Posts tagged ‘value added tax’

January 9, 2012

How Sales Tax Works

A sales tax takes the form of a charge added to the cost of a good or service. This is usually calculated as a percentage of the cost of the item. Sales taxes are usually automatically collected when a person makes a purchase at a store. Most register receipts will show you what percentage of tax was added to the sale.

General Sales Tax

The most common sales tax in the US is a general sales tax which is imposed on all or most purchases within a specific jurisdiction. In states without income taxes this is used to support the state government. In most areas it is used to support local governments such as the city or county or a special district.

The collection of this tax varies widely. In many places food purchased from grocery stores is exempt from it. Some states such as Colorado will not collect sales taxes on services. Others such as Texas tax services. If you run a home business or work as a freelancer in a state that taxes services you may need to charge or pay sales tax. The state tax agency can show you how this is done.

Other items that can be exempt are clothing, rent, medical services, medical equipment and prescription medicine. In many cases non-profit organizations and some businesses are exempt from the tax.

Collection of the Sales Tax

The sales tax is usually collected at the point of sale. That is it is paid by the business rather than the consumer. In some cases consumers will be held liable for state sales tax. A person who orders something from out of state via an online vendor or a catalog could have to pay the sales tax as part of the income tax. If there’s a state sales tax in your state you should check with your state department of revenue to see if you will have to pay it.

Sales Tax Rates

You can usually calculate what your sales tax rate is by adding up the sales tax on your receipts. Something to remember is that there maybe several levels of tax added to a purchase. The city, county, and special districts may add taxes to an item. That means the effective sales tax rate can often be much higher than you expect. Some urban areas such as New York City and Chicago effective charge sales taxes that are well over 10%.

Excise Taxes

There is no general federal sales tax in the USA but there are excise taxes. An excise tax is a levy that is charged on a specific item or product. The federal government charges excises taxes on vehicle fuel, tobacco, alcohol and a number of other products. The 2010 healthcare reform act added excise taxes on tanning salons and some high-dollar insurance policies.

Many state and local governments also charge excise taxes on certain items. Most states charge excise taxes on tobacco and alcohol. Recently there have been demands to charge excise taxes on fatty foods and fast foods.

Sales Taxes and Income Taxes

Something to remember is that sales tax can be deducted from your federal income tax. The IRS considers sales taxes a deductible expense. Some states with sales taxes on food, allow citizens to deduct those taxes from the state income tax.

Value Added Tax

There is no Value Added Tax or VAT in the United States. A VAT is a sales tax that is collected on all levels of a business transaction. A retailer would pay the VAT when it purchased an item from a wholesaler and when it sold the item to the customer. The VAT is the main sales tax used in Europe.

Steven Hart is a freelance writer and a Financial Advisor from Cary, IL. He writes about Annuity topics like Ordinary Annuity, Retirement Annuity, and Income Annuity.