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Chances are you’ve experienced paying aÌý6%Ìýsales tax rate atÌýone store, then paying 8.15% atÌýanother store just aÌýfew miles away.

Have you ever stopped toÌýscratch your head andÌýwonder why?

Today, we’re bringing you theÌýdefinitive explanation onÌýwhy U.S. sales tax rates vary soÌýmuch, andÌýwhy it’s important that you, asÌýanÌýonline seller, collect theÌýcorrect rate.

The anatomy ofÌýaÌýsales tax rate

InÌýtheÌýUnited States, sales tax isÌýadministered atÌýtheÌýstate level. This means that there are different sets ofÌýsales tax rules andÌýlaws inÌý45ÌýU.S. states andÌýWashington D.C. Five U.S. states don’t have aÌýsales tax.

Sales tax isÌýaÌýÁª±è²¹²õ²õ-³Ù³ó°ù´Ç³Ü²µ³ó tax,” meaning that, while it’s collected byÌýmerchants, they don’t get toÌýkeep it. Instead, they pass itÌýonÌýtoÌýtheÌýstate periodically along with aÌýsales tax return.

States rely onÌýsales tax toÌýfund budget items like roads andÌýschools, soÌýthey have aÌývested interest inÌýmaking sure that merchants inÌýaÌýstate are collecting theÌýright amount ofÌýsales tax from buyers inÌýtheÌýstate.

With all these different states, rules andÌýlaws come aÌýveritable cornucopia ofÌýsales tax rates! Let’s break itÌýdown.

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State sales tax rates

Each ofÌýtheÌýstates with aÌýsales tax has aÌýstatewide sales tax rate. This rate generally varies from 4-8%.

Local sales tax rates

Most states also allow local counties, cities andÌýother districts toÌýhave aÌýsales tax. These are generally 1-2% onÌýtop ofÌýtheÌýstatewide rate. The sales tax local areas collect goes toÌýfunding local budget items (again, like schools andÌýroads.)

Special district taxes

AÌýfinal kind ofÌýsales tax includes theÌý“special taxing district.”

These types ofÌýlocal sales taxes may apply toÌýaÌýgroup ofÌýcities orÌýcounties. The special taxing district sales tax generally goes toÌýfund something that benefits theÌýentire district, such asÌýeducation orÌýaÌýmass transit system.

ToÌýsee how all these different types ofÌýsales taxes combine, let’s look atÌýtheÌýsales tax rate inÌýCentennial, Colorado.

State, county, city andÌýtwo special district tax rates combine forÌýaÌýtotal ofÌý6.75% sales tax. Compare that with nearby Lakewood, which has aÌý7.5% sales tax rate. All throughout theÌýU.S. you’ll find varying sales tax rates.

Related: 5ÌýSteps toÌýSales Tax Compliance forÌýºÚÁÏÃÅ Merchants

Sales Tax Rate Exceptions

But wait, there’s more.

It’s not asÌýsimple asÌýcharging theÌýsales tax rate atÌýyour home office orÌýatÌýyour buyer’s location. AÌýfew more factors come into play before you, asÌýanÌýonline seller, can beÌýsure you’re collecting theÌýcorrect sales tax rate:

Origin andÌýdestination-based sales tax collection

Some states are origin-based sales tax states, which means that ifÌýyou are based inÌýthat state, you charge sales tax atÌýtheÌýrate ofÌýyour origin location (your home, office, warehouse, etc.)

Most states are destination-based states. IfÌýyou’re based inÌýone ofÌýthose states, then you charge sales tax based onÌýyour buyer’s ship-to address.

IfÌýyou have nexus inÌýmore than one state, theÌýstates where you have nexus but are not based are considered your “remote states.”

IfÌýyou sell toÌýaÌýbuyer inÌýaÌýremote state, you generally are simply required toÌýeither charge theÌýtax rate atÌýyour buyer’s location orÌýsimply theÌýstate tax rate.

Product taxability

States make their own rules about which items are taxable, too.
While most tangible personal property isÌýtaxable, sometimes states will choose not toÌýrequire sales tax onÌýthings like groceries orÌýclothing.

And this isn’t always straightforward. New York, forÌýexample, doesn’t require sales tax onÌýclothing items less than $110.

But some counties andÌýlocal areas can require sales tax onÌýthose same items. SoÌýinÌýNew York, you may find yourself charging your customer aÌýcounty andÌýcity rate but not theÌýNew York state rate onÌýaÌý$120Ìýpair ofÌýjeans. Confusing, IÌýknow!

Shipping taxability

Another consideration, especially forÌýonline sellers, isÌýwhether orÌýnot you are required byÌýtheÌýstate toÌýcharge sales tax onÌýtheÌýshipping charges you charge toÌýyour customer.

Some states require , andÌýothers don’t.

Sales tax holidays

About 1/3ÌýofÌýU.S. states also have some form ofÌýaÌý“sales tax holiday.” Sales tax holidays are periods spanning aÌýweekend (or sometimes aÌýlittle longer) where certain items like school supplies orÌýemergency weather preparedness items are sales tax-free.

All ofÌýthese factorsÌý— origin andÌýdestination based sales tax sourcing, shipping andÌýproduct taxability, andÌýsales tax holidaysÌý— combine toÌýmake charging theÌýright amount ofÌýsales tax pretty darn difficult.

The Sales Tax Rate Solution forÌýºÚÁÏÃÅ Sellers

Collecting theÌýright sales tax rate onÌýyour own can beÌýtough. But ºÚÁÏÃÅ has partnered with TaxJar toÌýprovide sales tax calculations that take all ofÌýthese scenarios into account.

You don’t have toÌýfret that you’re not collecting theÌýright amount ofÌýsales tax. Instead, you can get toÌýwork onÌýtheÌýaspects ofÌýyour business that actually turn aÌýprofit!

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• 6ÌýofÌýtheÌýBest Accounting Apps forÌýEcommerce Entrepreneurs
• Why DoÌýU.S. Sales Tax Rates Vary SoÌýMuch?