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Why Do We Have Sales & Use Tax?

Johanna Monroy

Senior Tax Associate

r&d tax credits connecticut

What is Sales & Use Tax?

Sales and Use Tax is a consumption tax, a form of tax that is levied by state or local governments on the sale of goods and services. A wide range of goods, including clothing, electronics, vehicles, food, and entertainment, are typically subject to Sales and Use Tax. Some states also levy Sales tax on services, such as legal services, haircuts, and car repairs. The rules governing what is and is not subject to Sales tax can vary by state. The percentage of a state’s revenue that comes from Sales and Use Tax can vary widely depending on the state. In general, the Sales and Use tax is one of the largest sources of revenue for most states. According to the United States Census Bureau’s Quarterly Summary of State and Local Government Tax Revenue, Sales and Gross receipts taxes accounted for approximately 31.2% of total state government tax revenue in the second quarter of 2021.

The primary reason for implementing Sales tax is to raise revenue for state and local governments. This revenue is necessary to fund essential public services that benefit the entire community. Sales tax is considered a stable revenue source, as it is less volatile than other forms of taxation, such as income tax, which can fluctuate based on economic conditions.

In addition to raising revenue, Sales tax can also be used as a policy tool to influence consumer behavior. For example, states may implement Sales tax exemptions or reductions for specific products or services to encourage the purchase of goods that are considered beneficial to the community, such as energy-efficient appliances or medical supplies. Conversely, states may implement higher Sales tax rates on products that are deemed harmful, such as cigarettes or alcohol.

In the United States, Sales tax is collected by state and local governments, and the rates can vary widely depending on the location. In some states, such as Alaska, Delaware, Montana, New Hampshire, and Oregon, there is no Sales and Use Tax. However, Alaska does have a local Sales Tax. In other states, such as California and New York, Sales tax rates can be as high as 10% or more.

Source Advisors can Help You with Your State and Local Tax Credits

Understanding the Sales and Use tax consequences of your businesses’ activities can be complicated as the rules vary from state to state. If you are operating a business and are unsure of your Sales and Use tax obligations, Source Advisors is here to help.

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