Sales tax is an indirect tax paid by consumers on purchases of goods and services. The government levies this tax on certain taxable goods, such as food and clothing. Businesses that have a nexus to a particular state must pay sales tax. In most states, businesses must pay sales tax on the amount they charge to consumers, but local percentage rates vary depending on the state. A business must collect sales tax in order to maintain local development.
If a merchant does not collect sales tax, a second type of tax is applied. A use tax is a different type of tax that applies to items that have been bought outside of a state and are not sold within that state. The use tax is a separate type of tax that must be paid in addition to sales tax, and is imposed when a product has been purchased out of state. Although both types of tax are important, they are often overlapping and confusing.
For example, let’s say a retail business like Joe’s Hardware Store buys inventory from a supplier and then sells it to a customer. This vendor purchased the items at a wholesale price, which means that the supplier didn’t have to pay sales tax. However, Joe’s Hardware Store will pay sales tax to the state when he sells them. Similarly, if a retail business doesn’t collect sales tax, the buyer won’t be responsible for paying the tax.