In the United States when you go to the store to purchase something, let’s say we go to purchase a T shirt, we buy the T shirt and when we go to the register to pay we give them cash, a debit or a credit card and they give us a receipt. When you look at the receipt, you will notice that at the end of each receipt, before the total, there is a subtotal showing the cost of the purchase, then there is the added sales tax, then the total amount, which is what you are required to pay.
A sales tax is a consumption tax imposed by the state government on the sale of goods and services. A conventional sales tax is demanded at the point of sale, collected by the retailer, and passed on to the government by the seller, at given periods such as monthly or quarterly. A business is liable for sales taxes in a given state if it has a presence there which is also called a nexus, which we will cover in further detail in the next segment.
Conventional or retail sales taxes are charged to the end user of a good or service. Because the majority of goods in modern economies pass through a number of stages of manufacturing, often handled by different entities, a significant amount of documentation is necessary to prove who is ultimately liable for sales tax. Here’s an example: A cow farmer sells milk to a company that manufactures cheese and other milk products. To avoid paying the sales tax, the cheese maker must obtain a resale certificate from the government stating that the cheese making business is not the end user. The cheese maker then sells its product on to a frozen food manufacturer. The frozen food manufacturer must also obtain a resale certificate saying they are not the end user either. Finally, the food manufacturer sells the frozen foods to a grocery store, or sometimes a restaurant. When the grocery store sells the product, they will collect the sales tax from the customer, who is the end user. The grocery story, on the other hand, is not the end user and they too must obtain a resale certificate. It’s the same way for a restaurant. Once the restaurant prepares and sells the food to their customers, who are the end user, a sales tax may be charged.
Not all states collect sales tax on food products. In Florida and many other states, prepared food sold in restaurants or grocery stores is taxable, but in other states, Arizona, Georgia, Louisiana, Massachusetts, Michigan, Nebraska, Nevada, New Mexico, South Carolina, Vermont, and Wyoming, grocery items are not taxed. Restaurant tax requirements can be even more complicated. In some states, there is a separate type of tax rate for fully prepared and served food consumed dine-in. Pre-packaged food and beverage items as well as carry-out items may be subject to standard sales tax or may have a separate tax rate. It is important, if you are selling any type of food items, that you check the state sales tax requirements for the sale of grocery and prepared food items.
Here is another example: Sale of a cotton t-shirt. A cotton farm sells the raw cotton to a company that manufactures different types of fibers and textiles. To avoid paying the sales tax, the fiber manufacturer must obtain a resale certificate from the government saying that they are not the end user of that cotton. They make the fiber from the raw cotton, and they sell the fiber to a clothing manufacturer. To avoid paying sales tax, the clothing manufacturer must obtain a resale certificate from the government saying that they are not the end user of that product. They make T-shirts with that fiber, and they sell the T-shirts to a retailer. The retailer is not the end user either. When the retailer sells the T-shirts to the consumer, the end user, they add the sales tax which will be paid along with the price of the T-shirt.
It is important to keep in mind that different states charge different sales taxes, which can often overlap when states, counties, and municipalities each require their own sales taxes. This happens most often in large metropolitan areas like NYC, Denver, Miami, etc. In general, sales taxes take a percentage of the price of goods sold. For example, a state might have a 4% sales tax, a county in that state has a 2% sales tax, and a city in that county has a 1.5% sales tax, which means that the customers in that area will pay a total of 7.5% in sales tax.
The end user rule does not mean that sellers and manufacturers never pay sales taxes. For example, if a company produces electronic goods, it will not pay sales tax on the components it purchases to construct the goods, but it would pay sales tax on the purchase of safety equipment used by its staff. The equipment is not a direct part of the final product, so it is not exempt. The same with the shelves, displays, light fixtures, pay terminals and everything else we can see in a retail store or a grocery store. These types of items and equipment are purchased for use by the manufacturer or seller and are not resold to the public. In this case, the manufacturers, the retailers, grocery stores are considered the end user and are required to pay sales tax.
Here is a partial list of goods which are typically exempt from sales tax:
- Goods purchased for resale
● Components/ingredients purchased to create goods for sale
● Machinery and equipment that is directly used to create goods
● Containers and packaging used to ship goods for sale
In specific cases, a sales tax may be applied to the same item indefinitely. For example, a consumer might pay sales tax on the purchase of a new car. At a later date, when someone else buys the car, he or she may also pay a sales tax on the vehicle based on its adjusted value. This will continue as many times as the vehicle is sold.
Minnesota, Pennsylvania, New York, Vermont, Massachusetts, and New Jersey do not place sales tax on clothing. The majority of jurisdictions exempt food and drugs from sales tax. Oregon, New Hampshire, Montana, and Delaware do not have a state sales tax at all.
Alaska has no state-level sales tax but permits local jurisdictions to impose their own regulations. Michigan, Maryland, Kentucky, and Idaho impose state-level taxes, but do not permit localities to impose their own regulations.
Needless to say, the application of sales tax can be very confusing for the merchant and the consumer. Foreign visitors to the U.S. are often confused when sales tax is not included in the list price of retail goods.
When the internet became a significant presence in the economy, it caused a number of challenges for tax authorities, and it still does. The online world made it possible for consumers to easily and frequently purchase goods from other states, and now countries, causing confusion as to which tax rate was applicable to which goods. In 1992, the Supreme Court case Quill Corp. v. North Dakota determined that states could not collect sales tax on goods sold over the internet, unless the seller had a physical presence in the state. However, in June 2018, the North Dakota Supreme Court overturned that decision, citing the fact that it is now much easier for internet-based retailers to determine where buyers are located and therefore will be required to collect the correct sales tax.
Learn more about sales tax for life-coaching or similar service businesses…
Author: Sanda Kruger
Sanda is an entrepreneur, real estate investor, health coach and professional dancer. Sanda is an entrepreneur with more than 20-year experience in business development and project management in the fields of life, health and fitness coaching. She is also a real estate investor and a banker, who learned outstanding adapted business strategies, sales and marketing techniques, communication, and goal setting skills, hands-on, through life and work experiences. She is a certified fitness professional and is the creator of two original fitness programs, called BellyCore® Fitness and AquaCor®.
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