What is Sales Tax?
Sales tax is a consumption tax imposed by governments on the sale of goods and services. It's typically calculated as a percentage of the purchase price and is collected by the seller at the point of sale, then remitted to the government. Unlike income tax, which is based on earnings, sales tax is based on spending.
Sales tax is one of the most common forms of consumption tax worldwide, though it goes by different names in various countries. In the United States, sales tax rates vary significantly by state and locality, creating a complex landscape for businesses and consumers alike.
How to Calculate Sales Tax
Adding Tax to a Price
To calculate the total price including sales tax:
Example: Adding 8% Sales Tax
Net Price: $100.00
Tax Rate: 8%
Tax Amount: $100 x 0.08 = $8.00
Gross Price: $100 + $8 = $108.00
Finding the Price Before Tax (Reverse Calculation)
To find the original price from a tax-inclusive price:
Example: Finding Original Price
Gross Price (total paid): $108.00
Tax Rate: 8%
Net Price: $108 / 1.08 = $100.00
Tax Amount: $108 - $100 = $8.00
Finding the Tax Rate
If you know both the original price and tax amount:
Sales Tax vs. VAT vs. Excise Tax
| Type | Description | Application |
|---|---|---|
| Sales Tax | Tax on retail sales to end consumers | Collected only at final point of sale |
| VAT (Value Added Tax) | Tax on value added at each production stage | Collected throughout supply chain, typically more common outside the US |
| Excise Tax | Tax on specific goods (fuel, alcohol, tobacco) | Fixed amount per unit rather than percentage |
States Without Sales Tax
Five US states have no statewide sales tax, making them attractive for large purchases:
- Alaska - No state tax, but some localities impose local sales tax
- Delaware - No sales tax at state or local level
- Montana - No sales tax, with some resort area exceptions
- New Hampshire - No sales tax on most goods
- Oregon - No sales tax at any level
Combined State and Local Sales Tax Rates
The following table shows the combined average state and local sales tax rates for each US state. Note that local rates can vary significantly within each state.
| State | State Rate | Avg. Local Rate | Combined Rate |
|---|---|---|---|
| Tennessee | 7.00% | 2.55% | 9.55% |
| Louisiana | 4.45% | 5.07% | 9.52% |
| Arkansas | 6.50% | 2.97% | 9.47% |
| Washington | 6.50% | 2.67% | 9.17% |
| Alabama | 4.00% | 5.14% | 9.14% |
| California | 7.25% | 1.57% | 8.82% |
| New York | 4.00% | 4.52% | 8.52% |
| Illinois | 6.25% | 2.25% | 8.50% |
| Texas | 6.25% | 1.95% | 8.20% |
| Kansas | 6.50% | 1.50% | 8.00% |
Sales Tax Deductions
In the United States, taxpayers who itemize deductions can choose to deduct either state and local income taxes OR state and local sales taxes. This is particularly beneficial for residents of states with no income tax.
When to Deduct Sales Tax:
- You live in a state with no income tax (or low income tax)
- You made major purchases during the year (car, boat, home improvements)
- Your sales tax paid exceeds your state income tax
Economic Impact of Sales Tax
Sales tax is considered a regressive tax because it takes a larger percentage of income from low-income earners than from high-income earners. Since lower-income individuals spend a higher proportion of their income on taxable goods, the effective tax burden is proportionally higher for them.
Many states address this by exempting essentials like groceries, prescription medications, and clothing from sales tax. These exemptions help reduce the regressive impact on lower-income households.
Frequently Asked Questions
How do I calculate sales tax backwards?
To find the sales tax rate from a receipt: Subtract the net price from the gross price to get the tax amount, then divide the tax amount by the net price and multiply by 100.
Is sales tax included in the displayed price?
In the United States, sales tax is typically NOT included in displayed prices and is added at checkout. In most other countries using VAT, tax is usually included in the displayed price.
Do I have to pay sales tax on online purchases?
Yes, following the 2018 Supreme Court ruling in South Dakota v. Wayfair, states can require online retailers to collect sales tax even without a physical presence in the state.
What items are typically exempt from sales tax?
Common exemptions include: groceries (in many states), prescription medications, medical equipment, and sometimes clothing. Exemptions vary significantly by state.