Key Takeaways
- Sales tax is calculated by multiplying the purchase price by the tax rate
- 5 states have no sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon
- Combined state and local rates can exceed 10% in some areas
- You can deduct state sales tax OR income tax on federal returns (not both)
- Many states exempt groceries, clothing, or prescription drugs from sales tax
What is Sales Tax?
Sales tax is a consumption tax imposed by the government on the sale of goods and services. It is typically calculated as a percentage of the purchase price and collected by the retailer at the point of sale. Sales tax is generally paid by the consumer and represents a primary source of revenue for many state and local governments.
Unlike income tax, which is based on earnings, sales tax is based on spending. This makes it a relatively straightforward tax to calculate and collect, as the burden of collection falls on businesses rather than individual taxpayers.
Sales Tax = Purchase Price x Tax Rate
Why Does Sales Tax Exist?
Sales tax exists to generate revenue for governments to fund essential services, such as education, healthcare, infrastructure, public safety, and transportation. It is considered an efficient way to collect tax because:
- Collection is automatic at the point of sale
- Businesses handle the administrative burden
- Revenue is generated continuously throughout the year
- It's harder to evade than income tax
However, sales tax is often considered a regressive tax, meaning it can disproportionately affect lower-income individuals who spend a larger portion of their income on taxable goods and services.
Sales Tax Rates Across the United States
Sales tax rates vary significantly by state, and many localities add their own taxes on top of state rates. Here are some notable examples:
Examples of Calculating Sales Tax
Here are real-world examples of how sales tax calculations work in different locations:
Example: New York City (8.875% combined rate)
NYC has a 4% state tax + 4.5% city tax + 0.375% Metropolitan Commuter Transportation District surcharge
Example: Chicago, IL (10.25% combined rate)
Chicago has one of the highest combined sales tax rates in the nation
Pro Tip: No Sales Tax Shopping
If you live near a state border, consider shopping in Oregon, Montana, Delaware, New Hampshire, or Alaska for major purchases. On a $1,000 purchase, you could save $50-100 in sales tax compared to high-tax states!
A Brief History of Sales Tax
Sales taxes have been used for centuries to generate government revenue. The concept dates back to ancient civilizations:
- Ancient Egypt: Taxes on oil and livestock sales
- Roman Empire: 1% sales tax (centesima rerum venalium) to fund military
- Medieval Europe: Various trade and market taxes
- United States (1930): Mississippi became the first state to implement a modern sales tax during the Great Depression
Today, 45 states and the District of Columbia impose a state-level sales tax, with most also allowing local jurisdictions to add their own taxes.
How to Deduct Sales Tax on Your Taxes
If you itemize deductions on your federal tax return, you 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 (like Texas, Florida, or Washington) who can deduct their sales taxes instead. You can either:
- Keep all receipts and calculate actual sales tax paid
- Use the IRS Sales Tax Deduction Calculator for an estimated deduction based on your income and location
Value-Added Tax (VAT) and Goods and Services Tax (GST)
Outside the United States, many countries use Value-Added Tax (VAT) or Goods and Services Tax (GST) instead of traditional sales tax:
- VAT: Collected at each stage of production, with businesses paying tax on the value they add. Common in Europe (typically 15-25%).
- GST: Similar to VAT, used in countries like Canada, Australia, and India. Often a single rate applied to most goods and services.
Both systems aim to be more efficient and harder to evade than traditional sales tax by spreading collection across the supply chain.
Frequently Asked Questions
Common exemptions vary by state but often include: groceries (unprepared food), prescription medications, medical equipment, and sometimes clothing (in states like Pennsylvania and New Jersey). Some states also offer tax-free holidays for back-to-school shopping or hurricane preparedness.
Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, most online retailers are required to collect sales tax if they meet certain sales thresholds in your state. If a retailer doesn't collect the tax, you may be required to report and pay "use tax" directly to your state.
Your total sales tax rate includes state, county, city, and sometimes special district taxes. You can find your exact rate by: checking your state's Department of Revenue website, looking at recent receipts from local purchases, or using tax rate lookup tools provided by organizations like the Tax Foundation.
The five states without sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon) generate revenue through other means: higher property taxes, income taxes, corporate taxes, or in Alaska's case, oil revenue. Each state has made policy choices about how to balance tax burdens among different sources.
In the United States, sales tax is almost always added at checkout and not included in displayed prices. This differs from many other countries where VAT is included in the sticker price. This is why your final total at American stores is always higher than the listed prices.