Glossary
What is sales tax?
Sales tax is a percentage added to the price of taxable goods and services in the US. See how it is calculated, collected and shown on an invoice.
Updated · By PayToMe Editorial
Sales tax is a percentage added to the price of taxable goods and services at the point of sale, set by US states and often by cities and counties. The seller collects it from the buyer and passes it to the tax authority. This page explains how it works and how to show it on an invoice.
How it works
The United States has no federal sales tax. States set their own rules, and many allow local governments to add their own rate on top. A few states, including Oregon and Montana, have no statewide sales tax. Because rates, taxable items and exemptions differ from place to place, always confirm the rules with your state’s tax agency.
For a seller, the process usually has four parts:
- Register. If you have a sales tax obligation in a state, you register with that state and receive a permit or account.
- Charge. You add the correct rate to taxable sales, based on where the sale is sourced under that state’s rules.
- Show it. The invoice lists sales tax as a separate line so the customer sees the subtotal, the tax and the total.
- Remit. You file returns on the schedule your state sets and send what you collected.
Some buyers are exempt, such as resellers or nonprofits. They typically give you an exemption or resale certificate, and you keep it on file. Since the 2018 US Supreme Court decision in South Dakota v. Wayfair, a state can require out-of-state sellers to collect tax once they pass its sales or transaction threshold, so selling online across state lines can create obligations in more than one state. This is general information, not legal advice.
Example
You build a website for a client and also sell them a hosting setup. Suppose your state taxes the setup but not the design work, and the combined rate is 8.25 percent.
Notice that the tax applies only to the taxable line, not the whole subtotal. Try the numbers with the sales tax calculator, or follow the steps in how to add sales tax to an invoice. PayToMe’s free tools work today, and its invoicing engine is in development with the same exact math.
Related terms
- VAT: the multi-stage tax used in the EU and UK.
- Subtotal: the amount before tax is added.
- Line item: each priced entry that may or may not be taxable.
- Reverse charge: a rule that shifts tax collection to the buyer.