Malcolm Rivera
The US Constitution and federal laws are deemed the Supreme Law of the Land, meaning that states cannot impose sales tax on the federal government. However, the federal government does not administer sales tax; instead, it is determined by state and local governments. Several state constitutions impose limitations on sales tax, restricting or prohibiting the taxing of certain items, such as food. Sales tax rates and what is taxed vary by jurisdiction, and currently, 45 states have a sales tax.
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What You'll Learn
The Supremacy Clause
Several high court rulings have established this legal precedent. For example, rulings have been based on liability for payment, where if the federal government is directly responsible for payment, states cannot assess a sales or use tax. Additionally, federal employees travelling on business or making work-related purchases may be exempt from state taxes. Centrally Billed Accounts (CBA) are issued at the agency, bureau, or division level, rather than to individuals, and are exempt from sales tax.
Another example is Individually Billed Accounts (IBA), where federal government employees are issued accounts for travel expenses, which are paid for by the employee and later reimbursed by the federal government. These transactions are also exempt from sales tax.
The Court has also held that certain instrumentalities of the federal government are immune from state taxation. For instance, in Choctaw & Gulf R. R. v. Harrison, the Court held that a lease with a lessee of restricted Indian lands, who was deemed an instrumentality of the United States, was exempt from a gross production tax. Similarly, in McCulloch v. Maryland, the Court held that a state may not tax an instrumentality of the federal government.
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State tax limitations
Sales taxes in the United States are taxes placed on the sale or lease of goods and services. Sales tax is governed at the state level and no national general sales tax exists. Forty-five states impose state-level sales taxes, while consumers also face local sales taxes in 38 states, including Alaska, which does not impose a statewide tax.
The federal government does not administer sales tax; it is determined by state and local governments. States cannot impose sales tax on the federal government. Several high court rulings have established this legal precedent, which include but are not limited to rulings based on liability for payment. If the federal government is directly responsible for payment, states cannot assess a sales or use tax. Federal employees travelling on business or making work-related purchases may or may not be subject to state taxes. States may be able to determine whether to apply taxes to federal government transactions.
Exemptions typically fall into two categories: use-based or entity-based. Use-based exemptions are when an otherwise taxable item or service is used in a manner that has been deemed exempt. The resale exemption is the most common use-based exemption. Other use-based exemptions could be items or services to be used in manufacturing, research and development, or teleproduction. Entity-based exemptions are when the item or service is exempt because the purchaser falls into a category the state has granted an exempt status. Exempt entities could be government (federal, state or local), non-profit organizations, religious organizations, tribal governments, or foreign diplomats. Every state decides for itself which use-based and entity-based exemptions it will grant.
In 2018, the Supreme Court ruled that states have the power to require out-of-state sellers to collect and remit sales tax, regardless of whether they have a physical presence in the state. Several state constitutions impose limitations on sales tax, restricting or prohibiting the taxing of certain items, such as food.
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Sales tax exemptions
Entity-based exemptions are granted based on the purchaser's identity. These include federal, state, or local governments, non-profit organizations, religious organizations, tribal governments, and foreign diplomats.
Each state has its own unique set of sales tax exemptions. For example, in Virginia, machinery, tools, fuel, and supplies used in industrial production are exempt from sales tax, along with items related to advertising, publishing, and education.
Some states exempt groceries from local taxes, while others provide income tax credits to compensate for food taxes. Certain states also exempt sales of machinery and equipment used in manufacturing, agriculture, and food production.
Diplomatic tax exemption cards are issued by the Department's Office of Foreign Missions (OFM) to eligible foreign missions and their members and dependents based on international law and reciprocity. These cards provide point-of-sale exemption from sales tax throughout the United States.
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Federal employee tax status
The Supremacy Clause of the US Constitution establishes that federal laws are "the supreme law of the land". As such, states cannot impose sales tax on the federal government. Federal employees who are travelling for work or making work-related purchases may be subject to state taxes, but this is not always the case. The federal government is billed directly for the purchase of goods and services and should not be assessed sales or use tax.
Federal employees are subject to federal income tax, Social Security and Medicare taxes, and federal unemployment tax. The government entity is responsible for withholding and paying these taxes. They must also issue a Form W-2, Wage and Tax Statement, to a public official.
There are some exceptions to the federal employee tax status. For example, medical residents are considered employees of the hospital where they work, but enrolled students who work less than full-time may be excepted from FICA. Another exception is for fee-basis public officials, who are considered self-employed and are therefore not employees for tax purposes.
Sales tax rates and what is taxed vary by jurisdiction in the United States. Some states exempt groceries from local tax, while others give an income tax credit to compensate poor households. Nonprofit organizations may also be exempt from sales tax. In 2013, the Marketplace Fairness Act was passed, allowing states to collect sales taxes for online purchases.
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Online sales tax
The federal government does not administer sales tax; instead, state and local governments determine it. Forty-five states currently impose sales taxes, with Alaska, Delaware, Montana, New Hampshire, and Oregon being the only exceptions. Most state sales taxes are general, meaning they apply to most goods, but states can also impose additional selective sales taxes on specific items. For example, some states tax food but offer an income tax credit to low-income households.
Sales tax is typically collected by businesses at the time of purchase, and they must report this to the Internal Revenue Service. Businesses with a physical presence in a state that imposes sales tax are generally required to collect sales taxes from online customers in that state. However, until recently, states could only mandate that out-of-state sellers collect and remit sales taxes if the seller had a "nexus" or sufficient physical presence in the state.
In 2018, the U.S. Supreme Court issued a ruling in South Dakota v. Wayfair, Inc., which overruled the physical presence rule for sales tax nexus for online sales. This decision gave states the right to require tax collection from online retailers and other remote sellers without a physical presence in their state. This ruling was supported by large retailers like Walmart and Amazon, who argued that it was unfair that online merchants did not have to collect sales taxes.
To summarize, while there is no federal sales tax in the United States, online sales tax is a complex issue that varies by state. Businesses selling online must understand their obligations to ensure compliance and avoid financial issues.
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Frequently asked questions
The federal government does not administer sales tax; it is determined by state and local governments. However, the Supremacy Clause of the U.S. Constitution establishes that the U.S. Constitution and federal laws are "the supreme law of the land", meaning states cannot impose sales tax on the federal government.
A sales tax is a tax placed on goods at the time of purchase. While the customer pays the sales tax, it is collected by the businesses that sell the goods, and they must report the tax to the Internal Revenue Service.
Currently, 45 states have a sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not.
Exemptions typically fall into two categories: use-based or entity-based. Use-based exemptions are when an otherwise taxable item or service is used in a way that has been deemed exempt. The resale exemption is the most common use-based exemption. Entity-based exemptions are when the item or service is exempt because the purchaser has been granted an exempt status by the state.
States have the jurisdiction and power to levy and collect sales tax in any federal area within their state to the same extent and with the same effect as though the area was not a federal area.
