Use this guide to help understand US sales and use tax rules. If you have specific questions about laws specific to your state, contact your accountant or visit your state's sales tax website.
Learn about:
- Types of Sales Tax
- States that have sales tax
- Products and services subject to sales tax
- Amount subject to sales tax
- Nexus and sales tax
- Sales tax sourcing
- Sales tax exemptions
- Partial sales tax
- Fees versus sales tax
- Streamlined Sales Tax
- Sales tax in QuickBooks Online
Types of Sales Tax
- Sales Tax: a tax on goods and services collected within a state. For example, sales where the ship-to and ship-from are in the same state.
- Use Tax: typically complements the sales tax, but applies to sales across states. For example, sales where the ship-to and ship-from are in different states. Use Tax can apply to a seller or a purchaser. The Seller’s Use Tax is collected and remitted by the seller. The Consumer’s Use Tax is a self-assessed tax that is remitted by the purchaser. Sales Tax Sourcing below will cover this in more detail.
- Gross Receipts or Transaction Privilege Tax: the gross proceeds of a sale determine this tax, and it is paid by the seller.
- Excise Tax: a privilege tax applied to a business for its activity in a state, typically based on gross income. This is applied similar to a sales tax and the seller can choose to pass the tax on to the consumer or not.
States that have sales tax
45 states impose sales and use tax at the state level. The 5 that do not are the NOMAD states: New Hampshire, Oregon, Montana, Alaska, and Delaware.
Many states, including Alaska, allow local taxes. These local level taxes may be imposed at the county, city, district, or transit level and are administered either by the state or by the locality. These localities are known as a “home rule” jurisdiction.
Products and services subject to sales tax
- Tangible Personal Property (TPP): TPP is defined as any movable object that has substance and value. TPP is generally taxable unless specifically exempt under state law.
- Services: a service is any action performed by one party for the benefit of another party. Services are usually exempt unless specified as taxable under state law. In some states, services are taxable unless specified as exempt.
Amount subject to sales tax
When calculating sales and use tax, you have to know the tax base (the amount subject to tax). This includes whether deductions, if any, are taken before or after tax is calculated. Some of these deductions include:
- Retailer coupons
- Manufacturer’s coupons
- Shipping charges
You also need to know where the tax applies (tax point), so you’re always calculating the correct rate, especially in states with local tax.
- Sales Tax: The tax point occurs at the sale of the product. If it’s a taxable service, then the tax point will often be the time the service is performed.
- Use Tax: The tax point occurs at the time property is stored, used, or consumed in the jurisdiction.
Nexus and sales tax
Nexus is the physical presence in a jurisdiction that requires a seller to collect tax. The rules on what a nexus is vary by state. Here are some examples:
- Physical location in jurisdiction such as a store
- Property in a jurisdiction
- Sales presence in the jurisdiction
- Trade Shows
- Providing services in a jurisdiction
- Deliveries in company owned vehicles
- Affiliate or 3rd Party nexus, which requires taxation without a significant physical presence in a jurisdiction.
There are other things you should be sure to understand when considering nexus.
- Dependent or independent nexus: for states that have local level taxes, be sure you understand at which levels you have nexus.
- Voluntary nexus: A state won’t stop you from registering and collecting tax, regardless if the nexus threshold is met. In some cases, a customer might request the seller to collect tax to minimize use tax requirements. In other cases a company might be closed, but may have had nexus while it was open during the reporting period. Lastly, the seller may register as a voluntary seller under the Streamlined Sales Tax Project (SSTP).
Sales tax sourcing
Sourcing, also called tax situs, is the location where sales tax applies. This is important in states that have local county, city, and/or district taxes. Sales taxes at the local level in addition to the state level, can make it difficult to determine the proper sales tax for some transactions. Transactions which occur between locations in two different states, are sourced to the destination. Learn about nexus tax obligations for sales in another state.
Types of sales tax sourcing
There are commonly two types of sourcing rules, called “destination-based” and “origin-based.” Most states use destination-based sourcing, but there are a few states that use origin-based sourcing.
- Destination-based sourcing means that you charge sales tax at the “ship-to” address.
- Origin-based sourcing means that you charge sales tax at the “ship-from” address.
Visit your state’s tax agency website to learn which sourcing rules apply. California especially has unique sourcing rules.
Sourcing for services
Generally, for most services, states will say the situs is the ship-to location. As such, tax will be calculated based on the location where services are performed.
This applies in both origin-based and destination-based states. Some states have special rules regarding the sourcing of service-based transactions. Check your local and state laws when you enter into business.
Sales tax exemptions
Products and services might be exempt in certain circumstances. Here are some examples:
- If there is a public policy reason for it. These items are exempt no matter who the purchaser is. Examples include food, clothing, utilities, and medical items.
- If state law contains an exemption based on the type of purchaser or the purpose of the purchase.
- Entity-based exemptions are for groups like the government, charities, religious organizations, and schools.
- Use-based exemptions include agriculture, manufacturing, sale for resale.
Exemptions generally require documentation or certification. Each state may have their own set of qualifications and requirements, so always check.
Partial sales tax
There may be times when sales are taxable, but not fully taxable. These can be either caps or thresholds.
- Caps can result in a tax only up to a certain amount of value (taxable amount cap); in only collecting a certain amount of tax (total tax cap); or limit the total state and local tax rate that can be imposed. Examples to illustrate this include:
- Tax is only charged on the first $5,000 of the sale
- A 1% tax on certain items up to a total of $80 in tax
- Local tax can be charged up to 2%
- Thresholds can start a tax at a certain dollar value or change a tax rate when you hit a certain dollar value. Examples to illustrate this include:
- The first $175 of a single item is not subject to tax, but if that item is more than $175, the amount over $175 is taxed at 6%.
- The rate is 3% for the first $5,000 of a transaction and 2% for the amount above $5,000.
Fees versus sales tax
Fees are a set % or dollar amount that are payable regardless of the purchaser’s sales tax exemption status. State law dictates if fees are included in the tax base or not.
- Environmental Fees on items such as tires, batteries, and e-waste.
- Location-related Fees such as Public Improvement Fees (PIFs) and Transportation Development District (TDDs)
Streamlined Sales Tax
The Streamlined Sales Tax Project (SSTP) was created in response to concerns about lost revenue due to sales over the internet by remote vendors. The goal of SSTP is to get laws passed to allow collection of taxes on remote vendors. Highlights of the SSTP include:
- 24 Member states
- Uniform sourcing rules
- No caps/thresholds for most items
- Uniform definitions for food, computer software, clothing, health-related items
- Central registration system where companies use one form to register in all SSTP states
- Provision for Certified Service Providers (CSPs) whose tax rules and rate calculations are certified for accuracy by the SSTP member states
Sales tax in QuickBooks Online
QuickBooks Online offers automated sales tax tracking to make your sales tax returns easier. With automated sales tax, QuickBooks automatically calculates sales tax based on what you sell, where you sell, and where you ship. If your state changes something, like the sales tax rate, QuickBooks automatically updates your tax rates for you.