Do I Charge Sales Tax If I Paid Sales Tax?

Sales tax is a consumption tax levied by state and local governments on the sale of goods and sometimes services. This tax is typically added to the purchase price at the point of sale. Sales tax rules and rates vary significantly by state and even by locality within a state.

Understanding Sales Tax Obligations

Sales tax is generally collected by the seller from the buyer at the time of purchase. The seller then remits these collected funds to the appropriate taxing authority, making it a “trust tax” where the seller acts as a collection agent for the government. This tax applies to the final retail sale of tangible personal property to the end-user or ultimate consumer.

For a business to be obligated to collect sales tax in a particular state, it must establish “nexus” there. Nexus signifies a sufficient connection or presence within a state that triggers a sales tax collection requirement. Historically, this meant a physical presence, such as having a store, office, or employees in the state.

The legal landscape changed with the 2018 Supreme Court decision in South Dakota v. Wayfair, which established “economic nexus.” This means a business can now have a sales tax obligation in a state even without a physical presence if it meets certain economic thresholds, typically based on sales revenue or transaction volume within a 12-month period. Common thresholds are $100,000 in sales or 200 transactions, though these can vary, such as California and Texas having a $500,000 threshold. Failure to comply with these obligations can result in penalties and interest charges, sometimes averaging 30% of the sales tax due.

The Resale Exemption

When a business purchases an item with the specific intention of reselling it, rather than for its own use or consumption, it generally does not pay sales tax on that initial purchase. This mechanism prevents “double taxation,” ensuring that sales tax is only applied once, by the final consumer. For example, a retailer buying inventory from a wholesaler would typically use this exemption.

To claim this exemption, the purchasing business provides the seller with a “resale certificate” or “exemption certificate.” This document confirms the buyer’s intent to resell the goods and typically includes the buyer’s sales tax permit or registration number. The seller must collect and validate this certificate and keep it on file to justify not collecting sales tax on the transaction. If a business mistakenly pays sales tax on an item intended for resale, it may be able to request a refund or credit from the seller or directly from the state’s tax authority.

Many states accept a uniform multistate resale certificate, such as the Streamlined Sales Tax (SST) Certificate of Exemption or the Multistate Tax Commission (MTC) Uniform Sales & Use Tax Resale Certificate, to simplify compliance for businesses operating in multiple jurisdictions. However, some states may require their specific state-issued forms. It is important for businesses to ensure they have a valid sales tax permit before seeking a resale certificate.

Sales Tax and Services

Sales tax on services varies significantly across states, unlike the more consistent taxation of tangible personal property. While some states impose sales tax on nearly all services by default, with specific exemptions, others only tax services explicitly listed in their tax laws. Five states do not impose a statewide sales tax on goods or services.

When a service involves tangible personal property, such as a repair service that includes parts, the transaction becomes more complex. These are often called “mixed transactions” or “bundled transactions” where taxable and nontaxable components are sold together for a single price. States often apply a “true object test” to determine the primary purpose of the transaction. If the true object is the service and the tangible property is incidental, the entire transaction might be nontaxable, or only the tangible property might be taxed if separable.

For example, if a business purchases materials and pays sales tax on them to perform a service for a client, the sales tax treatment of the final service depends on state law. If the service is taxable, the business would typically charge sales tax on the entire service, which includes the cost of the materials. If the service is not taxable, the business generally absorbs the sales tax paid on the materials as a cost of doing business and does not pass it on as sales tax to the client.

Key Factors for Sales Tax Collection

Whether a business must charge sales tax depends on several interconnected factors. The nature of what is being sold is a primary factor; tangible personal property is broadly taxable, while the taxability of services and digital goods varies considerably by state. Specific exemptions also exist for certain goods, such as groceries or prescription medicine, in many jurisdictions.

The location of the sale is also a determining factor, as state and local sales tax rates and rules differ, and businesses must establish nexus in a state to have collection obligations. Finally, the identity of the buyer matters. Sales to an end-user are generally taxable, while sales to tax-exempt entities or resellers, who provide a valid resale certificate, may be exempt. Staying informed about specific state and local regulations is important for accurate sales tax compliance.