Anyone who has been to the USA and enjoyed a little retail therapy in one of the local shops will know that the price you see is not always the price you pay. Unless you visited one of the handful of states that don’t impose sales tax, you would have experienced the $50 pair of jeans costing you more than $50, as sales tax is added at the till.

As an online business, you need to be aware of your sales tax obligations, starting with the most fundamental question: who pays sales tax, and when is it charged?

This article gives a whirlwind tour of the world of sales tax with the intention of arming you with a basic, high-level understanding of how this tax will impact your business.

What are sales taxes?

Sales tax is imposed by the states for transactions that occur within their borders. In most states, sales tax kicks in when a retail sale is consummated. Initially, states only added their tax to retail sales of “tangible personal property” *(TPP), but in recent years, most states have expanded the scope of their sales taxes to encompass digital products like software, apps, and online content.

The starting assumption is that all retail sales will be taxable, but most states allow some exemptions from sales tax, usually based on the product sold or the type of buyer.

As the seller, you are responsible for knowing what products are taxed at which rates.

Who is responsible?

There are a few different types of sales tax systems implemented across the United States. The main distinction is whether the seller or the buyer is the primary taxpayer. In some states, the tax is imposed on sellers, who then have the option of passing the tax along to their purchasers. In other states, the tax is imposed on the buyer, with the seller being responsible for collecting the tax and paying it to the state. There are other states where the liability for the tax is shared by both parties.

Generally, sales tax is calculated on gross receipts: the tax applies to the full amount a seller receives as opposed to the net profit made on the sale.

Sales tax has become a material source of revenue for U.S. states, so as a seller with customers in America, it is crucial that you understand your obligations and start charging tax immediately when nexus is created.