What is Sales Tax?

What is Sales TaxMost new businesses or even curious consumers wonder what is sales tax. This tax is one of the simpler types of tax at its core but it can be complicated. The following guide will provide a brief yet in-depth overview of this particular type of tax.

How Do Businesses Collect And Pay This Tax?

Legally, all businesses operating in a particular jurisdiction are required to collect this tax on purchases. When a business is founded, it needs to be registered with state and local taxation agencies. The business will then be provided with information on the local tax rate of their business address as well as when and how to pay. This is a consumption tax, meaning it is paid per use. The customer is responsible for paying the tax which the company then passes on to the various state and local agencies.

What Is A Tax Rate For Sales?

Tax rates vary by jurisdiction and they do change occasionally. Some areas may not have tax on sales at all, or not for certain goods. Alternatively, this tax might be higher on other goods, usually products that can be harmful or costly to society. Often, tax rates combine into a total amount. Investopedia gives an example of a state with a 4% tax, a county with 2% and a city with 1.5%, meaning the retailer needs to collect 7.5% of the purchase price total when taxing a sale. Businesses are responsible for staying informed about changes to the tax rate so they continue to collect the correct amounts.

When Do Businesses Need To Collect This Tax?

Businesses generally need to collect this tax at the point of sale when a customer makes a purchase. However, the rise of online businesses has complicated this. Although state laws vary, businesses usually need to have a physical presence in a state to be required to collect and remit tax on sales made there. Some states are imposing this tax on online purchases, however. Fortunately, many digital payment processing systems are able to calculate that amount and add it to a sale automatically, though it is still up to the business to ensure the right amount is collected. This tax is not typically collected on the purchase of services.

What Does This Tax Pay For?

The revenue generated from this tax goes to pay for all kinds of state and local services. It usually goes into a general fund but sometimes may be allocated to paying for certain things. This tax typically helps pay for government-provided services such as road maintenance, education, health care, public employee salaries and law enforcement. It can also be used for special, specific projects that may have a definitive end date, such as public library expansions or infrastructure projects. Sales tax is just one of the ways governments receive the money they need to function and some states do not collect this tax at all.


This tax is an important way state and local governments generate revenue in order to provide services to their citizens. Most businesses that sell tangible goods collect this tax from their customers and then pay it to the government. Entrepreneurs looking to start any new business need to understand what is sales tax and be prepared to collect and remit it properly.

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