Calculate sales tax

Sales tax is a tax that is paid to a tax authority for the sale of goods and services. Sales taxes can also be referred to as retail, excise, or privilege taxes, depending on the state. Sales tax is paid by the buyer and is collected by the seller. The seller has the obligation to remit the tax to the proper tax agency within a prescribed period.

Sales tax provides a state or local government with funds for public services. Some examples include improving education, building and maintaining infrastructures (roads, parks, and government-owned buildings), and hiring firefighters or police officers.

The sales tax rate can change based on your location because each state in the US has the authority to impose a sales tax. There is no federal law that tells states the rate to charge. Each state and local government can set the rate at a percentage within their state guidelines. For example, the rate on a sale in Massachusetts is 6.25% across the state, but if you shop in Texas, the rate can range from 6.25% to 8.25%.

Sales tax is generally required in all states that impose it. As a buyer, if a seller fails to charge you a sales tax, you’re not required to pay the sales tax. As a seller, if you fail to collect and/or pay a sales tax, and the tax authority determines it’s due, the authority will assess penalties and interest. They can ultimately take assets or put liens on them, which can have negative effects on your credit.

Use tax is a tax on goods or services purchased outside of a buyer’s home state and/or that they didn’t pay sales tax on. The buyer pays this tax to the tax authority, usually on a state income tax return. Sales tax and use tax rates are generally the same. They are based on the location where the item was consumed or “used.”

There are 45 states and the District of Columbia that require businesses to collect sales tax. If you sell goods (and certain services) in one of these states you are responsible for calculating, collecting, and paying sales tax. Each state has its own set of laws and rates for sales tax. On top of state requirements, counties, cities, and districts may have their own sales tax requirements.

When it comes to sales tax, there are several types of nexus, but the most common are:

Physical nexus – To have a physical nexus with a state is to have a sufficient physical presence in that state. The physical nexus obligation exists in all states. Physical nexus can be created by:

• An office
• An employee or sales people
• Providing services
• An independent contractor that provides services to your customers
• A warehouse

Economic nexus – To have economic nexus in a state is to have made a certain amount of sales or a certain number of transactions into that state. Economic nexus obligations already exist in multiple states with additional states enacting economic nexus rules in light of the 2018 Supreme Court decision in South Dakota v. Wayfair.

Bottom line is that if you have nexus in a state (physical or economic nexus) you have an obligation to collect and remit sales tax for taxable sales within the state.

In the past, online sellers typically would not need to collect sales tax for out of state sales if they did not have a physical presence in the state. Recent tax laws have changed this and now sellers are responsible for collecting sales tax on shipped items if they have an economic nexus with a state. Online sales tax varies from state to state and is dependent upon if you have nexus with that state.

Keeping track of sales tax can get messy, but we’ve got your back. QuickBooks sales tax automatically applies applicable sales tax rates to your invoices. We take into account all the variables and apply the correct rates every time.