Sales Tax in USA

Every economy to sustain development projects needs sources of funding. Sales tax worldwide has been major contributor for government funding.

In USA, sales tax is charged on sale of goods and services. It is a form of indirect tax, impact and liability is on different person. Sales tax is majorly governed at state and local levels.

Each state in USA have different sales tax laws and tax rates. Along with state sales tax rates, even local cities have different tax rates. For example, you may find 2 or 3 sales tax rates in your state, imposed by state and your local city municipalities. One can say, sales tax system in USA most complicated system.

Who need to pay sales tax?

Anyone selling a taxable product or service need to pay sales. Sellers collect sales tax from customers and pay to government. If you are selling any product which is not exempted, you will have to pay sales tax on the sale.

Every state have different sales tax laws and you need to check with state tax agencies if products are taxable.

What is sales tax cycle?

Sales tax cycle starts with sale of products and ends with payment and tax reporting.

• Seller Register with state tax agency
• Seller collects sales tax from buyer
• Seller pay tax to tax agency
• Seller files Sales Tax Return

Registration, Returns and Payments

Every state requires registration to charge sales tax. You have to register before collecting sales tax from customer. In some states, registration has to be done under state tax agency and also with city tax agency.

Every seller has to file sales tax returns. In Sales Tax Returns sellers have to report sales, purchase, tax collection and payment details. Even city authorities require separate tax reporting. You may be required to file monthly, quarterly and annual returns

Some states require monthly payments and some require quarterly payments. Each state has own rules with respect to payment of tax. States even have revenue based timeline for tax payment and returns.

In most of the states returns and payments can be done online using computer and internet.

Accounts, Audits and Penalties

You need to have proper book-keeping system to accurately assess and remit taxes. State tax agencies randomly audit dealers to assess tax reporting and accuracy of tax liability settled.

You need to maintain Sales Register, Purchase Register, Invoices and sales tax documents. Further states have different laws regarding maintenance of records and information.

State tax agencies examines returns to assess correctness of taxes paid and upon any finding may demand unpaid taxes.

All states have penalty provisions for non complying with sales tax laws. Penalties are imposed if you have not filed any of the required return or missed your payments.

Conclusion

Sales Tax System in USA is very complicated. Each state and city councils have different tax rates and requirements. It is even more complex when you have transactions in more than one state.

Penalties imposed on non compliance can further reduce your profit margins. It is advised to contact a good tax consultant to take care of your sales tax compliance, though if you have enough time you can manage paper works on your own.

Updated: March 31, 2020