Why Do U.S. Sales Tax Rates Vary So Much?

Oct 10, 2016 by Mark Faggiano, TaxJar
Why Do U.S. Sales Tax Rates Vary So Much?
Posted Oct 10, 2016 by Mark Faggiano, TaxJar

Chances are you’ve experienced paying a 6% sales tax rate at one store, then paying 8.15% at another store just a few miles away.

Have you ever stopped to scratch your head and wonder why?

Today, we’re bringing you the definitive explanation on why U.S. sales tax rates vary so much, and why it’s important that you, as an online seller, collect the correct rate.

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The anatomy of a sales tax rate

In the United States, sales tax is administered at the state level. This means that there are different sets of sales tax rules and laws in 45 U.S. states and Washington D.C. Five U.S. states don’t have a sales tax.

Sales tax is a “pass-through tax,” meaning that, while it’s collected by merchants, they don’t get to keep it. Instead, they pass it on to the state periodically along with a sales tax return.

States rely on sales tax to fund budget items like roads and schools, so they have a vested interest in making sure that merchants in a state are collecting the right amount of sales tax from buyers in the state.

With all these different states, rules and laws come a veritable cornucopia of sales tax rates! Let’s break it down.

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Related: Taxes 101 For E-commerce Business Owners

State sales tax rates

Each of the states with a sales tax has a statewide sales tax rate. This rate generally varies from 4-8%. Ten U.S. states have a state sales tax only.

Local sales tax rates

Most states also allow local counties, cities and other districts to have a sales tax. These are generally 1-2% on top of the statewide rate. The sales tax local areas collect goes to funding local budget items (again, like schools and roads.)

Special district taxes

A final kind of sales tax includes the “special taxing district.”

These types of local sales taxes may apply to a group of cities or counties. The special taxing district sales tax generally goes to fund something that benefits the entire district, such as education or a mass transit system.

To see how all these different types of sales taxes combine, let’s look at the sales tax rate in Centennial, Colorado.

The Sales Tax Rate in Centennial, Colorado
Colorado State Rate2.9%
Arapahoe County0.25%
City of Centennial2.5%
Regional Transportation District Tax1%
Scientific and Cultural Facilities District0.1%
Total6.75%

State, county, city and two special district tax rates combine for a total of 6.75% sales tax. Compare that with nearby Lakewood, which has a 7.5% sales tax rate. All throughout the U.S. you’ll find varying sales tax rates.

Related: 5 Steps to Sales Tax Compliance for Ecwid Merchants

Sales Tax Rate Exceptions

But wait, there’s more.

It’s not as simple as charging the sales tax rate at your home office or at your buyer’s location. A few more factors come into play before you, as an online seller, can be sure you’re collecting the correct sales tax rate:

Origin and destination-based sales tax collection

Some states are origin-based sales tax states, which means that if you are based in that state, you charge sales tax at the rate of your origin location (your home, office, warehouse, etc.)

Most states are destination-based states. If you’re based in one of those states, then you charge sales tax based on your buyer’s ship-to address.

If you have nexus in more than one state, the states where you have nexus but are not based are considered your “remote states.”

If you sell to a buyer in a remote state, you generally are simply required to either charge the tax rate at your buyer’s location or simply the state tax rate.

Product taxability

States make their own rules about which items are taxable, too.
While most tangible personal property is taxable, sometimes states will choose not to require sales tax on things like groceries or clothing.

And this isn’t always straightforward. New York, for example, doesn’t require sales tax on clothing items less than $110.

But some counties and local areas can require sales tax on those same items. So in New York, you may find yourself charging your customer a county and city rate but not the New York state rate on a $120 pair of jeans. Confusing, I know!

Shipping taxability

Another consideration, especially for online sellers, is whether or not you are required by the state to charge sales tax on the shipping charges you charge to your customer.

Some states require sales tax on shipping charges, and others don’t.

Sales tax holidays

About 1/3 of U.S. states also have some form of a “sales tax holiday.” Sales tax holidays are periods spanning a weekend (or sometimes a little longer) where certain items like school supplies or emergency weather preparedness items are sales tax-free.

All of these factors — origin and destination based sales tax sourcing, shipping and product taxability, and sales tax holidays — combine to make charging the right amount of sales tax pretty darn difficult.

The Sales Tax Rate Solution for Ecwid Sellers

Collecting the right sales tax rate on your own can be tough. But Ecwid has partnered with TaxJar to provide sales tax calculations that take all of these scenarios into account.

You don’t have to fret that you’re not collecting the right amount of sales tax. Instead, you can get to work on the aspects of your business that actually turn a profit!

Read also: Ecwid Teams Up With TaxJar to Provide Automated Tax Reporting And Multi-state Sales Tax Management

About The Author
Author Mark Faggiano is Founder and CEO of TaxJar. This post is geared toward sellers who live in the U.S. or who are required to collect sales tax in the U.S.

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