How to Calculate Sales Tax: A Simple Guide

  • Accracy
  • 26th Nov, 2023

Sales tax is a tax consumers pay when buying anything (usually products, but sometimes services). In the U.S., sales tax is a small percentage (usually 4-8%) of a sales transaction. Sales tax rates are set by states and local areas like counties and cities. Governments use sales tax to pay for budget items like fire stations or street sweeping.

How to Calculate Sales Tax: A Simple Guide
Tax Tips

If the products and services you sell are subject to sales tax, then you're required to:

  • Calculate how much sales tax to charge on each transaction
  • Collect the sales tax from buyers
  • Pass it on to your state's taxing authority by filing a sales tax return

Your state's taxing authority is generally called the "[State] Department of Revenue," but it may go by another name.

Do you need to charge sales tax?

Whether to charge sales tax depends on a few things.

Is what you are selling taxable?

Most "tangible" property in the U.S. is taxable. This includes items you can touch and feel like furniture, coffee cups and books. Since sales tax is governed at the state level, some states have decided not to tax necessities like groceries, clothing or textbooks. Check with your state's taxing authority to find out if the products you sell are taxable.

In most cases, services are not taxable, though some states have changed that in recent years. If you are a service provider, such as a graphic designer or plumber, double check with your state to ensure that you aren't required to collect sales tax.

What state is your customer in? And do you have nexus there?

Five states have no sales tax: New Hampshire, Oregon, Montana, Alaska, and Delaware. So you're not required to collect sales tax when making a sale to a buyer in that state.

That means every other state has a sales tax. The good news is that you are only required to collect sales tax in a state where you have "sales tax nexus." Nexus just means that you are subject to a state's sales tax laws. You'll always have sales tax nexus in the state where you operate your business. But other business activities may give you nexus, too. Employees, a physical store, a warehouse presence and other business activities create sales tax nexus. If you have nexus in a state, then that state generally requires you to collect sales tax from buyers in the state.

Sales tax laws are also changing fast. A recent Supreme Court ruling stated that you may have sales tax nexus in a state if you make a large amount of sales in that state. We recommend using an online sales tax nexus tool or speaking with a sales tax expert if you need help collecting sales tax.

Calculating sales tax (how much to charge)

If you sell from one location, like a retail storefront, find out your local sales tax rate and charge that rate to all customers. You can find your sales tax rate with a sales tax calculator or by contacting your state taxing authority. If your local sales tax rate is 8.5%, then you would charge 8.5% sales tax on all transactions. This is as long as the item you're selling is subject to sales tax.

If you sell online, figuring out the amount of sales tax to charge can get complicated for a couple reasons.

Sales tax generally depends on the ship-to location of the item

When selling online, you first need to determine if you are required to collect sales tax from buyers in your buyer's state. Next, you need to determine the sales tax rate at the buyer's location.

There are over 10,000 sales tax jurisdictions in the United States. And the sales tax rate you charge depends on your buyer's shipping address. For example, the sales tax rate in Atlanta, GA is 8.9%, but the sales tax rate just outside the city limit is 7%. To collect sales tax when selling online, you must determine if your customer lives within the Atlanta city limits or outside them.

If your customer lives in Atlanta proper, you'd charge them 8.9% sales tax. But if they live outside the city limits, you'd only charge 7%.

Sales tax rates are a combination of multiple taxes

The reason the sales tax rates in and around cities like Atlanta vary is because the total sales tax rate is made up of smaller rates. Each state sets a statewide sales tax rate. Then counties, cities, special taxing districts, and other local areas are allowed to add on more sales tax.

Let's look at the sales tax rate in the city of Atlanta as an example. The Georgia state sales tax rate is 4%. Atlanta is in Fulton County, which sets a sales tax rate at 3%. And then the city of Atlanta sets an additional sales tax rate of 1.9%. Add those three different taxes up, and you get the Atlanta total sales tax rate of 8.9%.

Taxing Jurisdiction Sales Tax Rate
Georgia 4%
Fulton County 3%
City of Atlanta 1.9%
Total Sales Tax Due 8.9%

The good news for ecommerce sellers is that most online shopping carts and marketplaces will calculate sales tax on your behalf. You only need to provide the origin point of your shipment (your home, warehouse, store, etc.) and the item's delivery address. From there, the shopping cart calculates how much sales tax your buyer should pay and adds it to the total. If you're not required to collect sales tax from that buyer, then the cart won't add sales tax.

You can also use a sales tax calculator to figure out the right sales tax amount to charge your buyers.

Once you've calculated the total amount of tax, you add that to the purchase price to get the total price of the item you're selling.

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