Do Retailers Pay Sales Tax? When and How It Works

Sales tax is a consumption tax applied to the sale of goods and, in some cases, services. It is collected at the point of sale and serves as a significant revenue source for state and local governments, funding various public services like education and infrastructure. Retailers play a dual role within this tax system. They primarily act as intermediaries, collecting sales tax from customers on behalf of the government. In specific situations, however, retailers also function as end-users, paying sales tax on items they purchase for their own business operations.

Collecting Sales Tax from Customers

Retailers are obligated by state laws to collect sales tax directly from the consumer at the time of purchase. This tax is added to the listed price of taxable goods or services. The retailer holds these collected funds in trust for the government.

Sales tax nexus determines a retailer’s obligation to collect sales tax in a state, signifying a sufficient connection or presence. This connection can be physical, such as having a store, warehouse, or employees, or economic, meaning the business meets certain sales thresholds. Following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., economic nexus rules require many remote sellers to collect sales tax even without a physical presence.

Sales tax rates vary by state and locality, with different jurisdictions imposing their own rates. Retailers must accurately apply the correct rate based on the customer’s location or the destination of the sale, depending on state rules.

Paying Sales Tax on Business Purchases

Retailers become the “end-user” when acquiring items for their own business operations rather than for resale. In these instances, the retailer is the consumer of the goods or services and pays sales tax to their supplier. This is distinct from collecting tax from customers.

Examples of taxable business purchases include office supplies, cleaning products, store fixtures, and equipment like computers, cash registers, or display racks. Retailers pay sales tax on these items when purchased for their own use. Certain services purchased by a retailer for their operations may also be subject to sales tax, depending on state taxability rules. Sales tax applies to the final consumption of goods and services.

Exemptions for Retailers

A primary exemption for retailers concerns items purchased for resale. Retailers do not pay sales tax on inventory acquired for resale. This “resale exemption” prevents the same item from being taxed multiple times as it moves through the supply chain, ensuring sales tax is ultimately paid only by the final consumer.

To claim this exemption, a retailer provides their supplier with a “resale certificate” or “resale permit.” This document certifies that the purchase is for resale and is exempt from sales tax at that stage. The resale certificate includes details such as the purchaser’s name, address, and seller’s permit number, along with a statement confirming the items are for resale. Retailers must use these certificates only for qualifying purchases, as misuse can lead to penalties. The resale exemption is the most common and widely applicable for retail businesses.

Remitting Sales Tax to Authorities

After collecting sales tax from customers, retailers are responsible for remitting these funds to the appropriate state and local tax authorities. This involves filing regular sales tax returns. The filing frequency—monthly, quarterly, or annually—is determined by the state based on the retailer’s sales volume and tax collected. Larger businesses with higher sales volumes face more frequent filing requirements.

Sales tax returns detail the total sales, taxable sales, and the amount of tax collected during the reporting period. Even if no sales tax was collected, a “zero return” may still be required. Most states provide online portals for electronic filing and payment, which are mandatory for businesses exceeding certain tax liability thresholds. Accurate record-keeping of all sales transactions, including tax collected, is important for compliance. Failure to file or pay sales tax on time can result in penalties, which include percentage-based fines and interest charges.