What is Sales Tax?

A sales tax is a tax imposed on retail goods and services at the point of sale. The tax is collected by the entity selling the product or service to a third party, and is remitted to the applicable government entity at regular intervals.

Sales taxes are a key form of revenue for state, county, and local governments. If a government does not impose a sales tax, then it will need to acquire revenue from some other source to make up for the lost income, such as property taxes.

Sales Tax Nexus

A business is required to collect sales tax when it has nexus within the taxing region. This has historically meant that the firm has a physical presence in the region, perhaps because of a facility, or because an employee lives there. The nexus concept has recently been expanded by a Supreme Court ruling to also include any region into which a business sells goods or services, such as through a website store.

Are Sales Taxes Regressive?

Sales taxes are regressive, because they have a larger impact on low-income people than high-income people. Nearly all of the income earned by a low-income person is used to make purchases, on which sales taxes are imposed. This is not the case for high-income people, who put a large part of their earnings into investments, and avoid paying sales taxes by doing so.