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Property tax vs. sales tax: What’s the difference?

A number of taxes contribute to government budgets. Generally speaking, each jurisdiction determines how much of the budget is funded by each type of tax (which is part of why some states have income tax while others don’t).

For businesses and for individual taxpayers, two expensive and complicated tax types to manage are sales tax and property tax. Who pays which and how much is decided by each jurisdiction — but whether the taxes get paid is not up for debate.

In this post, we’ll compare and contrast sales tax and property tax. Read on to learn:

What is property tax?

There are two types of property tax businesses need to be familiar with:

Real property tax

  • Includes land, plus the buildings and fixtures permanently attached to it
  • Is assessed on agricultural, commercial, industrial, residential, and utility property
  • Applies in all 50 states

Personal property tax

  • Includes items such as machinery, fixtures, and other equipment not permanently affixed to land 
  • Is assessed only on property used for the business
  • Applies in 43 states

Property taxes are assessed by jurisdictions based on an assessor’s audit. It’s part art, in that an assessor is trained to evaluate the worth of your property based on their expertise. It’s also part science in that many assessors also use complicated algorithms to help determine the ultimate value of both real and personal property, especially when adjusting for appreciation or depreciation.

A typical property tax year includes:

  • An assessment of the property value
  • A set period of time to appeal the assessment
  • Issuance of the property tax bill
  • Submitting the property tax payment
  • Filing the property tax return

What is sales tax?

Sales tax is a type of tax applied to goods and services at the time of purchase. Rates vary across jurisdictions and can be determined by any combination of state, county, and city tax authorities.

There are five states without sales tax:

  • Alaska
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

While it doesn’t have a state tax rate, Alaska does allow local jurisdictions to charge their own sales tax.

The remaining 45 states charge a state rate, with many also allowing for local jurisdictions to determine their own rates — which is why sales tax rates can vary from county to county, city to city, or even one street to the next.

Even in states with a state or local sales tax, not all items are taxable in every jurisdiction. For example, many states and local authorities exempt necessities like food, medical devices, feminine hygiene products, and diapers. 

Oftentimes, products vital to local economies are also tax exempt or subject to a lower tax rate. For example, jet fuel is exempt in Georgia and many states discount or exempt sales tax on farming equipment.

There are several ways businesses can establish nexus (an obligation to collect sales tax) in a state, including sales activities, physical presence, and affiliations. Once a business does, it’s required to register with the state, collect the tax (or a valid exemption certificate), file a sales tax return, and remit any owed tax to the state or local jurisdictions.

How are property tax and sales tax different?

These tax types vary in several ways:

 Property taxSales tax
Tax typeProperty tax is a direct tax, for which the owner of the property is obligated to pay the taxes.Sales tax is an indirect tax, for which a company collects tax from a customer on behalf of the government.
OccurrenceProperty owners are responsible for paying taxes on their property every year.Sales tax is paid once, when the goods or services are sold.
Filing frequencyProperty taxes are filed on an annual basis.Depending on where you sell and how much you owe, sales tax returns must be filed on a monthly, quarterly, semiannual, or annual basis.
AssessmentAn assessor determines the property’s value, which is then subject to the applicable tax rates.Rates are applied based on legislation, regardless of the value of the product or service.
Rate determinationIn most cases, property tax rates are determined by levies voted on by citizens of the jurisdiction.State and local governments determine sales tax rates.
AppealsA business can appeal the valuation of its real or personal property.Sales tax rates are set, and aren’t open to negotiation by consumers or sellers.

How are property tax and sales tax similar?

There are many similarities between property tax and sales tax:

  • Businesses can be audited for both sales tax and property tax compliance.
  • Exemptions may apply for either type of tax, though sales tax exemptions are far more common.
  • Jurisdictions set their own rules for both sales tax and property tax compliance, including deadlines, forms, exemptions, and filing requirements.
  • Rates can and do change frequently, regardless of whether they’re determined by legislative bodies or ballot measures.

Perhaps the most important similarity between property tax and sales tax is the requirement to pay — and the potentially steep consequences for not remitting the tax owed properly or on time. Fortunately, both sales tax compliance and property tax compliance can be simplified with automation.

Get help managing tax compliance

Avalara offers cloud-based tax automation software to help you manage your compliance processes for a range of tax types:

  • Avalara Property Tax helps businesses manage data entry, documents, deadlines, and due dates for assessments, bills, property tax returns, and more.
  • Avalara AvaTax dynamically applies sales tax calculations, based on regularly updated rules and rates in our tax engine, to a shopping cart or invoicing system at the time of purchase.

Our products work with common ERP platforms, accounting programs, and other business systems with prebuilt integrations and a powerful API.

If you want to know more about how Avalara can help your company manage sales tax and property tax, schedule a call today.

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