Many states and local governments impose a direct tax on consumption when you purchase goods and services.
Taxes when you spend
A sales tax is a direct tax on consumption that many states and local governments impose when you purchase goods and services. The amount of tax you pay is typically figured as a percentage of the sale price. As of 2023, 45 states and an array of counties and cities charge a sales tax.
Paying sales tax
As of 2023, five states, Alaska, Delaware, Montana, New Hampshire and Oregon, do not have a sales tax. Since sales taxes are based on fixed percentages, the only way to avoid paying it is to reduce your consumption or to make all of your purchases in one of the five states that don't impose it.
Sales tax exemptions
States usually exempt certain purchases such as prescription and nonprescription drugs and food items from sales tax. Of all the states that impose a sales tax, only Illinois charges the full rate of tax on these items. Just seven states charge sales taxes on food purchases. However, all seven offer a reduction in the rate rather than a full exemption, only charging from one to five percent on food purchases.
Collecting sales tax
Since sales taxes are imposed at the point of sale, merchants and service providers are responsible for collecting the tax and submitting it to the state. This requires many businesses that are likely to collect sales taxes to register with a state agency for a permit. This imposes an obligation on all merchants and service providers within a state to maintain records of all sales taxes collected and to make periodic payments to the government.
Online sales
The collection of sales taxes for online purchases has been a controversial topic over the years. Federal law prohibits a state from requiring a business to collect sales tax from customers in that state when the merchant has no connection with the state. For example, if a California company makes an online sale to a California resident, the company must collect sales tax. However, if the customer is a Wisconsin resident, then no sales tax is collected as long as the company doesn't have a location in Wisconsin. Alternatively, some states request consumer information from online retailers so the states can pursue the consumer directly and collect taxes for bring products into the state.
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