Sales tax
A tax charged at the point of sale to the final customer, most familiar as the state and local sales taxes in the United States and the provincial sales taxes in some Canadian provinces.
In short
- Unlike VAT, a retail sales tax is charged once, on the final sale, not at every stage.
- In the US, rates and rules are set by states and local governments, not federally.
- Since 2018, US states can require out-of-state sellers to collect tax based on sales volume alone.
A sales tax, in the strict sense, is a single-stage tax on retail sales. The seller collects it from the final customer and remits it to the government. Businesses buying goods for resale generally don't pay it, which is how it avoids being charged repeatedly along the supply chain.
In the United States
There is no federal sales tax. Most states levy one, and many counties and cities add their own, so a single sale can carry several layers of tax and rates vary by address. What is taxable also differs: some states exempt groceries or clothing, others tax many services.
A seller must collect a state's sales tax only if it has nexus there. Physical presence, such as an office or inventory, creates nexus. Since the 2018 Supreme Court decision in South Dakota v. Wayfair, states can also require remote sellers to collect once their sales into the state pass an economic threshold, commonly $100,000 a year. When tax isn't charged on a taxable purchase, the buyer may owe use tax instead.
In Canada
British Columbia, Saskatchewan and Manitoba levy provincial sales taxes that work as retail sales taxes, separate from the federal GST. Unlike GST, these are generally not recoverable by businesses. PST paid on business purchases is usually a cost.
Sales tax versus VAT and GST
VAT and GST are charged at every stage, with businesses recovering the tax on their inputs. A retail sales tax is charged once, at the end. The consumer's burden can be similar; the mechanics and the paperwork are very different.
Worked example
One order, two states
A Canadian e-commerce company sells $180,000 a year to customers in Texas and $40,000 to customers in Vermont. Texas's economic nexus threshold is $500,000 and Vermont's is $100,000. It doesn't yet need to collect in either state. When Vermont sales reach $100,000, it must register there and collect Vermont sales tax on future orders.