How Does Sales Tax Work In The United States?

In the United States, sales tax is only added to some goods and some services, and some states don’t charge any sales tax at all. 

However, if you run a business where sales tax is required, you may have an obligation to collect sales tax from your customers and pay the correct amount to the state. Depending on sales volume, your business may be required to pay sales tax either monthly, quarterly or annually.

Who Sets The Rules For Sales Tax?

Sales tax is determined on a state-by-state basis. There is no federal sales tax, and states are not required to collect sales tax to fund their operations. In addition to state sales tax, some states allow local municipalities to collect local sales tax, which increases the total amount of tax/tax rate. 

Most states require sales tax. However, the range between the lowest and highest percentages is pretty significant!

Of the states that collect sales tax, Alaska has the lowest local rate and state sales tax. Alaskans pay only 1.76% in sales tax in some areas.

The five highest average combined state and local sales tax rates are in the following states:

• Tennessee (9.55%)
• Louisiana (9.52%)
• Arkansas (9.51%)
• Washington (9.23%)
• Alabama (9.22%)

States That Don’t Collect Sales Tax

There are only 4 states that don’t collect any sales tax at all. They are:

• Oregon
• New Hampshire
• Montana
• Delaware

These states have to rely on other means to fund their operational costs.

When Do Consumers Have To Pay Sales Tax?

Consumers in sales-tax collecting states don’t have to pay sales tax on every item they buy. 

Goods that are categorized as essentials are often exempt from sales tax. In many states, clothing, medication, medical devices, and groceries are exempt from sales tax.

In Tennessee, there are usually a few “sales tax holidays” throughout the year. During this brief period, ranging from a weekend to a month, sales tax is suspended on specified items. 

Examples include:

• A sales tax holiday on food and food-related items at grocery stores

• A sales tax holiday on clothing, school supplies, and computers

• A sales tax holiday on gun safes and other safety equipment

Sales tax is calculated and added to the point of sale for most items. It is usually not reflected in the sticker price of the item but is calculated based on that sticker price. 

When Do Businesses Have To Pay Sales Tax?

Businesses pay sales tax on most items that they purchase. However, some purchases are either sold tax-free or are eligible for a tax exemption with the proper application.

These include:

• Industrial machinery
• Agricultural equipment
• Fuel
• Medical supplies
• Research & development costs
• Wholesale items that will be sold in a retail setting to consumers

Related: 10 Everyday Business Purchases That Are Tax-Deductible

Chaliff + Associates: Ready To Help You Navigate Your Sales Tax Obligation

Sometimes, small businesses can feel overwhelmed by what they have to do to abide by sales tax rules in Tennessee.

Whether you sell items that are eligible for the tax holidays or not, you still have to collect the appropriate amount of sales tax, document sales tax correctly on your sales tax returns, and pay the appropriate amount to the state. 

Chaliff + Associates is a team of highly qualified CPAs and accounting professionals who can help your business abide by all state, federal, and local tax laws. We keep you in the know so that you can focus on growing your business!

Need help? Insight? Advice? Schedule a free consultation to tell us about your business and what your needs are. We’re here to help!