What is sales tax?
Sales tax is a percentage added to the price of taxable goods and services. The business collects it on behalf of the government; it is not the business's revenue.
How it works
- The seller charges sales tax on the customer's [invoice](/glossary/invoice) or receipt.
- The tax is recorded as a [liability](/glossary/liability) (sales tax payable).
- The seller files a return and pays the tax over to the authority, usually monthly or quarterly.
Sales tax vs VAT
- Sales tax: charged only on the final retail sale; businesses buying for resale usually present an exemption certificate.
- [VAT](/glossary/value-added-tax-vat): charged at every stage of the supply chain, with businesses reclaiming input VAT.
The US uses state and local sales taxes; most other countries use VAT or GST.
US sales tax basics
- Rates vary by state, county and city.
- Nexus: a business must collect tax in a state where it has a sufficient connection, either physical presence or, since the 2018 South Dakota v. Wayfair ruling, economic activity above a threshold.
Accounting entry
For a $100 sale with 8% tax: debit cash or receivables $108, credit sales $100, credit sales tax payable $8.