Before a retailer or service provider can open for business, they first must get approval from the state for sales tax registration. Not all states charge sales tax, and not all products and services are taxable, so it’s essential to learn the facts before you find yourself in trouble.
Currently, forty-five states and the District of Columbia collect statewide sales taxes, while five states do not have a statewide sales tax. The states not collecting sales tax include Alaska, Delaware, Montana, New Hampshire, and Oregon, although Alaska does allow localities to charge local sales taxes.
Local sales tax rates are usually determined at the county level. In all, 38 U.S. states allow localities to set their own sales tax rates, with the highest rates in Tennessee, Louisiana, Arkansas, Washington, and Alabama.
Whether the product you are selling or the service you are offering is deemed taxable depends on a few factors, such as:
- The type of product or service
- Your business location
- Your customer’s location
In general, products are taxable, but states can declare some items (e.g., prescriptions and food) to be tax-exempt. Increasingly, states are taxing services, too, so check with the department of revenue in the states where you own or plan to establish a business.
States also vary on which specific location factors affect the collection of sales taxes. State tax rates may be based on the origin or destination of where the product or service is sold or a combination of both.