What is sales tax in the United States?
Let’s start with the important stuff. VAT is used in 137 countries worldwide, but in the U.S. and Japan, there is no such thing as VAT: “value-added tax” does not exist. The analog of the usual U.S. VAT is the sales tax.
There is no flat rate of sales tax in the USA, which means that each state independently sets its rate, and at two levels:
- state sales tax — at the state level
- local sales tax — at the county/city level.
However, its legal nature is significantly different because the American sales tax is a fee that is paid only once by the end consumer.
The object of sales tax in the U.S. is transactions related to the sale of tangible personal property (each state’s legislation determines its definition).
Sales tax on digital products and IT services
Special attention should be paid to the supply of digital goods (a variety of audio, video, e-books, usually made available for a fee through streaming platforms).
The tax situation for digital is as follows:
- 28 states tax digital products
- 23 states do not tax digital products
- 4 states have no retail sales tax (Delaware, Montana, New Hampshire, and Oregon)
States that tax digital products have tax rates ranging from 1% to 7%, depending on the state and type of digital good.
The concept of digital products or digital goods is defined as intangible (=not physical) goods that exist in an electronic or digital format. They are delivered to the end customer electronically, e.g., via e-mail or online download.
In terms of taxation, there are 6 types of digital goods:
The above information is relevant to IT companies developing software, hosting a digital product, and delivering/distributing it through SaaS platforms, mobile apps, websites, etc.
- Online Data Processing Services
- Downloadable software
- Downloadable books, such as eBooks and Kindle
- Downloaded music, digital audio files, such as iTunes and podcasts
- Downloaded movies or digital video, such as Netflix and Amazon Prime
- Other downloaded electronic items
Netflix as a streaming resource has developed a digital product to deliver digital videos on a paid basis. This also includes Spotify, Megogo, and many other platforms. The basic idea is that these companies develop software as a digital product and supply it through subscriptions/purchases.
In addition to the general categories listed above, many states have their own definition of digital goods and services.
Most states tax an extensive list of services as part of the law. Other states, however, may tax almost all services.
Some interesting facts about U.S. sales tax:
- Out of the 50 states only 38 of them pay local sales tax, and the local tax rates not only compete with the state sales tax, but can even exceed it;
- 5 states have the highest sales tax rates (combined) in the USA:
- Tennessee (9.55%)
- Louisiana (9.52%)
- Arkansas (9,51%)
- Washington (9.23%)
- Alabama (9.22%)
State sales tax has not changed since Utah collected the largest amount of sales tax in the U.S., increasing the state’s collected share of its tax from 5.95% to 6.1% in April 2019.
Consequently, Sales tax (our equivalent of VAT) rates vary from state to state, but some may offer reduced or zero rates on certain goods, such as food or utilities.
Full List of Combined Sales Taxes in the United States
In the table below, you will find a complete list of % sales tax in the USA, current as of 2021.
Who must register as a sales taxpayer?
Any person or entity whose business activities are subject to sales tax. Of course, the concept of entrepreneurial activity differs from state to state, but the rule is the same:
If your activity falls under “doing business,” you must register and obtain a sales tax license/permit/certificate before you start making sales/services.
But the main trend among states is to link the entrepreneur to the state and the “economic thresholds” of doing business. Thus, a person is subject to taxation only if there are signs of physical presence in the state, as well as depending on the number of transactions carried out, agreements made, etc. Even if the company’s turnover does not exceed the limits, it can still register as a sales taxpayer and will be subject to the same duties.
The provision of services is taxable depending on where they are provided or where the ultimate benefit is derived. Generally, however, services exported outside the United States are not subject to sales tax.
The situation is quite different with the importation of services because they are subject to sales tax, according to the state’s laws in which they are provided. In this case, if the supplier does not charge tax on services subject to taxation and provided or received in the state, the buyer may be liable to pay tax on the use of this service.
There is no sales tax refund system in the U.S., but states offer different exemptions from taxation depending on the type of activity being performed. The exemptions are specifically defined in the particular state’s laws, and the burden of proving the exemption is on the taxpayer.
We hope you found this short guide to sales tax in the U.S. helpful. Also, visit our blog, where we discuss filling out Form W-8BEN and the benefits of registering a business in the U.S.