How Do State and Local Sales Tax Work?

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How Do State and Local Sales Tax Work?

Author: Stephanie Gallegos
Published on: 11/30/20 4:32 PM
Last modified on: 08/3/21 11:18 AM

State and local sales tax are levied on transactions between sellers and buyers. The sellers must collect and remit the sales tax. Continue reading to learn more about how state and local sales tax work.

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What is Sales Tax?

Sales tax is the tax levied by states on the transactions between sellers and buyers. These transactions are usually when a customer buys goods from the seller. However, in some states services may also be taxable.

Not all goods are subject to tax in all states and exemptions are made. Additionally, some goods are subject to a different rate than other goods. For example, food is exempt in most states, and in others the rate on food is lower than the general rate.

Sales tax became popular with states during the Great Depression and revenue from property tax was greatly reduced. It was first introduced in West Virginia in 1921 with roughly half of the states enacting laws before the US entered World War II. The remaining states followed through the 1960’s.

The process is easy for customers as they are charged the tax when they pay for goods and services. For vendors it is more of a process. They must register for the tax, start collecting the sales tax from their customers using the correct rate, and then remit the tax to the state by filing a return.

What is the Difference Between State and Local Tax?

In some states sales tax is broken into state and local portions. In Texas, for example, there is a state portion, and then local portions that are broken down by county, city, or local districts. 

A local district is usually something used for a specific project, like a hospital, a fire district, a library, or a sporting arena. Each state handles how the funds are distributed differently. Some states use a formula to determine how the local tax is distributed, others use a more accurate accounting.

Is Local Tax Collected Separately?

Each customer pays the sales tax and unless the vendor’s system breaks it out (which some do), the customer will never know how the tax is split. So, the local tax is not collected separately. However, the vendor may need to report it in separate sections on a tax return but will make only one payment

But, in two states – Colorado and Louisiana – the vendor will have to file separate returns. In Colorado, some cities called “Home Rule” cities can levy a sales tax within city limits. These cities administer the tax and require separate returns and payments. The state of Colorado administers the state rate, counties and other cities and special districts. 

In Louisiana, the parishes (equivalent to the county) also administer the local tax, which can be parish wide, cities within the parish, and special districts within the parish. Only one return is due from each parish though, and an online electronic filing website makes it easy.

Are There States with No Sales Tax?

Yes. There are currently five US states that do not have a state sales tax – Alaska, Delaware, Montana, New Hampshire, and Oregon. However, in Alaska boroughs (the county equivalent) or cities can levy a tax. Vendors operating in Alaska should check with the local government to determine whether or tax collection is required. 

Additionally, New Hampshire has a restaurant tax of 9% that is like a sales tax. As a result, vendors should check with these state revenue departments to make certain that nothing sold is subject to a tax.

What is the Highest Sales Tax in the US?

10.25% is the highest rate in Chicago, Glendale, CA and Long Beach, CA. There are five states with the highest average ranging from 9.14% to 9.47% — Tennessee, Louisiana, Arkansas, Washington, and Alabama. While Texas does not have an income tax, rates can only go as high as 8.25%

How do I Get Set-up to Collect US Sales tax?

It can be easy but fairly time consuming for a vendor to register for sales tax. An application must be submitted to the state. You can step through the process using our registrations guides, or if you prefer we can handle the whole process from registration to filing using our Autofile Plus services.

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