What is Sales Tax?

Sales tax is a percentage or particular amount charged on goods or services and collected by a retailer. Sales tax payment isn't separated but added to the cost of a good. For every purchased item, a consumer pays the sales tax and it gets remitted to the government by the seller.  

In the United States alone, in well over 30 states, consumers pay combined local and state sales taxes on every product or service purchase. The remittance of these taxes from consumers is a responsibility of each business, and it's done quarterly or on a monthly basis.

To charge sales tax, businesses need a permit. Application for sales tax is accompanied by a fee charge in some regions, although some regions give sales permits free of charge.

Note that collected sales tax is to be remitted accurately and promptly by businesses to avoid huge penalties. 

What goods and services are subject to sales tax?

Sales tax charges do not cover all types of goods and services. Some are exempted such as groceries and medications or clothing in some regions. Other exempted products and services are raw materials and non-profit items. 

To account for sales tax, businesses exclude a certain percentage from revenue. For example, if Mr.X a retailer, sells a product worth $200, based on the percentage in that state, Mr. X will add between $15-$20 as sales tax to make a total of $215 or $220. However, only $200 counts revenue. 

Types of Sales Taxes

Sales tax falls into different categories and each has a few different components.

Vendor Privilege

Sales tax under vendor privilege is levied on businesses by the government. It's a form of licensing tax imposed on retailers where their business is located and operating. 

Excise Tax

Excise is imposed on seemingly unusual products like alcohol and cigarettes to mention a few. Due to the impact of the goods, excise tax charges are applied to discourage the use of such products. This type of tax is paid by wholesalers rather than retailers.    

State Sales Tax

Sales tax varies from state to state as mentioned earlier. It's usually a combination of state and local taxes which range from 7% to 10%, or even more.

In Louisiana for example, the sales tax is 9.45% which is a combination of 4.45% state tax and 5% local tax. In L.A, the sales tax is also 9.45% but the breakdown is different as 7.25% counts as state tax and 2/25% as county tax. Chicago, IL, USA has a more complex split. The sales tax in Chicago is 10.25%, 6/25% for the state, 1.25% as city tax, 1.75% for the county, and regional transportation tax of 1%.  

The breakdown above shows the difference also evident in other states. Often, many confuse value-added tax (VAT) with sales tax let's evaluate both.  

VAT vs Sales Tax

VAT is reoccurring, charged at every stage of the supply chain starting from manufacturers, suppliers, distributors, to retailers, and finally end-users. On the other hand, sales tax is collected majorly by the retailer from the end-user. The similarity between the two is that they are forms of indirect tax payments. 

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