How does state sales tax work

In the U. But some items, usually those considered necessities, are not taxable in some states. In other cases, these items are taxed at a different or reduced rate. For example, in Illinois, groceries are taxable at a reduced rate of one percent. This is another area where sales tax can get tricky for online sellers.

Some states consider a shipping charge to be an integral part of a sale, and thus taxable. In their eyes, if you are an online seller, then you must ship the item to your buyer to get it to them, so shipping is part of the sale. Some states consider shipping charges non-taxable since they are separate from the price of the item.

As an online seller, you need to know if your state considers shipping charges taxable. Of course, you can avoid having to keep all that straight by offering free shipping. Remember how states all have different rules for sales tax? Never is this more apparent to retailers than when it comes time to file their sales tax return. In most states, sales tax is due on the 20th day of the month after the taxable period ends.

However, plenty of states break from that rule: Sometimes sales tax is due on the 15th of the month, the last day of the month, or some other date. A use tax differs in that it applies where a good is purchased from an out-of-state retailer who is selling the good within California but does not have sales nexus within California such that they are required to collect sales tax.

The applicable tax rate is the same for both sales and use taxes. As a business owner, you are responsible for paying the sales tax to be remitted to the CDTFA and you carry the liability for any unpaid amounts. However, you may pass the cost of that sales tax onto the consumer as long as the buyer is made aware that they are paying sales tax as part of the transaction.

Business owners must have a permit in order to collect sales tax and should register for the permit as soon as possible. The current tax rate in California is 7. In Santa Barbara County, for example, an additional 0. There are a number of exemptions to the obligation to remit sales and use taxes. Some of these exemptions exist in an attempt to promote certain types of industry or consumer choices.

An example is the current such exemption on fresh, but not prepared, foodstuffs. Other exemptions are in place so that the same item does not give rise to two sales tax charges. Thus, items purchased for resale, or to various out-of-state entities usually transport companies or which are in transit to an overseas destination, are exempt.

Other examples of exempt sales include sales of certain food plants and seeds, sales to the U. Government and sales of prescription medicine. The list of exemptions is long and detailed, so if you are not sure if your business falls under those headings, you may wish to clarify with the DOE. A comprehensive list is available as Publication In general, businesses which provide a service that does not result in a tangible good are exempt from sales tax, as it only applies to goods.

For example a freelance writer or a tradesperson is not required to remit sales tax, although a carpenter making custom furniture is so required. Presence at trade shows or conventions for more than 15 days in a calendar year will also establish nexus.

If you are selling to a customer who has an exempt status, you must collect a California Sales Tax Exemption certificate and keep it on file. If you are audited, you will be expected to produce this as proof that you sold an exempt item. If you are a reseller, you may also apply for a California Resale Certificate, which allows you to buy goods within California for resale without paying sales tax on those goods.

Nearly all states in the U. Sales taxes go into the general fund to help pay for education, health care, public pensions, and other programs. Sales taxes can also be collected for special programs or specific areas of the state. Sales tax can be up to 10 percent or more on certain purchases. A district can be an entire county or part of a municipality. District taxes are approved by the local voters and are used for special services, such as libraries, or general services.

Use tax is typically collected by the retailer at the time of sale, but it is imposed on items for use in California but purchased outside of the state. The seller is responsible for paying the correct amount of tax to the CDTFA and almost always collects it from the purchaser. If the seller does not remit the taxes, they are then subject to additional tax charges, applicable penalties, and interest charges.

Sales and use taxes are collected on the retail sale or use of tangible personal property within the State of California. Some services require sales tax to be collected as well, but it can get tricky.

It includes services such as machine or equipment set-up, fabrication, or assembly. Installation and repair, on the other hand, are not taxable usually but installation and set-up sound like the same type of services. Construction is another service where it can be debated whether sales tax applies. If you think that is complicated, shipping and handling are worse.

California has unusually complex rules surrounding shipping which can be tax-exempt, partially taxable, or fully taxable depending on the situation. If you do not keep accurate records of your shipping costs, include delivery charges in the cost of the product, or deliver it using your own vehicle instead of a common carrier, the shipping charges may be fully taxable and you, as the seller, are stuck for it.

There is a long and detailed list of items that are not taxable, but generally, the following are tax exempt:. Looking at these lists, you can see the delineation between taxable and tax-exempt can be anything from the fact that the item in question is a human necessity, like food, to non-profit organizations to tax breaks provided to encourage certain industries to operate in the state.

It seems like for each exemption or exclusion there is an exception to the rule. Let us take a look. For a detailed list of tax-exempt items, the CDTFA puts out a Sales and Use Tax publication that shows the exemptions and exclusions to the tax, some of which have expiration dates. As you may have guessed, the top necessity of life is food. However, the exemptions can appear complicated because the CDTFA looks at a variety of items that may not seem to be food but are related in a way that allows tax exemption.

For example, most food products for human consumption are easily recognized but where and how they are sold impacts the exemption. Food that falls under the following conditions is considered taxable:. However, there is an exception. Hot bakery items or hot beverages such as coffee sold for a separate price are still tax exempt.

The justification for the tax exemption on food products sold through a vending machine is just as convoluted. AMZN to pay sales taxes despite their lack of physical presence in the state. In general, sales taxes take a percentage of the price of goods sold. At the same time, some products carry special taxes, known as excise taxes.

The U. In most of the developed world, value-added tax VAT schemes have been adopted. In the fuzzy sock example above, the yarn maker would pay a percentage of the difference between what they charge for yarn and what they pay for wool; similarly, the garment maker would pay the same percentage on the difference between what they charge for socks and what they pay for yarn.

Put differently; this is a tax on the company's gross margins , rather than just the end user. The main objective of incorporating the VAT is to eliminate tax on tax i. This would translate to a higher amount of total taxes paid, which is carried down to the end consumer in the form of higher costs for goods and services. Congressional Research Service. Accessed Dec. Organisation for Economic Co-operation and Development. Income Tax. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.

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