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Guide to GST tax

Most countries worldwide charge some form of GST tax at the point of sale. So, what is GST tax and how does it work? Here’s what you need to know about this type of sales tax within the US, including GST tax rates and exemptions for businesses.

What is GST tax?

GST usually stands for goods and services tax. It’s a form of VAT or value-added tax levied on goods and services sold domestically. GST is paid by the consumer at the time of sale but then sent on to the government by the businesses selling these goods or services. Because of this structure, it’s considered an indirect tax rather than a direct tax. Additional examples of indirect taxes include things like property tax, business licensing requirements and utility surcharges.

There is no federal sales tax system within the United States. Instead, indirect taxes like the GST tax or excise tax are imposed on a state-by-state basis. Each state has the constitutional right to impose its own sales tax, and this is broken down even further into city and county-wide tax regulations.

The GST tax rate varies by location. State sales tax generally ranges between 3% and 7%. At the local government level, GST tax rate might also include an additional 1% to 5%, dependent on the type of transaction. In most locations, goods like food products, residential utilities and essential machinery are exempt from these rates.

What transactions are subject to GST tax?

GST tax applies to the sale of goods and services, including “tangible personal property.” Some states tax digital goods as well as tangible, such as streaming video, e-books, or online music. Calculating US sales tax can be an onerous process since the rules vary from state to state. Businesses need to file returns to each jurisdiction where GST tax is collected, which can be time-consuming without automated software to do it for you.

In most cases, anyone involved with business sales must register with the appropriate state to receive a sales tax license or other certification. However, some states use an economic threshold such as volume of annual sales to determine whether you must register. For example, the threshold might be 100,000 USD of in-state sales before you need to worry about sales tax registration or goods and services tax credits. For small businesses with low sales volumes, sales tax wouldn’t apply here.

What is the GST tax exemption?

GST stands for goods and services tax in most countries, but within the United States it can also refer to the “generation skipping tax” exemption. The GST tax is usually mentioned alongside gift and inheritance taxes, levied on gifts made to younger generations. In this case, the GST tax applies to recipients that are at least 37.5 years younger than the donor. It also relates to any gifts between a donor and recipient within the same family that skips a generation, such as a monetary gift between a grandparent and grandchild. The idea is that this cracks down on wealthy taxpayers from dodging the usual estate taxes by skipping a generation.

The GST tax exemption, as with gift and estate taxes, has a threshold of $11.7 million in 2021. If your generation-skipping gift or money transfer exceeds this threshold, only the portion above the exemption is taxable. However, it gets a bit more complicated because you have the option of dipping into this exemption throughout your lifetime to transfer money to gift recipients and avoid taxation. The GST tax rate is adjusted for inflation, so may change over time.

The bottom line

Whether you’re concerned with goods and services tax credits or the generation skipping tax exemption, meticulous record-keeping is required in both instances. Be sure to keep accurate invoices, collect receipts, and file returns in line with all state and federal IRS requirements. Consulting an enrolled agent can also be helpful to be sure you’re following guidelines.

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