- Last Updated
- November 15, 2016
All the U.S. sales tax questions you never knew you had, answered.
- Why we even pay sales tax
- Reasons you may pay more or less sales tax than usual when buying online
- What to do if you think you were charged the wrong amount of sales tax
Most of us are accustomed to paying sales tax on the items we buy, whether we’re buying a tube of toothpaste or the latest model TV.
This guide is for anyone who has ever wondered why you pay sales tax, where the money goes, and what to do if you think you were charged the wrong amount of sales tax.
This guide will be especially useful for frequent online shoppers, who may find themselves paying variable amounts of sales tax on online purchases, or sometimes no sales tax at all.
About the Author
This guide was brought to you by TaxJar. TaxJar helps online businesses keep their customers happy be ensuring they collect the right amount of sale tax, from the right customers, every time.
What is Sales Tax Anyway?
The Short Answer: Sales tax is a tax on retail purchases. It is used to pay for state and local budget items like schools, roads and fire departments.
Sales tax is a consumption tax, and is generally charged on the sale of products from retailers to individual consumers.
When people in the U.S. hear the word tax, they generally think about the Internal Revenue Service. In fact, the IRS doesn't have anything to do with sales tax. Sales tax in the U.S. is governed at the state level. Forty-five states and Washington D.C. all have a sales tax. Each state sets their own sales tax rates, and makes their own sales tax laws and rules. This means you may find yourself paying sales tax at different rates, or sales tax on different types of items (like groceries and clothes) depending on what state you are in.
Sales tax is used to pay for state and local budget items like schools, roads and fire departments. Many areas rely on sales tax to fund their budgets, so they are very serious about collecting all the sales tax they are owed.
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How is sales tax calculated?
The Short Answer: Sales tax is a percentage of the sale price of an item that is then added on to the total price of the item.
To calculate sales tax, use this formula:
Total item price x 1 + sales tax rate = total sales tax
For example, let's say you are buying an item priced at $10.00 and the sales tax rate is 6%.
$10 total item price x 1.06 = $10.60
Sales tax rates can vary from state to state and even within counties or cities. If you need to look up a sales tax rate, check out [TaxJar's Sales Tax Rate Calculator](https://www.taxjar.com/sales-tax-calculator).
What Items Are Taxable?
The Short Answer: Most tangible products - products you can see and touch and otherwise perceive with your senses - are taxable. Most of the time services are not taxable.
But while both of those are rules of thumb, what products and services are and are not subject to sales tax can vary by state to state.
If you're wondering which products and services are taxable in your state, here are a few examples:
Digital Products (Books, Movies, Music, etc.)
You can also find more information about sales tax in individual states here
Who collects sales tax?
The Short Answer: When you make a purchase, the retailer generally collects sales tax from you.
But paying sales tax to a retailer at checkout is just the beginning. The retailer doesn't get to keep the sales tax he or she collects. Instead, they are required by law to pass the sales tax along to the state.
Most of the time, you'll be charged sales tax when you purchase a product (and sometimes a service.) Though in some cases sellers are not required to collect sales tax from you.
When you are buying something from a brick and mortar store, every customer pays the same sales tax rate.
Example 1:
Jo's Store is in Marietta, Georgia where the sales tax rate is 6%. All of Jo's customers would pay 6% sales tax on purchases made in-person, inside the store.
But, in almost every state, if you buy something online and pay sales tax on it, you'll pay the sales tax rate at the address where you have the items shipped.
Example 2:
Jo's Store also sells online to other customers around Georgia, those customers would pay the sales tax rate at the address where they had the items shipped. So if you live in Moultrie, GA where the sales tax rate is 7%, and order something from Jo's store, you would be charged the Moultrie 7% sales tax rate on that purchase.
But sometimes when buying something online you'll pay a slightly different sales tax rate.
How does sales tax work when buying online?
The Short Answer: When buying online, you'll usually pay the same sales tax rate you pay when buying something from a local store. Sometimes, however, you'll pay a slightly different rate or no sales tax at all.
Most of the time, when you're buying something online, you'll either pay:
- The sales tax rate at your home address (Remember, you can check your sales tax rate here)
- Just your state's base sales tax rate with no local rates added
- A sales tax rate close to the rate at your home address
- No sales tax at all
In the vast majority of cases, an online seller will charge you the sales tax rate at your home location. Though if you and the business are both located in the same "origin-based" state, they may be legally required to charge you the sales tax rate at their business location instead of your home location.
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If you live in one of these states, you may sometimes find yourself paying a slightly different sales tax rate than usual when shopping online
In some states, the amount of money the retailer charges you for shipping is taxable. In other states, shipping charges are not taxable.
Example 1: States where shipping charges are taxable:
Item cost: $10
Shipping Charge $2.99
$12.99 is the taxable total. You'll be charged sales tax on the price of the item and the shipping charges.
