Overview of Sales Tax

Sales Tax

Sales tax is a method of taxation used by the United States of America to collect taxes. It is a one-time charge paid by the consumer when purchasing goods and services.

How does sales tax differ in the US?

Like other countries, the US does not have a nationwide sales tax; the taxes are levied by the state, county, and local authorities. Some US states have only a statewide sales tax with no local (city/county) taxes, and some states have only local sales taxes but no state-level sales tax.

For example, Connecticut has a state-wide tax of 6.25% but no local (city/county) taxes, whereas Alaska does not have a state-wide tax but has a local tax range of (1–7.5%).

States like Oregon do not have sales tax at any level.

Use tax

Use tax is a tax imposed on the use, storage, or consumption of goods within a state when sales tax was not collected at the time of purchase. This tax is the responsibility of the consumer.

For example, suppose you are an online seller from Utah who regularly ships gardening tools to a buyer in Georgia. You made $55,000 in Georgia sales last year, which is well below the state's economic nexus threshold. You are exempt from collecting Georgia sales tax because you have no physical or economic nexus in the state. However, the Georgia buyer uses the gardening tools in Georgia, which has sales/use tax laws. The buyer is responsible for filing and paying use tax with the Georgia tax authorities.

Tax exemption/Excise items

Since the tax is imposed by state and local governments, tax exemptions are also defined by them. Most states in the US exempt groceries, medications, healthcare equipment, basic utilities, agricultural equipment, non-profit organizations, charities, and resale purchases from sales taxes.

Excise items are goods and services that are subject to federal and/or state excise taxes. Manufacturers and distributors frequently pay excise taxes, which are then passed on to consumers at the final price. Examples include tobacco products, alcohol, gasoline, and financial services.

Sales tax eligibility

In the US, a business is required to collect and remit sales tax once it establishes either a physical nexus (a physical presence) or an economic nexus (by exceeding the state's sales threshold).

If your business meets either of these criteria, you must register with the appropriate state authorities and obtain a seller’s permit to legally collect and remit sales tax in that state.

Enable Sales Tax

You need to enable sales tax in order to have it reflected in all your modules.

Navigate to Settings > Taxes.

Click Enable Sales Tax.

Once enabled, you will be directed to the tax page with all options associated with sales taxes, exemptions, and tax authorities.

Create a New Tax

To associate a sales tax to your transactions, you need to create a tax with required information like name, tax authority, and rate.

Navigate to Settings > Taxes.

Click + New Tax.

Enter the required details and click Save.

Create a Tax Group

Most states in the US levy multiple taxes. To configure taxes for these states, you can start by creating individual taxes and grouping them together.

Utah has a state sales tax rate of 4.7%, a local sales tax rate of 1%, and a county option sales tax rate of .25%. A total sales tax of $5.95 will be levied on taxable items.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the + New Tax button and select New Tax Group.

Provide a name for the tax group and check the taxes you want the group to be associated with.

Click Save.

Create a Tax Exemption

Certain items and customers may be exempt from sales tax under US tax laws. To ensure these exemptions are applied correctly, you should create a tax exemption and associate it with the applicable items or individuals.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the + New Tax button and select New Tax Exemption.

Provide the required details and click Save.

Create a Tax Authority

A tax authority is a government agency responsible for the intake of government revenue, including taxes and sometimes non-tax revenue. They involve themselves with tax collection, investigation of tax evasion, or carrying out audits.

For example, if you run a store in Franklin City, Virginia, you must register with the Virginia Department of Taxation to obtain a sales tax permit. The Virginia Department of Taxation serves as the primary tax authority responsible for administering sales tax in the state.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the + New Tax button and select New Tax Authority.

Provide the required details and click Save.

Actions on Sales Tax

Modify Sales Tax

If a tax authority updates a tax rate, the corresponding changes should be promptly reflected in the individual tax or tax group configurations to ensure compliance and avoid potential penalties.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the tax/tax group and select Edit option.

Provide the required details and click Save.

Delete Sales Tax

If you no longer require a particular tax or tax group, you can delete the tax/tax group.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the tax/tax group and select Delete option.

In the pop-up that appears, click Ok to delete the tax/tax group.

Default Sales Tax

The Default Tax will be used in transactions when customer tax is not available. The first tax you create will be marked as the Default Tax initially. However, you can change it.

Default tax can be useful for the following scenarios:

Default tax in POS

If the customer's delivery type is either Fulfill Now or Store Pickup, the store's default tax will be applied, regardless of the customer's location. This is because, under both origin-based and destination-based taxation, the location where the product is delivered determines the applicable tax. In these cases, since the product is handed over to the customer at the store location, the store’s default tax rate will be used for the transaction.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the tax/tax group and select Mark as Default option.

Inactive Sales Tax

If you don't require a tax or tax group for a particular period of time, you can deactivate the tax/tax group temporarily and mark it active when required.

Navigate to Settings > Taxes.

Click the drop-down icon adjacent to the tax/tax group and select Mark as Inactive option.

Tax preference for business location

You can set tax for your business location. If not, the default tax marked at taxes will be applicable for the business location.

Navigate to Settings > Locations > Click Add Location.

On the Add Location page, enter the required details and scroll down to Default Tax.

Select your default tax from the drop-down list.

Click Add Location.

Tax preference for items

You can set your tax preference when creating an item.

Navigate to Settings > Items > Click + New.

On the New Item page, enter the item name and other details.

Under the Tax Preference field, choose the Taxable option if the item is taxable.


(or)
If its a non-taxable item, choose the Non Taxable option and add an Exemption Reason for it.

Click Save.

Tax Preference for Customers

You can also set a tax preference for your customers. For every transaction, the customer tax preference is preferred over the tax preference of the items included in the transaction.

For example, if you create an invoice for a tax-exempt customer that includes taxable items, the invoice will become non-taxable because the customer is exempt from taxes.

Non-taxable items, on the other hand, are exempt from taxes, even if the customer is taxable.

Navigate to Sales > Customers > Click + New.

On the New Customer page, enter the customer name and other details.

Under the Tax Preference field, choose the Taxable option if the customer is taxable, and add the tax rate applicable to the customer.


(or)
If the customer is exempt from tax, choose the Tax Exempt option and add an Exemption Reason and Tax Authority.

Click Save.

Add a customer in POS

Click Customer.

In the Search Customer pop-up, select Add a new customer.

In the Add Customer pop-up, enter the required details.

Under the tax details, choose the Taxable option if the customer is taxable.


(or)
If the customer is exempt from tax, choose the Tax Exempt option and add an Exemption Reason and Tax Authority.

Click Save.