What is sales tax (and who is responsible for it)?
Sales tax is a percentage added to the price of goods and some services. The customer pays for it. The seller collects it and sends it to the tax authority.
The business does not pay this from its own money. It holds the customer’s tax and passes it on when due. But if the wrong rate is charged or the payment is late, the penalty falls on the seller, not the customer.
Rates are not the same everywhere. The US has no federal sales tax. Each state sets its own rate. Counties and cities stack their rates on top of that.
A shop in Austin and a shop in Houston charge different combined rates even though both sit in Texas. Before collecting anything, the exact combined rate for the business location needs to be confirmed.
How to use this calculator?
This calculator does three things. Pick the one that fits the situation.
1. Adding tax to a price. Put in the product price and the tax rate. The calculator shows the tax amount and what the customer pays in total. Use this when pricing products or writing a quote.
2. Extracting tax from a tax-inclusive price. Put in the total price and the tax rate. The calculator splits it into the pre-tax price and the tax amount. Use this when a price was quoted with tax included and the figures need to go into the books separately.
3. Finding the tax rate. Put in the pre-tax price and the final price. The calculator works out what rate sits between the two. Use this when checking if the right rate was used on a past transaction.
Retailers use the first most. Bookkeepers use the second. The third comes up when reviewing old records or during an audit.
When do you need to collect sales tax?
Sales tax is collected when a business has a connection to a state. This is called tax presence.
If a business has a physical location in a state, it must collect sales tax there. This includes a store, office, or warehouse. Even storing inventory in a warehouse in that state counts.
For online sales, tax is required once a certain limit is reached. In many states, this starts at $100,000 in sales or 200 orders in a year. After crossing this, the business must register and start collecting tax in that state.
Groceries are often not taxed. Prescription medicines are usually not taxed. Some states also do not tax certain items like clothing. Before collecting tax, check what is taxable in each state where the business sells.