Overview: U.S Sales Tax is a state-level tax on the sale of goods and services. Unlike federal taxes, sales tax laws and rates differ for each state in the USA, and can directly impact a business’s success, regardless of size, industry, or stage.
Sales taxes are typically calculated as a percentage of the sale price, and are collected at point of sale.
The responsibility of collecting and remitting sales taxes falls on the business owner. This is a vital step in the tax compliance process for founders.
Sales Tax = Purchase Price/Invoice Value * Sales Tax Rate
Example:
Scenario: “Company A” sells a product to college students that enhances their productivity and workflows using AI.
Customer: Your first customer is based in New York City, and purchases the product from New York State.
Revenue Model: Company A charges a simple $100 for their product.
Sales Tax Calculations:
New York State charges a 8.875% sales tax.
If Company A charges $100/month - the total charge would be $108.88 for your customer’s monthly fee.
Sales Tax charged: $8.88.
Collecting and remitting sales taxes on time is required.
If sales taxes go unpaid, state regulators have the power to audit customers, gather information from various third parties, and charge business owners hefty fees with interest, sometimes leading to lawsuits and penalties.
Why does sales tax exist?
Governments utilize sales taxes to fund various important services across many sectors - including infrastructure, education, healthcare, and urban planning.
As a founder of a business, sales taxes can naturally affect many aspects of your decision making process - things like pricing strategy, cash flow management, competitive positioning and of course, compliance.
It is important to always consider sales tax as a factor in effective revenue management practices.