A Brief Guide to Sales Tax

What is the Sales Tax? A sales tax is a tax levied on the purchase of certain products, which can be levied at the time of purchase or can be built into the price of the item. In the United States, the sales tax is imposed by most states, which all have different rules on what is taxed and at what rate they will be taxed. The seller will retain the sales tax from the purchaser and deliver the funds to the necessary government agency when required. Most foreign nations, especially European countries, instead use a value added tax. This type of sales tax is taxed when the item is manufactured and the seller will pass the price of the tax on to the consumer. How Sales Taxes are calculated In the United States, the sales tax is commonly only instituted by the state government, however some localities will include their own sales tax. Chicago is an example of one of the more complicated sales taxes, as taxes are collected by the 6.25% state, 1.25% city, 1.75% county and 1% regional transportation authority, totaling 10.25%. 1. Examples of State Sales Tax States vary greatly with the sales taxes that they impose. Some states do not impose any sales tax, while others may impose up to 10% for certain items in certain locations. The following are some examples of state sales taxes: - Five states do not have an income tax. They include New Hampshire, Delaware, Montana, Oregon, and Alaska. - California has the highest statewide sales tax at 8.25%, while Indiana, New Jersey, and Rhode Island have 7% sales taxes. - Most states exempt the sale of prescription drugs from sales tax, while some exempt necessities, such as food and clothing. 2. Other Forms of Sales Tax Most states also impose special sales taxes on specific products. Especially taxed are cigarettes and gasoline, which have much higher than average sales tax. The Federal government imposes an excise tax on gasoline, which adds on average 18 to 24 cents per gallon of gasoline. States may add additional excise taxes on top of the Federal excise tax, which vary greatly from state to state. Cigarette taxes are imposed by several states, on top of the federal excise tax of $1.01 per pack of cigarettes or other tobacco product. New York has the highest state tax on cigarettes, adding $4.35 in excise taxes per pack. About 80% of the costs of cigarettes go to the government either through these taxes or other required payments made through the manufacture and sale of cigarettes. 3. How Sales Tax Revenues are Used. Sales taxes collected by the states are used in numerous ways. They are collected by the state and put into the state treasury, which helps pay for statewide services such as the construction and maintenance of state roads, paying for the state police force, and providing state funding for schools and education. The Future of Sales Tax State sales taxes are often attacked as being inherently unfair to low income families, as they are taxed on an equal basis as people with much higher incomes. As a response, many states do not impose the sales tax on what is deemed a “necessity”, such as basic food, clothing , and shelter purchases. Instead, the focus has been turned to use sales tax for purchases of items that are consider more of a luxury. It remains to be seen whether the Federal government will move to unify sales taxes in order to create more equal taxation of all citizens.