What Is Sales Tax?
Sales tax is a consumption tax imposed by government on the sale of goods and services. In the United States, sales tax is administered at the state level, with some states allowing local jurisdictions to impose additional sales taxes.
When you purchase a product or service in a state with sales tax, the seller collects the tax from you and remits it to the appropriate government agency. The rate varies significantly between states and even between cities within the same state.
How Sales Tax Works
Tax-Inclusive vs Tax-Exclusive Pricing
In the U.S., sales tax is typically added at the point of sale, meaning the price displayed usually doesn't include tax. However, some businesses include tax in their displayed prices, which is more common in other countries.
Calculating Sales Tax
To calculate sales tax on an item, multiply the price by the tax rate (expressed as a decimal). For example, an $100 item with an 8% tax rate would have $8 in sales tax ($100 × 0.08 = $8).
Reverse Calculating Sales Tax
If you know the total price including tax and want to find the original price, divide the total by (1 + tax rate). For example, if you paid $108 for an item with 8% tax, the original price was $100 ($108 ÷ 1.08 = $100).
Sales Tax Variations by State
States Without Sales Tax
Five U.S. states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, local jurisdictions in Alaska may impose sales taxes.
States With High Sales Tax
California has the highest state-level sales tax at 7.25%, but when combined with local taxes, some areas can exceed 10%. Other high-tax states include Tennessee (7%), Indiana (7%), and Mississippi (7%).
Combined State and Local Taxes
Many states allow cities, counties, and other local jurisdictions to add their own sales taxes on top of the state rate. This means the total sales tax rate can vary significantly within a single state.
What's Taxable and What's Not
Commonly Taxable Items
Most tangible personal property is subject to sales tax, including clothing, electronics, furniture, and vehicles. Many services are also taxable, though this varies by state.
Commonly Exempt Items
Many states exempt groceries, prescription drugs, and medical devices from sales tax. Some states also exempt clothing below a certain price threshold or during specific tax holidays.
Digital Products and Services
The taxation of digital products like e-books, software, and streaming services is evolving. Many states now tax these items, but the rules vary significantly.
Sales Tax vs Use Tax
Sales Tax
Sales tax is collected by the seller at the point of sale and applies to transactions within the same state.
Use Tax
Use tax applies to purchases made from out-of-state sellers where sales tax wasn't collected. Consumers are generally responsible for reporting and paying use tax on their state income tax returns.
Economic Nexus
Following the South Dakota v. Wayfair Supreme Court decision in 2018, states can require out-of-state sellers to collect sales tax if they meet certain economic thresholds, typically based on sales volume or transaction count.
Tips for Managing Sales Tax
For Consumers
When budgeting for purchases, remember to account for sales tax. Use a sales tax calculator to determine the true cost of items before making purchasing decisions.
For Businesses
Businesses must register for sales tax permits in states where they have nexus, collect the appropriate tax from customers, file regular returns, and remit the collected taxes to tax authorities.
Online Shopping
Most online retailers now collect sales tax, but if they don't, you may be responsible for paying use tax on those purchases. Keep records of online purchases for tax purposes.
Tax Deductions
Sales tax can be deducted on federal income tax returns if you itemize deductions, though you must choose between deducting sales tax or state income tax.