How to calculate sales tax in the US

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  1. Introduction
  2. How to calculate sales tax
  3. When to collect sales tax from customers

Sales tax is a type of indirect tax that applies to most purchases in the US. Whether you are making a purchase or selling an item to a customer, you will likely have to consider sales tax in the transaction.

Sales tax is managed at the state and sometimes even city level. Each of the 46 states with a sales tax has different rates and rules, which can make calculating sales tax a challenging task. Here’s a guide to calculating sales tax, including when to collect sales tax from customers.

What’s in this article?

  • How to calculate sales tax
  • When to collect sales tax from customers

How to calculate sales tax

Sales tax is a percentage of a sale, so the amount of sales tax you owe will always be based on the sale price of the item you are purchasing or selling. Here are the steps to calculating sales tax:

  1. Determine the correct sales tax rate at the point of sale by researching each state and jurisdiction individually. Average state sales tax rates, combined with local tax rates, are generally between 6% and 9%, but they may be as high as 11.5%.
  2. Once you have determined the correct sales tax rate, translate the rate into decimal format by dividing the sales tax rate by 100. For example, 5% would become 0.05.
  3. Multiply the price of the item by the sales tax rate in decimal format:
    Price of item x Sales tax rate in decimal format = Sales tax amount
  4. Finally, to get the total of the entire transaction, add the sales tax amount 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 you are purchasing a $10 item and the sales tax rate is 5%, the sales tax owed would be 50¢, making your purchase price $10.50 (if there are no other fees or taxes involved).

When to collect sales tax from customers

Before you begin researching sales tax rates, the first step to collecting tax is to register for a sales tax permit in the state (or states) in which you 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 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.

You’ll also need to assess where you have met sales tax nexus requirements and register for a permit in those states. To register for a sales tax permit, you’ll need general business information, and keep in mind that certain states charge a small fee for registering. Registration is done online, and you can review this comprehensive list to find the relevant registration link.

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