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Sales Tax: What It Is and How to Deduct It
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Sales Tax: What It Is and How to Deduct It?
There’s nothing like saving for your dream car, laptop or iPhone only to be surprised by a much higher bill at checkout, all thanks to state sales tax.
Taxes are a source of income for the government and fund things like schools, roads, security and national debt. For US states, sales tax is usually the primary source of funding.
There’s no denying that paying taxes is a task no one enjoys, but there’s some good news about sales tax. You can take a sales tax deduction on your tax return and save some of your hard-earned cash.
Key Takeaways
- Filing for an extension is fast and easy
- The request must be made before the filing deadline
- An extension doesn't change the time when your taxes are due
Table of contents
What is sales tax?
Sales tax is a tax imposed by the government when citizens purchase goods or services. It is collected by the payment processing entity or a third party, such as Paypal or Venmo.
Sales tax is considered a pass-through tax system, meaning when the tax is collected from a merchant, instead of keeping it, they pass it on to the state along with a sales tax return.
Sales tax rates vary by state. For example, Hawaii’s sales tax rate is 4.44%, but California’s sales tax rate is 7.25%. All but five states have some sort of sales tax in place. The states without a sales tax are Delaware, Oregon, New Hampshire, Alaska and Montana.
Local counties, districts and cities can also collect sales tax. This means an extra 1-2% on top of the state sales tax. This tax goes towards funding things like local schools, roads and parks.
For example, in Philadelphia, you’ll be charged a tax of 1.5 cents per ounce for sugary drinks like soda and other sweetened beverages. But the same soda won’t have the city tax if bought outside city limits.
What does sales tax fund?
Since sales tax is administered at a state level, any collected sales tax is used to benefit the state. Most of the money collected goes into a General Fund, the main source of funds for funding the state’s operations.
The specific programs funded by the General Fund vary by state. For example, in Pennsylvania, state legislators voted on spending for the General Fund, which determines how much money will be allotted for each fund category.
Can I deduct sales tax?
You might be wondering, is sales tax deductible? Well, you could be eligible to deduct sales tax if you:
- Make big renovations or purchases throughout the year
- Live in a state without sales tax
- Can save more by itemizing deductions instead of taking the standard deduction
Are state taxes deductible?
Simply put, yes, you can take the state tax deduction. However, the Tax Cuts and Jobs Act (TCJA) changed the federal tax deduction for state sales tax requirements, and taxpayers are only allowed to deduct up to $10,000 of state sales tax or income tax.
For example, if you’re a professional musician, and the amount of self-employed income you earned requires you to pay $12,000 in income taxes and $4,000 in state sales tax, you can only deduct $10,000 from the $14,000 total tax amount.
Schedule C for taxes
On the Schedule C tax form, you will list the amount of sales tax you paid throughout the tax year. Schedule C is used for any deductions you might take as a freelancer, independent contractor, self employed person or gig worker.
Some Schedule C deductions include things like:
- Vehicle mileage
- Work clothes or uniforms
- Education expenses
- Business meals
- Business travel
What’s the difference between sales tax and VAT?
Both sales tax and VAT (value-added tax) are consumer taxes, meaning they have to be paid when you purchase something to be used. But one key difference is sales tax is added to the final price, whereas VAT is already included in the price.
How to avoid sales tax?
Some people are adamant about avoiding sales taxes, even if you can take a sales tax deduction on your taxes. If you think you might fall into this category, there are some ways you can actually avoid paying it. But trying to avoid sales tax does come with a risk of penalties or interest charged if the IRS finds out.
States without sales tax
One easy way to avoid sales tax is to make purchases in a state without sales tax. For example, people living in Pennsylvania travel to Delaware to buy big-ticket items like laptops, sofas, cell phones and TVs to avoid sales tax. But this option might not be possible if you don’t live near one of the five states without sales tax.
Buy online
Internet merchants don’t have to collect sales tax if they don’t have a physical presence in the state. These remote sales cause states to miss out on a lot of uncollected tax. Small merchants and sellers on eBay are not allowed to collect sales tax.
States with special exemptions
Some states have exemptions in place on certain items. You can reduce sales tax when you buy the products in those states.
There's no sales tax on chocolate in California, Vermont, Ohio, Pennsylvania and Arizona. In Connecticut, you won’t have to pay sales tax on diapers. In South Carolina and Virginia, there’s no sales tax on digital products.
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