subject: Sales Taxes In The United States [print this page] Sales taxes in the United States are taxes added onto the price of goods or services that are purchased in the United States. A sales tax is a tax on consumption, which is displayed as a percentage of the sale price. Sales taxes are assessed by every state except Alaska, Delaware, Montana, New Hampshire and Oregon. Hawaii has a similar tax although it is charged to businesses instead of consumers. In some cases, sales taxes are also assessed at the county or municipal level..
The sales tax is the responsibility of the merchant to collect and remand to the state, and stated separately (or implicitly added at the time of sale) to consumers. Usually only consumers are charged the tax; resellers are exempt if they do not make use of the goods. In some jurisdictions, a reseller's certificate is required to make use of this privilege. This is in contrast to a value added tax (VAT), where resellers are also taxed (resellers may then claim the VAT paid on their purchases from the applicable authority). States which have exemptions for specific types of organizations (such as schools), may also require a certificate. A sales tax audit is the examination of a company financial documents by the state tax agency to verify if they have collected the correct amount of sales tax from their customers.
The United States Constitution limits the power of the states to subjects within their jurisdiction. Jurisdiction over interstate commerce is reserved to the federal government. Nevertheless, a resident of a state with a sales tax who purchases goods from a place with no sales tax (or at a lower rate) might be subject to pay a "use tax" (often at the same rate as the state sales tax) for non-exempt purchases (see also tax-free shopping). Washington, D.C. policymakers have also looked at replacing the income tax with a national sales tax, or adding a national value added tax in combination with an income tax as a way to generate additional revenue.
History
In 1921, West Virginia became the first US state to enact a sales tax. Georgia passed legislation enacting a sales tax in 1929. Eleven other states enacted sales taxes in 1933. By 1940, at least 30 states had a sales tax. Currently, 45 of the 50 U.S. states levy a sales and use tax against purchases. Alaska, Delaware, Montana, New Hampshire, and Oregon are the exceptions.
Impact of sales taxes
Sales taxes are often implemented with the effect of being "regressive" on income (using a cross section time-frame), since low income families spend a greater share of their income on taxable consumption in a given year. Sales taxes can be applied to tangible goods like food (in some states), clothing, cars, furniture, household items, and other goods that make up the bulk of lower-income and middle-income family budgets. By comparison, the sales tax does not generally apply to landscaping services, attorney fees, private school tuition, stocks and bonds, real estate investments, and other purchases more typically made by higher-income families.
The effect on the distribution of economic welfare differs with each state and their implementation of a tax. In addition, sales taxes do not apply to all goods, services, and investments made by various families, creating differing impacts on families at different income levels. Many states attempt to offset regressive effects by exempting necessity goods (like groceries) from the sales tax base. Some states have also worked to expand the sales tax to services, not traditionally taxed, in part as an effort to address fairness and the shift to a service economy. The sales tax also poses equity issues between those who can avoid the sales tax by buying on-line and those who shop locally. The Streamlined Sales Tax Project is an organized effort by states to standardize tax law among states and ultimately begin taxing Internet and mail-order sales in order to address this equity challenge.
Other types of state tax systems can have similar distributions of tax incidence. The Tax Foundation states that corporate taxes accounted for 6.3 percent of low-income households tax bills last year and estimate that American households pay $3,190 on average in corporate income taxes per year. Sales taxes are often seen as good tax systems for economic growth, savings, and investment. Economists at the Organisation for Economic Co-operation and Development studied the effects of various types of taxes on the economic growth of developed nations within the OECD and found that sales taxes are one of the least harmful taxes for growth.
States and federal districts
Alabama
Alabama has a state general sales tax of 4%, plus any additional local taxes which can amount to a combined total sales tax of up to 12% in some cities. Alabama is one of several states that do not exempt food from state taxes. The capital of Montgomery has a sales tax of 3.5%. The largest city of Birmingham has a sales tax of 4%.
Alaska
There is no state sales tax in Alaska; however, local governments (boroughs and their municipalities) may levy up to 7%, and 108 of them do so. Municipal sales taxes are collected in addition to borough sales taxes, if any. Regulations and exemptions vary widely across the state. Anchorage and Fairbanks do not charge a local sales tax. The capital of Juneau has a 5% sales tax rate.
Arizona
Arizona has a transaction privilege tax (TPT) that differs from a "true" sales tax in that the tax is levied on the gross receipts of the vendor and is not a liability of the consumer. (As explained in Arizona Administrative Code rule R15-5-2202, vendors are permitted to pass the amount of the tax on to the consumer, but remain the liable parties for the tax to the state.) TPT is imposed under sixteen tax classifications (as of November 1, 2006), with the tax rate most commonly encountered by Arizona consumers (e.g., for retail transactions) set at 5.6%. The current tax as of 2009 is 6.3%, though cities and counties can add as much as 6% to the total rate. Food for home consumption and prescription drugs (including legend drugs and certain prescribed homeopathic medication) are two of many items of tangible personal property that are statutorily exempt from the state retail TPT, but cities can charge tax on food and many do). Arizona's TPT is one of the few excise taxes in the country imposed on contracting activities rather than sales of construction materials. The capital and largest city of Phoenix has a 2% TPT rate.