Example 2: States where shipping charges are not taxable:
Item cost: $10
Shipping Charge: $2.99
$10.00 is the taxable total, and you are not charged sales tax on shipping charges.
Also, in some cases, online sellers may charge you no sales tax at all.
Why do you sometimes pay no sales tax on online purchases?
The Short Answer: Some retailers are not required to collect sales tax on online purchases in some states. This depends on the retailer's business activities.
You are charged sales tax based on whether or not the seller is required to collect sales tax from buyers in your state.
Online sellers with "sales tax nexus" in your state are legally required to collect sales tax from you.
Businesses can have nexus for a number of reasons, including:
- A location in your state
- An employee in your state
- A salesperson, contractor or other personnel in your state
- A warehouse or inventory stored in your state
- Making temporary sales in your state, such as at a tradeshow
Buying online without paying sales tax feels awesome! But there is a downside to that. Most states also have "use tax" laws on the books.
This means that if a seller doesn't charge you sales tax on a taxable purchase, you are supposed to remit the amount you should have paid to your state. Most of the time states include a line on your state income tax form where they ask you to declare any use tax you owe.
A tax on purchases made outside your state on an item that will be used, consumed or stored in your state of residence, and which had no tax included at the time of the purchase. (Source: Investopedia
Of course, consumer use tax is extremely hard to enforce. Only the most organized and law-abiding online shoppers will keep track of how much sales tax they should have paid on a purchase had that purchase been taxable.
Some larger online marketplaces, like Amazon, are required by some states' laws to send out notifications to consumers reminding you of your use tax obligation. This only happens when you bought items from that marketplace without paying sales tax.
Here's an example letter sent from Amazon to residents in the state of South Carolina in early 2016:
Hello from Amazon.com,
As you may know, Amazon was not required to collect sales or use tax on orders delivered to South Carolina prior to January 1, 2016. However, South Carolina does require us to provide you with the notification below. Since Amazon is now required to collect tax, this will be the last notification you will receive on this topic.
REQUIRED NOTIFICATION:
You may owe use tax on purchases you made from Amazon during the previous calendar year. The amount of tax you may owe is based on the total sales price of the items you purchased during the calendar year unless an exemption exists under state law or you have already paid the tax. A sale is not exempt under state law because it is made through the Internet. The total sale price of purchases you had shipped to South Carolina in 2015 was $XXX.XX. This is the amount that you may include on your South Carolina use tax return to calculate the appropriate sales tax owed unless you have already paid the tax.
In addition, the South Carolina Department of Revenue requires us to provide you with the following links that you can use to get more information and pay any taxes due:
Use Tax: http://www.sctax.org/tax/use
Paying Your Use Tax: https://www3.sctax.org/DOREPAY
In other words, this letter was an attempt by the state of South Carolina to have Amazon assist them in collecting consumer use tax from Amazon's buyers. (Starting January 1, 2016, Amazon began collecting sales tax from South Carolina buyers, so they will no longer need to send letters like this out.)
What if you are charged the wrong amount of sales tax?
The Short Answer: Contact the retailer and express your concerns. Sales tax in the U.S. is so convoluted that often this is an honest mistake.
If a business charges you the wrong amount of sales tax on an online sale, first know that they probably aren't doing this maliciously.
Figuring out the correct amount of sales tax to charge an online buyer is exponentially harder than figuring out how much to charge a customer at a brick and mortar store. Here are just a few reasons:
- Each state's sales tax laws, including the rate online seller should charge, is slightly different
- Many states have hundreds of sales tax jurisdictions, and online sellers need to determine which jurisdiction your shipping address falls into
- Many jurisdictions have several sales tax rates – a city rate, county rate, and other special rates
- In some states charges to ship the purchase to your house are taxable; in some states they aren't
- Many states have sales tax exemptions for certain items, but because each state is different, it can be difficult for business owners to keep up with what is and is not taxable in each state
If you ever have a question about why you were charged a certain amount of sales tax, always contact the seller first. They may have a good reason for charging you the rate they charged you. And if not, they will more than likely be happy to refund you the excess amount of sales tax collected. You may even help them find a mistake in the way they're charging sales tax.
If the seller is unresponsive or refuses to work with you, you can also check with each state's department of revenue to determine if the seller has a valid sales tax permit.
Here are some scenarios where you may wonder if you were charged the right amount of sales tax:
I bought something from a seller outside my state, but was still charged sales tax. Is this legal?
Even though the seller may have a business address outside your state, she still might have sales tax nexus in your state due to other business factors. If you truly feel like you shouldn’t have been charged sales tax, we recommend contacting the vendor to ask why you were charged.
I bought a gift for someone and was charged an unexpected amount of sales tax. Why?
Sales tax is almost always calculated based on the “ship to” address of the product. So when you buy a gift for someone, you are paying the sales tax rate at their address. This will likely be different than the sales tax rate you are accustomed to paying when you order something shipped to your own home.
