What Are Taxable Purchases? Sales Tax & Exemptions

When individuals or businesses acquire goods and services, an additional cost often appears beyond the listed price. These charges, known as taxes on purchases, contribute to government revenue used for various public services. Understanding which transactions incur these taxes is important for consumers and businesses.

Understanding Sales Tax

Sales tax is a consumption tax imposed by state and local governments on the retail sale of taxable goods and certain services. While the seller collects this tax at the point of sale, the financial burden ultimately falls on the consumer. This system allows states and local jurisdictions to fund essential public services like education, transportation, and emergency response.

The imposition and rates of sales tax are determined at the state level, with no federal sales tax existing in the United States. Consequently, sales tax rates and the specific items or services subject to taxation can vary significantly across states and even within different localities of the same state. For instance, a base state sales tax rate might be supplemented by additional local taxes, leading to varied total rates depending on the purchase location. This variability necessitates awareness of local regulations to ensure accurate tax accounting.

Goods and Services Generally Subject to Sales Tax

Most tangible personal property, which includes physical items, is subject to sales tax. Common examples of such goods include clothing, electronics, furniture, vehicles, and general merchandise. These items are taxed at the point of retail sale, with the tax calculated as a percentage of the purchase price.

The taxability of services presents more variation across jurisdictions. While some states broadly tax services, others tax only specifically enumerated services, or none at all. Services that might be taxable in some areas include repair services, landscaping, certain telecommunications, and digital streaming services. Conversely, professional services like legal advice, medical care, or educational services are generally not subject to sales tax in most states.

Common Sales Tax Exemptions

Many jurisdictions provide sales tax exemptions for certain purchases to reduce the tax burden or prevent multiple layers of taxation. One common exemption applies to most groceries or food items intended for home consumption, although prepared foods or restaurant meals are typically taxable. Prescription medications and certain medical devices are also frequently exempt from sales tax. Some states may also offer exemptions for clothing, particularly during specific tax holidays or for items below a certain price threshold.

Beyond consumer goods, specific business-to-business transactions often qualify for exemptions. Purchases made for resale are a widespread example, where a business buys goods without paying sales tax because they intend to sell them to an end consumer who will then pay the tax. Similarly, raw materials used in manufacturing processes that become an integral part of a finished product destined for sale are often exempt. These exemptions require proper documentation, such as a resale certificate, from the buyer to the seller.

How Use Tax Works

Use tax functions as a complementary tax to sales tax, ensuring that taxable purchases are subject to taxation regardless of where they are acquired. This tax typically applies when a consumer purchases goods or services from an out-of-state seller, such as through online retailers or mail-order catalogs, and the seller does not collect sales tax. The consumer then owes use tax on those items when they are used, stored, or consumed within their home state.

The primary purpose of use tax is to prevent consumers from avoiding sales tax by purchasing from out-of-state vendors and to maintain fairness for in-state businesses. The use tax rate is generally the same as the sales tax rate that would have applied if the purchase had occurred in the consumer’s home state. While businesses are typically responsible for remitting use tax on purchases where sales tax was not collected, individual consumers may also be required to self-report and pay use tax, particularly for large purchases like vehicles, often through their annual income tax returns.