Arkansas
Arkansas has a state sales tax of 6%, plus any additional local taxes, for instance Little Rock charges a 0.5% city sales tax.
Effective July 1, 2009, Arkansas state sales tax on unprepared food (groceries) reduced to 2% from 3%. Sales taxes on groceries had previously been reduced to 3% from 6% on July 1, 2007. Local sales taxes on groceries remained unchanged.
California
At 8.25%, California has the highest state sales tax, which can total up to 10.75% with local sales tax included. Sales and use taxes in the state of California are collected by a publicly elected tax commission. The statewide 8.25% is allocated as:
8.25% - State
5.00% - State - General Fund
0.25% - State - Fiscal Recovery Fund
0.50% - State - Local Revenue Fund
0.50% - State - Local Public Safety Fund
1.00% - Uniform Local Tax
0.25% - Local County - Transportation funds
0.75% - Local City/County - Operational funds
On April 1, 2009 the state sales and use tax increased by 1% as a result of the 2008-2009 California budget crisis. The minimum sales tax statewide is 8.25%.
Supplementary sales tax may be added (with voter approval) by cities, counties, service authorities, and various special districts (such as the Bay Area Rapid Transit district). The effect is that sales tax rates vary from 8.25% (in areas where no additional taxes are charged) to 10.75% (as of July 1, 2009, the city of South Gate and Pico Rivera increased their sales-tax rate to this level, the highest in California). For instance, the capital of Sacramento has a combined 8.75% sales tax rate, and the largest city of Los Angeles has a combined 9.75% sales tax rate.
The last changes to the published local tax rates took effect on April 1, 2007. Official updates are published on the Board of Equalization website and also in Publication 71.
In general, sales tax is required on all purchases of tangible personal property to its ultimate consumer. Services are not subject to sales tax (but may be subject to other taxes).
Vehicle purchases are taxed based on the city and county in which the purchaser registers the vehicle, and not on the county in which the vehicle is purchased. There is therefore no advantage in purchasing a car in a cheaper county to save on sales tax (a one-percent difference in sales tax rate would otherwise result in an additional $300 loss on a $30,000 car).
In grocery stores, unprepared food items are not taxed but vitamins and all other items are. Ready-to-eat hot foods, whether sold by supermarkets or other vendors, are taxed. Restaurant bills are taxed. As an exception, hot beverages and bakery items are tax-exempt if and only if they are for take-out and are not sold with any other hot food. If consumed on the seller's premises, such items are taxed like restaurant meals. All other food is exempt from sales tax.
Also excluded are food animals (livestock), food plants and seeds, fertilizer used to grow food, prescription drugs and certain medical supplies, energy utilities, certain alternative energy devices and supplies, art for display by public agencies, and veterans' pins. There are many specific exemptions for various veterans', non-profit, educational, religious, and youth organizations. Sale of items to certain out-of-state or national entities (mostly transportation companies) is exempt, as are some goods sold while in transit through California to a foreign destination.
Occasional or one-time sales not part of a regular business are exempt, except that sales of three or more non-food animals (puppies, kittens, etc.) per year are taxed.
There are also exemptions for numerous specific products, from telephone lines and poles, to liquid petroleum gas for farm machinery, to coins, to public transit vehicles. There are partial exemptions for such varied items as racehorse breeding stock, teleproduction service equipment, farm machinery, and timber-harvesting equipment. For an organized list of exemptions, with estimates for how much revenue the state loses and the people saves for each, see Publication 61 of the Board of Equalization.
Sales tax is charged on gasoline. The tax is levied on both the gasoline and on the federal and state excise taxes, resulting in a form of "double taxation" (if the money used to purchase the gas had already been subject to income tax, as would be the case with a California resident, the scheme results in a rare form of triple taxation). The sales tax is included in the metered price at the pump. The California excise tax on gasoline is 18 cents a gallon.
Motor vehicle gasoline and jet fuel are subject to special taxation regimes. In 2005, there was a political dispute in the San Francisco Bay Area about whether revenues for jet fuel should be credited to San Mateo County (where San Francisco International Airport is physically located), the City and County of San Francisco, which owns the airport, or Alameda County, where Oakland International Airport is located. (The distinction is largely point of delivery vs. point of negotiation for the sale.) This is controlled by Regulation 1802, which has other provisions about businesses which have multiple locations.
Critics of the current sales tax regime charge that it gives local governments an incentive to promote commercial development (through zoning and other regulations) over residential development, including the use of eminent domain condemnation proceedings to transfer real estate to higher sales tax generating businesses.
Colorado
Colorado's state sales tax is 2.9% with some cities and counties levying additional taxes. Denver's tangibles tax is 3.62%, with food eaten away from the home being taxed at 4%, most unprepared food (groceries) are exempt. There is also a football stadium tax, mass transit tax, and scientific and cultural facilities tax. The total sales tax varies by city and county. Total sales tax on an item purchased in Falcon Colorado would be 4.9% (2.9% state, 1% county, and 1% RTA). Most transactions in Denver and the surrounding area are taxed at a total of about 8%. The exact sales tax rate for Denver is 7.72%.
