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> Information provided on this site is for general guidance only and is often simplified. Actual IRS procedures are complex, and taxpayers should obtain professional assistance or use IRS sources for complete information.


Introduction
Sales taxes are imposed in the United States by state and local administrations, of which there are more than 40,000.

Table Of Sales Tax Rates
The rates of sales tax in individual states, and average total rates by state.

The Multi-State Tax Commission
The Multistate Tax Commission is a joint agency of state governments established to improve the fairness, efficiency and effectiveness of state tax systems as they apply to interstate and international commerce, and preserve state tax sovereignty.

Business Activity Taxes
Some states attempt to tax out-of-state corporations on their in-state sales.



Introduction

Sales taxes are imposed in the United States by state and local administrations, of which there are more than 40,000. Merchants (shops and other sellers) charge the customer a combined rate which bundles together the state tax with the tax of the locality in which they sell. Depending on the locality, the merchant then either pays on the tax to the state administration, which unbundles it and remits the locality's share, or pays the state and the local administration their shares separately.

A seller has to charge sales tax if it has 'nexus' where it is located. Nexus, or substantial physical presence, is established if a business maintains a temporary or permanent presence of people (employees, service people or independent sales/service agents) or property (inventory, offices, warehouses) in a given locality. There is no over-arching definition of nexus, so each taxing locality may define it differently - and many do, leading to endless problems for businesses which have operations in multiple states.

Not all products are subject to sales tax, and states differ in the exemptions they offer. Food and clothing is commonly excluded, as are many pharmaceutical products; purchases for agricultural and sometimes manufacturing use are also frequently excluded. The rates of sales tax may also vary within a state for different types of business. All but five states impose a general sales tax at the state level (Alaska, Delaware, Montana, New Hampshire, and Oregon are the exceptions), but even in these five states some localities impose their own sales taxes, and some of the five impose sales taxes on particular products or services.

Although from the buyer's perspective, a sales tax is a sales tax, in actuality there are varying legal bases for the tax: in some cases the tax amounts to a 'privilege' tax charged on the retailer's turnover, in other cases the tax is nominally imposed on the buyer, and there are hybrid situations as well. The legal basis of the tax can affect how it is described on invoices, bills or receipts, and can affect the calculation of the amount due, for instance in regard to discounts, although, needless to say, states differ in their treatment of discounts.

A sales tax is a tax on the end-purchase of a good, or in other words a retail sale, so it normally does not apply if a sale is for re-sale or for subsequent processing. Most states define a retail sale very broadly, including for instance credit and instalment sales, trade-ins and exchanges. Normally sales tax is levied on 'tangible personal property'; it has to be movable, so that real estate is not included. Intangible property (eg stocks and bonds) are also excluded.

In October 2007 Senators Lamar Alexander (R-TN) and Bob Corker (R-TN) joined Sen. Kay Bailey Hutchison (R-TX) in reintroducing a bill to make the state sales tax deduction permanent.

“This is a simple matter of tax fairness and common sense,” explained Corker. “Tennessee is fortunate not to have a state income tax, but Tennesseans should not be penalized for this on their federal tax returns. Making the state sales tax deduction permanent keeps more money in the pockets of hard-working families and it’s the right thing to do.”

Alexander and Corker said that losing this deduction – which was set to expire at the end of that year if Congress does not act – would cost Tennesseans more than $200 million.

Tennesseans don’t pay a state income tax on wages. In order to be treated fairly with other states whose residents are allowed to deduct their state income taxes from their federal income taxes, Alexander and Corker said Tennesseans should be able to deduct their sales tax payments.

Nationwide, state, and local sales tax collections account for about a quarter of total state tax revenue, which is about the same as property taxes and income taxes. But the current provision allowing Americans to deduct state and local sales taxes from their federal income tax return is not permanent.

Under the leadership of Senator Alexander and Senator Bill Frist (R-TN), Congress passed a tax relief bill in 2004 permitting the sales tax deduction for two years. Congress extended the deduction for another two years in 2005.

Tennessee is not the only state that would be unfairly impacted by the expiration of the sales tax deduction. Seven states – Alaska, Texas, Florida, Wyoming, Washington, South Dakota, and Nevada – do not have a state income tax. Two states – Tennessee and New Hampshire – only impose an income tax on interest and dividends, but not wages.

Historically, services have normally escaped sales taxation, but recently many states have begun to broaden the scope of their taxes to include some services, particularly if they are ancillary to or linked with tangible sales.

Since a state does not have authority to tax outside its borders (other than when an out-of-state business has nexus in the state) it is tempting for buyers to make their purchases from sellers in other states; and this is especially true when a state's sales tax applies to purchasers rather than to sellers. States have attempted to extend the reach of their sales taxes to cover out-of-state vendors, but the Supreme Court has consistently refused to allow this. For this reason, most states have 'use' taxes alongside their sales taxes, which typically apply to 'use, storage, or other consumption' within the state where the tangible personal property is located.

Use taxes can be easily ignored by individuals, of course, and often are, with impunity, but businesses have more difficulty in ignoring them. Goods bought for out of state for re-sale would not be caught by a use tax, but a shop that bought fittings out of state would be liable.

As regards international transactions, the existing rules are clear about sales of physical products delivered in the United States: if the seller is in a country with which the United States has a double tax treaty (almost all high-tax countries) then there is no sales tax unless the company has a "permanent establishment" in the United States; for other countries (including almost all offshore jurisdictions) products are taxed on arrival if the sale is "effectively connected with the conduct of a US trade or business".

The advent of the Internet has made something of a nonsense of the structure of sales and use taxes, since a seller in one state may distribute products to buyers in many other states, without tax being collected at any point. This subject is dealt with in the section on sales over the Internet, and the states attempted answer to the problem is described in the Streamlined Sales Tax Program section.

From time to time, there is discussion over the introduction of a Value Added Tax (VAT). In October, 2009, t he Center for Freedom and Prosperity Foundation (CF&PF) warned that imposing a federal value-added tax (VAT) in the United States would lead to more spending, bigger government and a higher tax burden, following comments from senior Democrats and Obama administration advisors that such a tax would be desirable.

Given the rising federal deficit, set to hit USD1.8 trillion this year, the hefty price tag of the imminent health care reforms and the fact that President Obama's tax reform panel is due to report its recommendations by the end of this year, it is perhaps not surprising that this debate is happening again; a similar debate about consumption taxes was had around the time President Bush created his own tax panel in 2004. However, this time, it seems that opinion is crystallizing in favor of the tax in the places of power rather than in lecture halls and committee rooms.

Talking on the subject of tax reform on PBS's Charlie Rose show recently, House Speaker Nancy Pelosi, a California Democrat, said that "somewhere along the way, a value-added tax plays into this," before going on to add: "Of course, we want to take down the health-care cost, that's one part of it. But in the scheme of things, I think it's fair to look at a value-added tax as well." John Podesta, an Obama advisor, has also suggested that VAT is worth looking at, in a "small and progressive" way.

However, according to the CF&PF, the evidence from Europe, where most countries impose VAT at rates averaging about 20%, the evidence that such taxes achieve their goals is far from convincing.

BACK TO TOP

Introduction
Sales taxes are imposed in the United States by state and local administrations, of which there are more than 40,000.

Table Of Sales Tax Rates
The rates of sales tax in individual states, and average total rates by state.

The Multi-State Tax Commission
The Multistate Tax Commission is a joint agency of state governments established to improve the fairness, efficiency and effectiveness of state tax systems as they apply to interstate and international commerce, and preserve state tax sovereignty.

Business Activity Taxes
Some states attempt to tax out-of-state corporations on their in-state sales.

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