What is Sales Tax, and What is it Used For?

So exactly what is a sales tax? 

A sales tax is imposed by the government on the sales of goods and services – a conventional sales tax is taken at the point of sale, collected by the retailer, and passed back to the government. A business owner or service provider is liable for sales taxes in specific jurisdictions if they have a nexus there- so it can be a store location, an employee, etc.

Breaking it Down  

Conventional or retail sales taxes are charged at the end of a good or a service. Sometimes it can be hard to determine who is responsible, since most of the time goods and services can be passed through to the next person – like a manufacturer, or a broker – so documentation is necessary to prove who is liable for that sales tax. For example, since I like crafting, say I make a design that a t-shirt company wants to use. So that I am not responsible for the sales tax on selling the design to the company, I must obtain a resale certificate from the government saying, “hey, I’m just the middle man.” So I sell my design to a t-shirt company, so say they get a resale certificate too, because they are going to design these shirts and actually sell it to a retail store – so they aren’t responsible either. So the retail store will have to charge the customer sales tax along with the price of the t-shirt, since they will be the final responsible party in this arrangement – so they are the ones responsible for the sales tax audit.

There can be issues sometimes, when different jurisdictions charge different sales tax amount, and they can overlap, such as when states or counties or even cities at each level have their own sales tax. A sales tax is kind of like a ‘use’ tax, which applies to residents who purchase items from outside their jurisdiction (think online). So they have the same rate, but it may be difficult to enforce it. Usually this only comes in to play with a large purchase, like purchasing a car out of state – you would have to pay the sales tax in the state you purchased the car in, not your home state. (you can actually calculate sales tax based on the purchase price and zip code in this handy sales tax calculator)