Forty-five out of the fifty U.S states, and Washington D.C., all have sales tax. Sales tax is a small percentage of a retail sale and is charged by sellers (online or brick & mortar) at the point of sale.
Sales tax is governed at the state level in the U.S. This means that every state can set their own sales tax laws, including setting different rates, rules, taxable products, due dates, fines, penalties and more.
This means collecting the right amount of sales tax can get complicated for sellers who have to deal with sales tax in more than one state.
Let’s break down how charging sales tax in the U.S. works:
Statewide sales tax rates
Each of the 45 U.S. states (plus Washington D.C.) with a sales tax rate gets to set a statewide rate. These rates generally vary from 4-6%, but can be higher or lower. A handful of states only have a statewide sales tax rate.
Example:
The statewide sales tax rate in Connecticut is 6.35%. There are no local sales tax rates in Connecticut. So if you are required to collect sales tax in Connecticut, you would charge a flat 6.35% sales tax rate to all of your Connecticut customers.
City and County sales tax rates
Cities and counties located within U.S. states may also have their own sales tax rate. These rates are combined together to make a total rate.
Example:
The combined total sales tax rate in Mustang, Oklahoma is 8.85%. This combined sales tax rate is made up of the following individual rates:
As an online seller, if you are required to collect sales tax in Oklahoma, then you are required to collect the full combined 8.85% sales tax rate when selling to a customer in Mustang, Oklahoma.
District sales tax rates
Some “districts” span more than one city or county. These “district taxes” may be passed when a collection of local areas want to raise revenue for something like a mass transit system or education.
Example:
The city of Centennial, Colorado is part of two special taxing districts – the Regional Transportation Tax District and the Scientific and Cultural Facilities District. So in this case, the total combined sales tax rate of Centennial, CO is made up of the following tax rates:
As if this weren’t complicated enough, some states have different tax structures for different types of items.
For example, in Illinois, a state with no local sales tax rates, the state sales tax rate is 6.25% for most tangible property. But the sales tax rate for qualified food, drugs and medical appliances is just 1%.
And in New York, clothing priced at $110 or less is tax exempt, but some counties can still levy local taxes on all clothing. So you may find yourself charging no New York state sales tax on clothing, but still charging city, county and special taxing district sales tax to your customers.
Essentially, if you sell items that are often taxed differently – like food & groceries, clothing, prescription drugs, software-as-a-service, digital goods, supplements or alcohol, you may have to deal with more complicated sales tax rates.
The TaxJar SmartCalcs Sales Tax API offers accurate sales tax rates & calculations at the state, county city and special taxing district level. No more fussing with rate tables or chasing down tax changes (and they do change often!). You’re sure to charge the customer the right amount, every time.
Guest blog by Jennifer Dunn, Chief of Content, TaxJar
Jennifer Dunn is chief of content at TaxJar, the leading sales tax solution for ecommerce businesses. TaxJar helps more than 9, 000 online sellers collect, report and AutoFile the right amount of sales tax so you can get back to doing what you do best - running your ecommerce business.