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A sales tax is a “consumption-type”[1] tax designed to generate revenue. In general, these taxes are calculated and collected by businesses at the point of sale and remitted to the appropriate taxing authorities.


Sales taxes have been levied throughout history, and became more widely applied in the United States beginning with the Great Depression. In 1932, Mississippi was the first state to impose a general state sales tax. During the remainder of the 1930's, an era characterized by declining revenue from income and corporate taxes, 23 other states followed suit and implemented a general sales tax to compensate for the lost revenue. At the time, the sales tax was relatively easy to administer and could raise a significant amount of revenue with a relatively low rate. Given the relative success of the sales tax in raising revenue, all but five other states added the sales tax to their tax infrastructure by the late 1960.

States' authority to levy these taxes is derived from the 10th Amendment of the U.S. Constitution, which states, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

Ordinarily imposed on the sale of tangible goods, the rates for these taxes range from 0.875% to 11%. A small number of state and local governments also impose sales tax on some services.[2] These include, for example, personal and repair services. Besides determining their own rates, states and, in some cases, local governments define and classify items and exempt certain items within their tax codes. Many of these exemptions target necessities, such as food and prescription medicines. Throughout the year, tax rates, definitions, classifications, and exemptions included in the sales tax code may be changed.

State and local governments that levy sales taxes rely on them as a major source of revenue for their general funds. The inability of state and local governments to require remote sellers to collect use taxes can be traced back to a line of the U.S. Supreme Court cases that established the "substantial nexus" standard.[3] These cases point to the Commerce Clause of the U.S. Constitution and Congress' role to regulate interstate commerce as the basis for restricting states from forcing out-of-state sellers to collect use tax.[4]


With the explosion of e-commerce, there are concerns that an increasing number of consumers will purchase items through remote sales channels such as the Internet and catalogues, and sales tax revenues from face-to-face sales may diminish. While the exact impact of e-commerce on sales tax revenues may be uncertain, clearly the need for substantial sales tax simplification is necessary in this emerging digital economy.


  1. 2 Richard D. Pomp & Oliver Oldman, State and Local Taxation, at 6-1 (3d ed. 2000).
  2. Hawaii, New Mexico and South Dakota tax services, Arkansas, Connecticut, Minnesota, Ohio, and Texas have recently expanded their taxation of selected services.
  3. Quill Corp. v. North Dakota, 504 U.S. 298 (1992)(full-text); National Bellas Hess, Inc. v. Dept. of Revenue of State of Illinois, 386 U.S. 753 (1967)(full-text).
  4. Under the Articles of the Confederation, states levied taxes as competitive trade barriers. Resulting from the competition was a lack of uniformity that hindered interstate and international trade. To rectify this situation, the Framers of the Constitution provided Congress the authority to regulate interstate commerce. Under U.S. Const., Art. I, §8, cl. 3, Congress has the authority to "regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

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