What happens to the sales tax we pay on everyday purchases? Does sales tax go to the state government or federal government? Is sales tax different from income tax? We’ll answer these questions and more as we analyze the path sales tax takes from your wallet all the way to government programs and services.
How Sales Tax Differs from Income Tax
Before we follow the money trail, let’s clarify the key differences between sales tax and income tax:
Sales tax is added onto the price of goods and services purchased by the consumer. For example, if you buy a $100 gadget, you may pay $108 total at the register with $8 as sales tax. This tax is collected by the seller.
Income tax is a percentage of personal or business earnings. It’s paid directly by individual taxpayers or business owners when they file taxes. Income tax helps fund federal initiatives and programs.
So sales tax is transactional, paid at the point of sale, while income tax is paid yearly on what you or your business earns. This distinction is key to understanding where your money goes.
Does Sales Tax Go to the State Government or Federal Government?
Here’s the number one takeaway – sales tax goes to state governments, not the federal government.
Forty-five states levy sales taxes on purchases. Local jurisdictions like cities and counties then piggyback an additional sales tax percentage on top of the state rate.
For example:
- State sales tax rate: 5%
- County sales tax rate: 2%
- Total sales tax paid: 7%
The state retains the 5% portion while routing the 2% county sales tax to local municipalities.
On the other hand, there is no federal sales tax. While state sales taxes range from 2.9% to as high as 7.25%, consumers don’t pay an additional federal chunk when purchasing goods.
So why do states heavily rely on sales tax while the federal government uses income taxes? Let’s take a brief look at the history.
History Behind State Sales Taxes and Federal Income Taxes
Back in the early 20th century, the federal government amended the United States constitution to enable Congress to levy income taxes without apportioning it among the states.
However, per the Tenth Amendment, states retain powers not explicitly granted to the federal government. This gives them jurisdiction over sales taxes as a major revenue engine.
Fast forward to today, and you can see clear divisions:
- State governments depend heavily on sales tax revenue due to constitutional restrictions on levying income taxes.
- The federal government relies primarily on income tax plus social insurance taxes rather than sales taxes.
Now we know about the structure, but what’s the impact on actual tax dollars collected?
Comparing Total State Sales Tax Revenue vs. Federal Revenue
We’ve established that sales taxes flow only to states while the federal government collects income taxes. But how do they compare in terms of overall revenue? Which pot is bigger?
Check out this revenue breakdown:
| Revenue Source | Annual Tax Revenue |
|---|---|
| Total State Tax Revenue | $1.1 trillion |
| Total State Sales Tax Revenue | $471 billion |
| Total Federal Revenue | $4.05 trillion |
A few interesting observations here:
- State sales tax accounts for around 43% of total state tax revenue on average. Other sources like personal income taxes, corporate taxes, motor fuel taxes, and licenses round out state funding.
- Federal income taxes and social insurance taxes like payroll taxes comprise over 90% of federal revenue. Only a tiny sliver comes from excise taxes on specific goods.
- Federal tax revenue significantly outpaces total state tax income. This aligns with its broader spending powers and responsibilities.
Now that we’ve mapped the different tax flows, let’s get specific…
Where exactly does my sales tax money go once I swipe my credit card?
Where Do State Sales Tax Dollars Ultimately End Up?
When you pay sales tax on retail purchases, where does that money travel in the state financial ecosystem? We’ll do a 4-step following of the dollars to trace the life cycle:
1. You Pay Sales Tax at Time of Purchase
First, consumers pay the sales tax to sellers at the point of making retail transactions. For example, your grocery store collects a 7% sales tax on milk, eggs, and other goods. This tax gets bundled into the total amount due.
2. Sellers Remit Collected Taxes to State Tax Authorities
Next, sellers gather all sales taxes accumulated from customers and regularly remit lump sums to relevant state departments of revenue.
Grocery stores send all sales taxes from milk, eggs, bread, and more to the state tax agency. Some small- to mid-sized sellers use intermediate services to file and pay sales taxes on their behalf.
3. State Tax Departments Distribute Revenue Shares
Upon receiving sales tax payments from stores across the state, the tax agency separates allocations for the state treasury vs. any local municipality shares buried in the total percentages.
Our 7% grocery store example contained 5% state sales tax and 2% county sales tax. So the tax man divvies up and sends 70% to the state treasurer while routing 30% to county government budgets.
4. Funds Used for State and County Public Services
Finally, sales tax revenues flowing into state and county coffers fund all types of public services from infrastructure to parks, schools, police, tourism bureaus and more. The money keeps circulating locally rather than routing to the IRS.
Phew! Now we’ve fully followed the trail to see how everyday sales taxes power vital community services through state and local governments.
Conclusion
We’ve explored key differences between sales taxes and income taxes. Importantly, sales tax revenues flow entirely to state and local governments rather than the IRS.
States and counties rely heavily on retail sales taxes to fund essential services that citizens depend on every day. From roads to schools to health programs and beyond, sales taxes keep communities up and running.
So next time you’re tallying up the cost of a shopping cart, know that sales tax dollars collected stay closer to home supporting needs across your state.
FAQs
Still have some lingering questions around sales tax collection, rates, and reporting? Here are 5 of the most frequently asked questions for clarity:
Is sales tax federal or state or local?
Sales tax in the United States is imposed at the state and local levels. There is no federal sales tax. States and local municipalities have the authority to collect sales tax under federal law.
Which tax is applicable on local state sale?
For in-state sales, the sales tax rate applied is based on the local rates where the product or service is delivered. For example, if a sale occurs in Los Angeles county (9.5% sales tax), the 9.5% county/city sales tax would apply on the total sales price. The rate combines state, county and city-level sales taxes.
What is sales tax compliance in the US?
Sales tax compliance refers to businesses correctly calculating, collecting, filing, and remitting sales tax to state and local tax authorities. Businesses are required to charge, collect, and remit sales tax in states and localities where they have a physical presence or economic nexus. Compliance requirements can vary across different tax jurisdictions. Staying updated on registration, tax rate changes, filing due dates, and audits is necessary for sales tax compliance. Most states require businesses to use sales tax compliance software to properly manage their sales tax responsibilities.
