Income Tax vs Sales Tax

Nov 30, 2022 | Blog Posts

Income Tax vs Sales Tax

Income tax is a direct tax paid by individuals on their income while sales tax is a pass-through tax charged on the sale of goods.

Individuals pay federal and state income tax while sales tax is administered at a state level only, and consumers who live in a state with sales tax pay it directly to merchants at the point of sale. Merchants then remit the sales tax collected to the state.

In other words, income-earning individuals must comply with income tax but only sellers of goods must deal with collecting and remitting sales tax on behalf of the state.

Both income tax and sales tax are major sources of revenue and states are naturally interested in ensuring that merchants comply with sales tax laws but can only enforce sales tax collection on merchants who have sales tax nexus in their state. Nexus is created by the following:

  • Having an office or warehouse
  • Having an employee 
  • Having economic nexus
  • Storing inventory 
  • Drop shipping from a 3rd party provider 
  • Temporarily doing physical business in a state (i.e. trade show)

For example, if you live and operate your business in New York, then you have sales tax nexus and must register for a sales tax permit and collect sales tax from customers there. But if you live in California and do not have any sales tax nexus (no office, employees, inventory, etc.) in Pennsylvania, then you don’t need to collect sales tax from your customers in Pennsylvania.  The amount of sales tax you collect varies from state to state and location to location as well.

As always, sales tax varies by state and if you have questions about your sales tax obligations or would like to outsource the burden, please reach out to our team.