Business Finance

What Is Sales Tax?

Dec 17, 2020 • 3 min read
Sales Tax written on a notebook
Table of Contents

      Sales tax is added by businesses to cover the cost of goods and services. It is required by most states for businesses to stay in operation and is based on a percentage of goods sold. If you are a business owner, you will likely need to collect sales tax. Keep reading to answer some common questions about this tax, including how to collect and pay it. 

      Do I Need to Collect Sales Tax?

      There is no simple answer to whether or not your state needs to collect sales tax. Each state has its own guidelines for which goods and services are taxable. You will need to check with your local regulators to understand if your products fall under the taxable category. 

      How Can I Find My State’s Sales Tax?

      The Tax Foundation has a guide that was updated for 2020 on state sales tax. You can learn about the tax in your particular state and see how it compares to others. For example, Tennessee has the highest sales tax rate at 9.53%, while Alaska’s sales tax rate is 1.76%. 

      Some states, like Oregon, Montana, Delaware, and New Hampshire, do not have any state sales tax. 

      Some regions charge local sales taxes as well.

      What Is a Sales Tax Permit?

      Before you can start to collect sales tax, you need to apply for a sales tax permit. This can also be called a seller’s permit or sales tax license. You can register with your state tax collector and then begin your operations. 

      Requiring companies to apply for a permit beforehand protects customers from businesses that claim to collect sales tax but actually pocket the profits. Sales tax pays for various local services like schools, road improvements, and city operations.    

      How Do I Collect Sales Tax? 

      There are many ways to collect sales tax from your customers. If your business uses an automated point-of-sale (POS) system, you may be able to program the sales tax into the final cost. If you use an invoice system, you may be able to set up a formula that automatically calculates sales tax for you and adds it as a line item to your bill. 

      Sales tax is typically listed outside of the standard receipt because it is a percent of the total goods or services sold. 

      How Do I Pay Sales Tax?

      Business owners are required to remit their sales tax to the IRS within a reasonable time. You may be able to pay your sales taxes monthly or quarterly. However, it is important that you accurately track your products sold and the sales tax collected in order to pay the correct amount. 

      Tracking your sales tax can help you better understand your expected costs and cash flow. It can also keep you in good standing with your local state and municipality so you don’t get any unexpected fines or tax bills. 

      Consider using a service like Lendio’s software to better manage your ledgers and keep your accounts organized. This free tool can help you establish your business and grow it as you learn.

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      About the author
      Derek Miller

      Derek Miller is the CMO of Smack Apparel, the content guru at, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy,, and StartupCamp.

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