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.

Example of Sales Tax Nexus

An online retailer based in California sells products nationwide through its website. The company does not have physical stores or employees outside California, but it does ship products to customers in other states. It faces the following sales tax nexus situations:

Physical nexus. The company opens a warehouse in Texas to fulfill orders. The presence of a physical facility in Texas establishes a physical nexus, requiring the company to collect and remit sales tax on sales to Texas customers.
Economic nexus. The company sells $150,000 worth of products to customers in California in a calendar year. The state has an economic nexus threshold of $500,000. Since Since the company’s sales into the state are well below its economic nexus threshold, it does not have nexus there.
Marketplace nexus. The company sells products through a marketplace like Amazon, which collects and remits sales tax on behalf of sellers in certain states. If the company relies solely on the marketplace to handle sales tax in states with marketplace nexus laws, the responsibility shifts to the marketplace.

In short, nexus can arise from physical presence (e.g., offices, warehouses, employees), economic thresholds (sales volume or transaction count), or affiliations (marketplace facilitators).

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.