It’s no secret that sales tax in the US can get a little complicated. Unlike the standardised VAT (Value Added Tax) that can be found in the UK, Australia, Ireland and other countries where Debitoor is available, US tax rates often differ by state, region, county, and sometimes even city.
Up until recently, Debitoor offered a simplified US edition to our American users. It allowed the basics of invoicing and accounting (as we do for all our users). However, we’re thrilled to announce that the US edition now features your tax rate.
Your US tax rate
While there are a few states that do not impose a state sales tax rate, the majority (45, to be specific) do. As of the latest information, this rate ranges from 2.9% in Colorado, up to 7.25% in California.
However, these figures are a bit deceiving. This is only the state level sales tax. In most states, there are also ‘local’ level taxes. For example, while Colorado has the lowest (non-zero) state tax rate, it ranks among the highest for the local level at 4.62%. Only Alabama and Louisiana have higher local tax rates (5.10% and 5.02%, respectively).
The state with the highest combined average for state and local level taxes is Louisiana, at an impressive 10.02%.
What is sales tax?
Sales tax is the tax applied to the sale of goods and services by the state and local level authorities. As a small business owner, it’s your responsibility to apply and collect the necessary rates for your sales.
Sales tax is considered a flat tax, which means that the amount is determined by a percentage of the total sale (as opposed to a scaled tax which takes into account other factors such as the income level of the person purchasing).
Critics argue that this puts an unfair and unnecessary burden on people with a lower income, as basic, everyday necessities represent a larger part of their budget than for those with a higher income. However, many argue that the flat tax is fair and keeps the tax system as simple as possible (in an already complex tax system).
How to add tax to your US invoice
As with any sale, it’s important to calculate and show any applicable sales tax when you create an invoice. For small businesses based in the US, understanding the tax rates that apply in your state, as well as local tax rates is crucial.
The combined rate should be determined and applied to your sales invoice if your products/services are not tax-exempt (see next section).
Invoicing software like Debitoor allows you to easily select the appropriate tax rate depending on your business location. When creating a new invoice, the percentage can easily be selected from the drop down menu. The subtotals and total are calculated automatically depending on the rate applied.
What if you sell in other states?
More and more businesses are using an online platform to reach more customers. In the US, this can easily mean selling to customer out-of-state. In that case, which sales tax rates apply? The answer is unfortunately not very cut-and-dry. It can quickly become complex, but in general, the following rule applies:
- If your business is located in a state (has a physical presence), then you must apply sales tax for that state
There are several situations where a business could be exempt from applying sales tax. These include:
- If the business is reselling items that were purchased at wholesale prices
- If the business creates and sells items that are considered raw materials
- If the business sells to non-profit organisations
It is important to determine whether your particular business is tax exempt, or which rates apply.
Managing your US tax as a freelancer or small business owner
It goes without saying that one of the first steps in running a business is managing your cash flow effectively. This includes staying on top of not only the taxes your business is charged, but also those that you’re charging your customers.
Debitoor online accounting & invoicing software makes it easy to include your US tax rate on each invoice you create, depending on your state and location.