Connecticut
Connecticut has a 6% sales tax, with no additional local taxes. Most non-prepared food products are exempt, as are most prescription and nonprescription medications, all internet services, all magazine and newspaper subscriptions, and textbooks (for college students only). Most clothing costing less than $50 per item is also exempt; items costing more than $50 are charged sales tax on the entire price.
Shipping and delivery charges (including charges for U.S. postage) made by a retailer to a customer are subject to sales and use taxes when provided in connection with the sales of taxable tangible personal property or services. The tax applies even if the charges are separately stated and applies regardless of whether the shipping or delivery is provided by the seller or by a third party. No tax is due on shipping and delivery charges in connection with any sale that is not subject to sales or use tax. Shipping or delivery charges related to sales for resale or sales of exempt items are not taxable. Likewise, charges for mailing or delivery services are not subject to tax if they are made in connection with the sale of nontaxable services.
Delaware
Delaware does not assess a sales tax on consumers. The state does, however, impose a tax on the gross receipts of most businesses. Business and occupational license tax rates range from 0.096 percent to 1.92 percent, depending upon the category of business activity.
District of Columbia
Washington, D.C. has a sales tax rate of 6.00%. The tax is imposed on sale of tangible personal property and selected services. A 9% tax is imposed on liquor sold for off premises consumption, 10% on restaurant meals and rental cars, 12% on parking, and 14% on hotel accommodations. Groceries, prescription and non-prescription drugs, and residential utilities services are exempt from the District's sales tax.
The District once had two sales tax holidays each year, one during "back-to-school" and one preceding the holiday shopping season. The 'back to school' tax holiday was repealed on May 12, 2009.
Florida
Florida has a general sales tax rate of 6%. The tax is imposed on the sale or rental of goods, the sale of admissions, the lease, license, or rental of real property, the lease or rental of transient living accommodations, and the sale of a limited number of services such as commercial pest control, commercial cleaning, and certain protection services. There are a variety of exemptions from the tax, including groceries and prescriptions.
A "discretionary sales surtax" may be imposed by the counties of up to 1.5%, charged at the rate of the destination county (if shipped). This is 1% in most counties, 0.5% in many, 1.5% in very few such as Leon, and 0.25% in one county. A few have none at all. Most have an expiration date, but a few do not. Only the first $5,000 of a large purchase is subject to the surtax rate. Most counties levy the surtax for education or transportation improvements.
There are annual sales tax holidays, such as a back-to-school holiday on clothing, books, and school supplies under a certain price, as well as one in June 2007 to promote hurricane preparedness. The 2008 Legislators did not enact any sales tax holidays.
Florida also permits counties to raise a "tourist development tax" of up to an additional 6% on hotel rooms.
Georgia
Georgia has a 4% state sales tax rate. Groceries are exempt from the state sales tax, but still subject to tax by the local sales tax rate. Counties may impose local sales tax of 1%, 2%, or 3%, consisting of up to three 1% local-option sales taxes (out of a set of five) as permitted by Georgia law. These include a SPLOST, a homestead exemption (HOST), and one for public schools which can be put forth for a referendum by the school board instead of the county commission (in cooperation with its city councils). Also, the city of Atlanta imposes an additional 1% municipal-option sales tax (MOST), as allowed by special legislation of the Georgia General Assembly, solely for the purpose of fixing its water and sewerage systems.
As of July 2008, total sales tax rates in Georgia are 3% for groceries and 7% for other items in the vast majority of its 159 counties. A few counties charge only 2% local tax (6% total on non-grocery items), and four partially exempt groceries from the local tax by charging 2% on food, and 3% (7% total) on other items. Fulton and DeKalb counties charge 1% for MARTA, and adjacent metro Atlanta counties may do so by referendum if they so choose. For the portions of Fulton and DeKalb within the city of Atlanta, the total is at 8% (4% on groceries) due to the MOST.
Similar to Florida and certain other states, Georgia has two sales tax holidays per year. One is for back-to-school sales the first weekend in August, but sometimes starting at the end of July. A second usually occurs in October, for energy-efficient home appliances with the Energy Star certification.
Georgia has many exemptions available to specific businesses and industries. To identify potential exemptions, businesses and consumers must research the laws and rules for sales and use tax and review current exemption forms.
Hawaii
Hawaii does not have a sales tax, but it does have an excise tax which applies to nearly every conceivable type of transaction (including services), and is technically charged to the business rather than the consumer. Unlike other states, rent, medical services and perishable foods are subject to the excise tax. Also, unlike other states, businesses may or may not show the tax separately on the receipt, as it is technically part of the selling price. 4.0% is charged at retail with an additional 0.5% surcharge in the City and County of Honolulu (for a total of 4.5% on Oahu sales), and 0.5% is charged on wholesale. However, the state also allows "tax on tax" to be charged, which effectively means a customer is billed 4.166% (4.712% on Oahu). The exact dollar or percentage amount to be added must be quoted to customers within or along with the price. The 0.5% surcharge on Oahu was implemented to fund the new rail transport system. The use of an excise tax means tha
