How Does Sales Tax Work for Online Orders?

Sales tax is a form of indirect tax. How does sales tax work for online orders?

Ambrish Shah - Author

Nov. 13 2020, Published 12:32 p.m. ET

How Does Sales Tax Work For Online Orders
Source: Pixabay

Globally, governments depend on borrowings and taxes to fund their spending. Taxes are classified as direct and indirect taxes. Sales tax falls under the category of indirect tax. Sales tax is based on consumption and not income. It can be charged by national, state, or local governments.

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Sales tax is a consumption tax levied by the government on the sale of products and services. In this article, we’ll discuss how sales tax works for online orders.

How Does Sales Tax Work For Online Orders
Source: Pixabay
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What is sales tax?

Sales tax is a tax that is paid to a governing body for the sales of certain products and services. It's usually calculated as a percentage of the purchase price and collected by the retailer. For example, if you buy a new television for $500 and live in an area where the sales tax is 10 percent, you would pay $50 in sales tax. Your total bill would be $550.

Does sales tax apply to online orders?

Yes, sales tax applies to online orders. Currently, 45 states have state sales tax rates that range from 2.9 percent (Colorado) to 7.25 percent (California). Also, about 38 states allow local municipalities to add their own separate sales taxes to the state rate. Consumers pay the combined local and state sales tax rate each time they make a purchase. Retail businesses are required to collect the sales tax from consumers and remit it to their state, either quarterly or monthly.

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When did states start charging sales tax for online orders?

In 2018, states were allowed to start charging sales tax for online orders. The U.S. Supreme Court ruling in South Dakota vs. Wayfair Inc. established that Internet retailers can be required to collect sales taxes on their sales. The ruling overturned an earlier law that made the consumer accountable for paying sales tax to the state.

Which state does the sales tax apply to?

Sales tax is levied where goods and services are consumed. It's collected based on the rate at the location where the buyer receives the product or services. If the customer picks up the product at the seller’s location, the tax should be collected for the state where the seller is situated. For example, a resident of California orders a computer online from a merchant located in Washington. If the seller delivers the computer to the buyer in California, the sales tax is based on the buyer’s location in California.

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sales tax online
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Do some states not charge sales tax?

Currently, Alaska, Delaware, New Hampshire, Montana, and Oregon don't charge state sales tax on purchases. Retail businesses don’t need to collect state sales tax in these states. However, local municipalities are permitted to charge sales tax in Alaska and Montana. 

Do sales tax holidays apply to online orders?

Yes, sales tax holidays apply to online purchases. No sales tax is due if you order and pay for an eligible product online on the sales tax holiday.

A sales tax holiday is a certain period of time when a state allows purchases of specified products to be made tax-free. The aim of the sales tax holiday is to encourage consumer spending.


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