Sales tax is a way for states to generate revenue from retail purchases. It helps pay for essential services like schools, roads and fire departments.
Retailers must understand sales tax in order to prevent common compliance errors.
Sales tax is a type of tax levied on the sale of certain goods and services. It’s calculated as a percentage of the sale price, collected from buyers at time of purchase, then remitted to the government by retailers.
States and local governments use this revenue to pay for education, public safety, roads, parks, and other services. It’s also used to finance community development initiatives like public buildings or infrastructure improvements.
State and local governments often impose sales taxes on foods, accommodations, and other items purchased by individuals. This has caused controversy as it can significantly raise costs of food and lodging – especially for low-income people.
There are various exemptions from sales tax. Some of them are product-specific, such as certain types of food and groceries, over-the-counter prescription medications, medical devices, family planning items, machinery and chemicals used in research or development activities.
Some exemption certificates are based on the type of buyer, such as foreign missions and their members. Generally speaking, states require sellers to claim their exemption certificates in good faith.
State regulations also impose penalties on taxpayers who fail to file sales and use tax returns, regardless of jurisdiction. These sanctions may range in amount but usually involve audits or proposed adjustments to the amount due.
Some states allow blanket exemption certificates that remain valid as long as a buyer makes exempt purchases from the same seller. To maintain validity, buyers must provide the seller with an updated blanket certificate every year. If there are changes to the seller’s address, identification number or other information listed on the certificate, then it must also be updated by the seller.
If a business has any sort of nexus with a state, they must collect and remit sales tax to that jurisdiction for every sale made within that territory. Nexus requirements can be complex and vary based on the size of the enterprise.
In today’s digital and remote world, states are seeking new ways to generate revenue from out-of-state sellers. As a result, states have moved away from traditional physical presence standards towards other types of nexuses which offer greater flexibility without requiring businesses to be physically present.
Furthermore, many states have passed Marketplace Nexus laws which require marketplace facilitators to register and collect sales tax from participants. These policies may also impose notice and reporting obligations on individual retailers.
State and local governments depend heavily on sales tax for revenue. In fact, sales tax accounts for nearly one-third of all state government revenues, ranking second only to income tax as the primary source.
Tax rates are determined by a variety of factors. Two key ones are how businesses use sales taxes and whether or not municipalities add their own taxes.
In New York State, each county adds an additional sales tax between 3% and 4.5%. Furthermore, counties within the Metropolitan Commuter Transportation District (MCTD) collect an additional 0.375%.
The state offers a range of resources to assist businesses with collecting, reporting and remitting state and local sales taxes. For instance, our publication 718, New York State Sales and Use Tax Rates by Jurisdiction, contains rates per jurisdiction that can be found on our website.