Sales tax is a huge issue for both customers and retailers. A retailer is anyone who sells a product at retail, and thus usually collects a sales tax when the product is sole. The reason that I say, "Usually collects a sales tax" is because not all states have a sales tax. Sales tax also isn't collected for services. To top off the complexity of it all, every local city in the United States can have a different sales tax. Wow...kinda complex.
What is a sales tax license?
As we mentioned, not all states have a sales tax. When I was younger I knew of a person who went to the state of Nevada to buy a car. The reason for this is that he didn't have to pay any sales tax for the purchase. Over the early days of Amazon, they didn't collect any sales tax for online transactions. In 2018, they are starting to force retailers to collect sales tax when customers make purchases online.
Do all states have sales tax?
No, as we mentioned not all states charge a sales tax. And so the businesses in those states aren't required to collect any sales tax. The following states don't require collection of sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon.
Are some organizations or businesses exempt from sales tax?
Yes, there are some types of businesses that are exempt from collecting a sales tax. In general here are the types:
- Wholesale companies who do not sell at retail. These are sometimes "middlemen" who are reselling goods.
- Service companies who do not sell products. If a service company sells a product, then they would collect tax for just that product.
- Military, some non-profits, or churches are examples where orgs can get exemptions.
How has Amazon changed the landscape?
When Amazon first arrived on the scene, they were just selling some books, and online transactions were in their infancy. In 2018, online sales are reaching 15% of total retail sales so the Government isn't ignoring the lost sales taxes as they used to. On June 21, 2018, the United States Supreme Court changed the rules for collecting sales tax by Internet retailers. In South Dakota v. Wayfair Inc., the Court effectively stated that states can require online retailers to collect state sales tax.
I would say that the success of Amazon and their dominance in online retailing forced the states and the Supreme Court to act.
Supreme court ruling about Sales Tax.
The United States Supreme Court ruled on June 21, 2018 thereby changing the rules for collecting sales tax by Internet retailers. In South Dakota v. Wayfair Inc., the Court changed the laws to require online retailers to collect state sales tax. Thousands of small businesses that never collected sales tax except in their home states will be responsible for tax in some 10,000 state and local jurisdictions.
Do all types of companies need to collect sales tax?
No, there are many types of businesses out there and not all of them need to collect a sales tax. We are not talking about states without sales tax laws. I am talking about states that have sales tax, and yet some companies don't need to collect taxes. In general there are some types of businesses that don't need to collect, such as service companies. Service companies are not obligated to collect sales tax for their work.