Although most people assume sales taxes are paid by the purchaser, the general sales tax is considered to be imposed on the seller, and is considered a tax on the privilege of doing business in the state or municipality. It is imposed when the seller completes a sale of tangible personal property or services.
The goods and services covered by a sales tax are generally extensive—virtually any transaction within the state or municipality where money changes hands is covered by the general sales tax, including all consumer goods, entertainment such as movies or sports events, hotels, restaurants, and even items such as phone charges or electrical bills.
Although the seller is required to collect the sales tax, the tax is imposed upon the purchaser as part of the final purchase price. The seller is usually considered ultimately responsible for the collection of the tax as the primary tax collector.
The sales tax is identified in percentage terms within the measure of a dollar—a 4 percent sales tax means for every dollar spent, there will be a four-cent tax. Most government entities utilize a bracket system to identify how much tax is to be paid on specific goods. The bracket system allocates how much sale tax is to be paid to a specific dollar amount. For example, the six percent sales tax in Michigan results in the following brackets: no tax due on amounts from $0.00 to $0.10, one cent due from $0.11 to $0.24, two cents due from $0.25 to $0.41, three cents due from $0.42 to $0.58, four cents due from $0.59 to $0.74, five cents due from $0.75 to $0.91, six cents due from $0.92 to $0.99, and for $1.00 and each multiple of $1.00, 6 percent of the sale price. Like Michigan, many states have these specific bracket calculations set out in their statute, although some states delegate this power to an administrative agency.
Sellers are generally required to remit the sales tax on a periodic basis, usually quarterly, sometimes more frequently if the amount of the tax reaches a certain point. Most states allow sellers to keep a small portion of the tax as a payment for the work they do in collecting the tax.
General sales taxes usually contain exclusions and exemptions. These exclusions and exemptions can be quite broad, often including sales of intangible personal property and goods meant for resale. Goods used in production are also often exempted from sales tax to prevent multiple taxations. Most states exempt professional and personal services such as those provided by doctors and lawyers from sales taxes.
The sales tax is a regressive tax—that is, its burdens fall more heavily on poorer people. Because of this fact, basic goods such as food, clothing, and medicine are many times exempted from sales tax. Some states also declare “tax holidays” exempting persons shopping within a specific time frame from having to pay sales tax.
Most states allow local government entities within the state to impose their own general sales taxes. Usually, doing so requires the approval of both the state and municipal government, although in some states with strong home rule provisions, these taxes can be passed without state approval. The same exclusions and exemptions of the state sales tax are usually present for these local sales taxes, though state law sometimes allows local governments to override these exclusions with their own taxes. Local governments are also commonly restricted in the rates they can impose.
A problem that often arises when local government entities impose their own sales taxes in multiple sales taxes for businesses located in several different places. States solve this problem by declaring the sales tax is to be imposed at the place of business of the seller. If there is more than one place of business, then the place where the initial transaction occurs determines the imposition of the tax.