Accounting terms

Dictionary of all accounting terms

What is Sales Tax?

A sales tax is imposed by the government on sales of goods and services and falls under the consumption tax category.

Consumption taxes are any taxes that are added to the sale of goods or services, and besides the sales tax, other consumption taxes include tariffs, excise and others. Normally, sales taxes are applied at the moment of the sale and is collected by the seller. The seller then passes this on to the government.

Any business that operates in some way in a location, such as a physical store, employees, affiliates or other forms, will be liable for sales tax.

Retail sales taxes are charged only to the 'final' or 'end user' of a particular good or service, and not the intermediary businesses that pass the goods through the various stages of manufacturing. For example, a pair of shoes may pass first from the farm producing leather, to the leather manufacture, through many stages and finally to the customer who buys the shoes in the retail store. Only the final user ends up paying the sales tax. The other points in the chain have to get a significant amount of documentation to obtain a resale certificate to avoid a sales tax.

Sales tax is applicable in a few countries, although the most popular is the United States, who still uses this scheme instead of the Value-Added Tax (VAT) scheme. With sales tax, a state might charge 5%, a country 2% and a city 2%, meaning the resident of that particular city will have to pay 9% in total.

However, there are certain exemptions, such as food or thresholds, where any clothing purchases below $200 are not taxed. On the other hand, some products such as cigarettes carry greater taxes.

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