I live in a state without sales tax, but was charged sales tax on an online purchase. Why?
Sales tax is almost always calculated based on the “ship to” address of the product. If you had the product shipped to your home in a state with no sales tax, you should not be charged sales tax.
But if you had an item shipped to a location outside your state, you are likely paying the sale tax rate at the item’s “ship to” address. You can look up sales tax rates at TaxJar’s Sales Tax Calculator.
I live in a state with sales tax, but ordered something online and wasn’t charged sales tax. Is that correct?
Online sellers are only required to collect sales tax from buyers in states where they have sales tax nexus. Nexus is just a fancy way of saying a “significant presence.” If an online seller did not charge you sales tax, it’s more than likely that they simply don’t have nexus in your state and were not required to collect sales tax from you.
However, your state likely has a “use tax” law. This means that if a seller doesn’t charge you sales tax on a taxable purchase, you are supposed to remit the amount you should have paid to your state. Most of the time states include a line on your state income tax form where they ask you to declare any use tax you owe. These types of laws are very hard to enforce, and only the most organized online buyers keep track of “use tax.”
How do I know if an item is taxable in my state?
Most of the time retailers will charge you sales tax on items that are taxable in your state, and not charge you sales tax on the items that aren’t. But that said, sometimes retailers are unaware that items aren’t taxable in your state.
To see the taxability of some items by state, you can check out our Sales Tax by State guides, or contact your state.
What if I still have a question about sales tax?
If you still have a question about sales tax, start by contacting your state’s taxing authority. (This is usually called the “(State) Department of Revenue,” but may go by another, similar name.)
You can check with your state by:
If you have other sales tax questions, try searching for the answers on the TaxJar blog.
If you are an online seller who needs help collecting, reporting and filing sales tax, try a 30-day free trial of TaxJar.
When are the Tax Free Weekends?
The Short Answer: Tax free weekends, also known as sales tax holidays, vary from state to state. States can have sales tax holidays any time of year, and many states have tax free weekends in the fall as school starts. Some sales tax holidays are actually longer than weekends, too.
States can choose to declare "tax free weekends" where certain items are exempt from sales tax.
These sales tax holidays are in general intended to give consumers a break on expensive items like back to school supplies or energy efficient appliances, as well as stimulate the state's economy. (Though experts disagree on whether this is actually the case.)
The video below explains more about sales tax holidays:
What is the future of sales tax in the United States?
The Short Answer: Proposed legislation and pending court cases may soon mean that consumers pay sales tax on more items bought on the internet.
States are hard up for money, and they partially blame online purchases. In their view, when online sellers don't collect and remit sales tax to their state treasury, they lose out on revenue they could use to fund state budget items like schools and roads.
On the other hand, the law of the land as it currently stands means that online sellers with no sales tax nexus in a state are not required to collect sales tax from their buyers in that state. (Which is why you sometimes won't pay sales tax on a product you buy on the internet.)
In an added wrinkle, online buyers who do not pay sales tax on a purchase are supposed to remit the corresponding “use tax” to their state. However, “consumer use tax” is extremely unpopular and difficult to enforce. Rather than anger constituents by enforcing existing laws, states would much rather force out-of-state retailers (who don't have a vote!) to collect and remit sales tax.
Several laws have been introduced in Congress to ensure that states get their share of sales tax:
The Marketplace Fairness Act (MFA)
The Remote Transaction Parity Act (RTPA)
The Sales Tax Simplification Act of 2016
At TaxJar, we think only the Sales Tax Simplification Act of 2016 is fair to online sellers, as a consumer you may have a different view. Here are some pros and cons of internet sales tax:
Pros of Internet Sales Tax:
- States and local areas would potentially be able to collect more money to fund budget items like schools and roads
- Small and medium sized brick and mortar businesses won't feel like they are competing with online retailers who aren't required to charge sales tax
Cons of Internet Sales Tax:
- Small eCommerce businesses would be forced to comply with sales tax in all states, which is a regulatory nightmare even for businesses who can afford an army of accountants
- People who make their livelihood selling online could be driven out of business, harming the economy
- Consumer prices could go up as smaller online sellers are put out of business and competition is stifled
Further, some court cases are poised to overturn Quill v. North Dakota. This Supreme Court case set the precedent that only sellers with a significant presence in a state need to collect sales tax from their customers in that state. If the Supreme Court overturns this case, even more online sellers may find themselves collecting sales tax from even more online buyers.
Keep an eye out here to stay up to date on internet sales tax.
About the Author
This guide was brought to you by TaxJar. TaxJar helps online businesses keep their customers happy be ensuring they collect the right amount of sale tax, from the right customers, every time.
Next Steps
For more about TaxJar, to ask us a question, or to find out how to use TaxJar’s sales tax automation for your other online stores, visit TaxJar.com.