Sales tax is a type of indirect tax that applies to most purchases in the US. Whether someone in the US is making a purchase or selling an item to a customer, they will probably need to consider sales tax in the transaction.
In the US, sales tax is managed at the state and sometimes even the city level. Each of the 46 US states with a sales tax has different rates and rules, which can make calculating sales tax a challenging task. This guide looks at calculating sales tax in the US, including when sales tax should be collected from customers.
What's in this article?
- How sales tax is calculated in the US
- When sales tax should be collected from customers
How sales tax is calculated in the US
In the US, sales tax is a percentage of a sale, so the amount of sales tax owed will always be based on the sale price of the item being purchased or sold. Here are the steps for calculating US sales tax:
- The correct sales tax rate at the point of sale should be determined by researching each US state and jurisdiction individually. Average US state sales tax rates, combined with local tax rates, are generally between 6% and 9%, but they may be as high as 11.5%.
- Once the correct sales tax rate has been determined, the rate should be translated into decimal format by dividing the sales tax rate by 100. For example, 5% would become 0.05.
- The price of the item should then be multiplied by the sales tax rate in decimal format:
Price of item x sales tax rate in decimal format = sales tax amount - Finally, to get the total of the entire transaction, the sales tax amount should be added to the price of the item. This will become the transaction total, if there are no other fees or taxes to take into consideration.
For example, if a US$10 item is being purchased and the sales tax rate is 5%, the sales tax owed would be 50¢, making the purchase price US$10.50 (if there are no other fees or taxes involved).
When sales tax should be collected from customers
Before starting to research sales tax rates, the first step to collecting tax is for a business to register for a sales tax permit in the US state (or states) in which they have sales tax nexus. Sales tax nexus commonly occurs in two ways: physical or economic. Physical nexus means having enough physical presence or activity in a US state to merit paying sales tax in that state. Economic nexus means passing a state's economic threshold for total revenue or the number of transactions in that state. These thresholds vary by state – learn more about what creates economic nexus.
Businesses will also need to assess where they have met sales tax nexus requirements and register for a permit in those US states. To register for a sales tax permit, general business information will be needed and businesses should bear in mind that certain US states charge a small fee for registering. Registration is done online and you can review this comprehensive list to find the relevant registration link.