What is Sales Tax?

Published by Thomas Herold in Economics, Laws & Regulations

The term 'Sales Tax' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Sales Tax refers to a government imposed tax on consumption of both services and goods. Traditional sales taxes are collected at the appropriate points of sale. The retailers gather the money which they then pass on to the appropriate governmental agency. Businesses are also liable to pay such sales taxes to the relevant jurisdiction (state or local government) if they have what is known as a nexus in that jurisdiction. This could be an employee, physical office location, presence of some other type, or an affiliate. The laws of the jurisdiction in question determine which of these criteria apply in determining business residence.

Conventional forms of sales taxes only become charged to or are payable by the final seller of a service or a good. Since the overwhelming numbers of goods in today’s economies go through a range of manufacturing points and stages, they become a part and parcel of many different entities’ operations. This means that great quantities of paper work must be kept and filed in order to determine the end seller who will be finally liable for the sales taxes owed.

As an example to better understand the dilemma this poses, consider a sheep farmer. The farmer sells his wool to a firm which makes yarn. The yarn maker would be responsible for the sales tax unless it is able to gain a resale certificate from the responsible governmental agency. This certificate must declare that the yarn maker is not the final user. Next, the yarn maker will sell its yarn products to a clothing manufacturer. This manufacturer also has to get such a resale certificate. The clothing maker then sells its wooly sweater to an outlet store. It is this outlet store that must charge sales tax to its customers besides the price of the sweater.

The various jurisdictions all charge their own sales tax rates. This can be confusing as they are also overlapping on one another. In some localities, the state, the county, and even the municipality (city or town) will all levy their individual sales tax amounts.

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The nexus point raises an often-confusing set of issues for many businesses. They are only resident to a particular jurisdiction (state or locality) if the government there defines the nexus in a way that will call them resident for business purposes. Such a nexus is defined usually by the criteria of physical presence. Such a presence may not only be limited to maintaining a warehouse, factory, or office though.

It could mean that a company which has an employee who lives in the state will be considered to have a nexus. Partner websites (which direct traffic over to a business’ websites in exchange for cash payments), or affiliates, can also be considered to be part of a nexus. This illustrates the difficulties encountered between sales tax collection and the sprawling and growing arena of e-commerce. Bigger states like New York have enacted what they call “Amazon laws.” These make all internet retailers selling goods to customers in their states pay the sales tax, regardless of whether or not they maintain a physical presence in the state. The laws were named for the giant Internet retailers like Amazon.com.

Sales taxes usually work on a percentage basis of the goods’ prices. As an example, states could collect a five percent sales tax, while the county gets two percent, and the city one percent. This would mean the residents in that given city of the county would have to pay a total sales tax of eight percent.

Many necessary items can be exempt from these taxes to help the lower income earners. This includes food as well as sometimes clothing items which cost under $200 in total. Other taxes specially levied on only certain products are called excise taxes. Many of these the states refer to as “sin taxes.” In essence, this kind of excise tax would cover cigarettes and alcohol, which have been historically labeled by the churches as sins. New York State levies a $4.35 excise (and “sin”) tax on every pack of cigarettes, as of 2016.

The term 'Sales Tax' is included in the Laws & Regulations edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.