What is sales tax? What is sales tax?

What is sales tax?

When you sell products or services, you will need to pay sales tax on every item sold. This is classified as a consumption tax and has been put in place by the government to ensure that the sale of goods and services brings income back into the local economy. Businesses will be liable for sales taxes depending on the state they live in and potentially the jurisdiction if it has a brick-and-mortar store, an employee, or a registered business address.

How sales tax works

Sales tax is charged at the point of sale for all products or services and is actually paid by the customer as part of the transaction. When you make a sale, your customer will pay a percentage of the purchase price in addition to the cost of the item, and you will be expected to pay it forward to the government (or relevant governing bodies) on a regular basis. As it isn’t paid directly to the government, it is considered an indirect tax.

Contrary to other parts of the world, the US doesn’t have a set national sales tax, but 45 states and a host of municipalities participate in protocols to generate funds from retail sales. All taxes collected will be distributed to the correct departments at the local, county, and state levels, where the cash will be delegated to meet the needs of the economy.

If businesses don’t have a connection within a specific jurisdiction, they won’t have to pay sales tax. This connection refers to a physical presence or sales representative, but it can even apply to the number of transactions or amount of sales that are generated from a specific state (again, each will have its own rules). If you purchase materials to make the products you sell, you may also be exempt if you have a retail certificate. There will also be differing rules for interstate commerce, dropshipping, remote services, and selling via online marketplaces, so you will need to properly do your research.

How to calculate sales tax

Calculating sales tax can be difficult, as the rules vary from state to state and municipality to municipality. Some states will have a predefined base tax rate that local governments can add their own tax on top of, and municipalities can contribute their own as well.

Because of this, there will be instances where the tax rate isn’t simply defined by the state the business is registered in. If there are multiple contributors to sales tax, then you will need to be aware that you will need to split the tax that you receive and pay each individual section to the correct taxing bodies.

It may be worthwhile to keep in mind that online sellers may not have to remit sales tax to the state and may have to charge a base tax rate to the state and nothing more. If you are unsure of what you need to do to remain compliant, it can be worthwhile to have the assistance or support of a reputable company formation service or similar legal entity.

There is a formula that you can follow to help you calculate it, and this will cover converting the tax percentage to a decimal number and multiplying the cost of the product by this to get the amount of tax required. Here is the simplified equation to help you see how it works.

  • Sales tax rate = Sales tax percent / 100
  • Sales tax = List price x Sales tax rate

When tax rates are expressed as a percentage, all you have to do is remove the percentage sign and divide the tax amount by 100. This will give you the decimal numbers needed for the tax rate. Once you have this, you can multiply the price of your product by the decimal tax number, and the result will be the tax amount. Add this to the final sale price of the goods at the point of sale.

Is sales tax deductible?

The good news is that sales tax is deductible and you can use any state and local general sales tax that has been remitted throughout the year. This won’t be possible if you deduct local income tax from your earnings, however. When it comes to deduction, simply compare what you paid in tax to what you paid in state local, and foreign income tax – and deduct the larger one.

5 states with no sales tax

Sales tax is used to fund a host of municipal and state necessities, ranging from infrastructure to community-level projects. There may be variances in how it is distributed from state to state and municipality to municipality, but the key aim is to insure a level of economical support. States that don’t require sales tax may generate funds in other ways, such as by increasing property prices or having higher tax brackets for other services.


When it comes to sales tax in Delaware you will instead have to pay a gross sellers tax. This will be paid by the seller and will be calculated on the total sales of goods and services.


The taxation protocols in Alaska state that its countries and boroughs can charge sales taxes, so if your business is operating here, be sure to check the areas that apply. The Alaska statewide sales tax rate is currently 0%. Individual municipalities have wide authority to set their own taxation rates, which can be as high as 7.5%.


Montana doesn’t apply sales taxes as a rule but will enable popular tourist destinations to require sales taxes on the municipal level.

New Hampshire

There is no sales tax on goods purchased in New Hampshire.


Oregon has no state taxes. Again, it is important to keep in mind that the rules and regulations vary, so you will need to ensure that everything is correctly calculated and paid to avoid potential issues, fines, or worse.

Get professional assistance from Workhy

If you are unsure about any aspect of your taxes, it is advisable to seek professional help. Workhy is here to provide not only company formation services for entrepreneurs worldwide but also to help you with tax filing, bookkeeping, registered addresses, opening online bank accounts, assisting with EIN & ITIN applications, and more. For more detailed information about Workhy and what we do, you can check out our website.

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