A consumption tax imposed by state or local governments on the sale of goods and services, collected by the seller at the point of sale and remitted to the taxing authority.
Understanding Sales Tax
Sales tax is a consumption tax levied by state and local governments on the sale of goods and certain services. The seller collects the tax from the customer at the point of sale and is responsible for remitting it to the relevant tax authority on a periodic basis (monthly, quarterly, or annually).
Sales tax rates vary significantly by jurisdiction — there is no federal sales tax in the United States. States set a base rate, and cities and counties may add additional local taxes, creating thousands of unique tax rate combinations. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no state sales tax.
For ecommerce sellers, sales tax compliance has become increasingly complex due to the 2018 South Dakota v. Wayfair Supreme Court decision, which allowed states to require out-of-state sellers to collect sales tax based on economic activity (economic nexus) rather than physical presence alone.
Why It Matters for Ecommerce
Sales tax compliance is one of the most challenging aspects of ecommerce accounting. Depending on where you have nexus, you may need to collect, track, and remit sales tax in multiple states. While marketplace facilitator laws shift the collection burden to platforms like Amazon, sellers must still ensure their books correctly account for tax collected and remitted.
Practical Example
You sell a $100 product to a customer in Texas (8.25% combined rate). The customer pays $108.25. You record $100 as revenue and $8.25 as sales tax payable (a liability). When you remit the $8.25 to the Texas Comptroller, the liability is cleared. The $8.25 is never part of your revenue.
Related Terms
Nexus
A sufficient connection between a business and a state that requires the business to collect and remit sales tax in that jurisdiction. Can be established through physical presence or economic activity.
EcommerceMarketplace Facilitator Tax
State tax laws that require the marketplace (e.g., Amazon, Etsy, eBay) — not the individual seller — to collect and remit sales tax on transactions. Now enacted in most US states.
EcommerceSales Tax Nexus
The specific threshold (physical or economic) that triggers a business's obligation to collect sales tax in a given state. Varies by state and can include office locations, employees, or inventory storage.
Related Tools
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