the ex­cep­tions to this, none of these states have a sales tax.

Sales tax is charged on trans­ac­tions for services and products that your business offers in every state you operate in. If your business has a physical location in a state, you will most likely have nexus in that state – meaning you need to pay sales tax for trans­ac­tions in that state. Each state has its own list of taxable goods, but be aware that local gov­ern­ments may have ad­di­tion­al lists to observe. Always check with a local tax advisor. There are some items which are commonly exempt from state sales tax, such as food, agri­cul­tur­al products, pre­scrip­tion drugs, or so called “in­tan­gi­ble property” which is something that has no physical substance. In­di­vid­ual state laws can be quite complex, and something that counts as in­tan­gi­ble property in one state, may not count as in­tan­gi­ble property in another.

So far we have only discussed products, but services are also charged with sales tax. This happens less than with goods, but is more likely to occur when connected to products, such as a delivery charge. Some services are normally exempted from being charged sales tax, such as doctor’s services, dentist’s services, attorney services, as well as religious or­ga­ni­za­tion’s services. Again, make sure you check your local tax ju­ris­dic­tion reg­u­la­tions to ensure you’re charging the right kind of tax.

Cal­cu­lat­ing sales tax is simple. A pocket cal­cu­la­tor is all you’ll need. Al­ter­na­tive­ly, there are many programs on the internet that make the process easier for you – these include doing the tax look-up for you, in case you operate in different counties and states.

The following method shows the simplest way of cal­cu­lat­ing sales tax.

Cal­cu­lat­ing the total cost of an item

1. You sell something for $50 , so now multiply this by the sales tax rate.
2. Just as an example, the sales tax in Niwot, Boulder County, Colorado is 5.985%, so we’ll take that as our sales tax rate.
3. The cal­cu­la­tion is: 50 x 0.05985 = 2.9952. This means that the sales tax is $3 (rounded)
4. Add this to your original price, and you’ve got cal­cu­lat­ed your sales tax!

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