Sales tax is a percentage tax added to the price of goods and services at the point of sale

When you buy something in a store or online, sales tax is calculated on the purchase price and added to your bill. The seller collects this tax and sends it to the state or local government. The rate varies by location — it depends on your state, county, and sometimes even your city. Some states have no sales tax at all, while others combine state and local rates that can reach 10 percent or higher.

Sales tax is different from income tax. You pay it only when you buy taxable items, not on money you earn. It is also different from property tax, which is based on what you own, and from excise tax, which applies to specific goods like gasoline or alcohol.

Key Takeaways

  • Sales tax rates vary by state and locality, and some states do not charge sales tax at all.
  • Most tangible goods are taxable, but groceries, prescription medications, and some services are often exempt.
  • Online purchases are now subject to sales tax in most states, even when shipped from out of state.
  • The seller is responsible for collecting and remitting sales tax to the government, not the buyer.

Which items are taxable and which are exempt

Not everything you buy is subject to sales tax. Most states exempt groceries, prescription medications, and medical equipment. Some states also exempt clothing, utilities, or services like haircuts and repairs. The rules differ significantly from state to state — what is taxable in one state may be exempt in another.

Digital products like e-books, software, and streaming subscriptions fall into a gray area. Some states tax them; others do not. If you are unsure whether a specific item is taxable where you live, your state's Department of Revenue website lists the rules for your location.

How sales tax applies to online and mail orders

For many years, online retailers only collected sales tax if they had a physical presence in your state. That changed in 2018 when the U.S. Supreme Court ruled that states could require remote sellers to collect sales tax. Today, most large online retailers collect and remit sales tax based on the shipping address of your order, regardless of where their warehouse is located.

If you order from a small seller who does not collect sales tax, you may owe use tax — a tax on items purchased out of state for use in your state. Most people do not pay use tax voluntarily, but some states are increasing enforcement, especially for high-value purchases. The rate is usually the same as your local sales tax rate.

Sales tax rates by state

State sales tax rates range from zero to just over 7 percent. Five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — do not charge a state sales tax. However, some cities and counties in Alaska still collect local sales tax.

Many states layer local taxes on top of the state rate. For example, California has a state rate of 7.25 percent, but combined state and local rates in some cities exceed 10 percent. When you check out online, the retailer calculates the rate based on your zip code. If you move or shop in a different location, the rate may change.

Who pays sales tax and when

The buyer pays sales tax, but the seller collects it. When you see a price tag in a store, that price usually does not include sales tax — the tax is added at checkout. Online retailers typically show the tax separately in your cart or at the final step before payment.

The seller then has a important date to send the collected tax to the state. important date vary — some states require monthly payments, others quarterly. If a seller fails to collect or remit sales tax, the state can pursue the seller, not the customer. As a buyer, your responsibility ends when you pay the amount shown at checkout.

Sales tax deductions for business owners

If you own a business, you may be able to deduct sales tax you pay on business purchases. However, the rules depend on how you structure your business and whether you are registered as a sales tax collector. Sole proprietors and pass-through entities like S-corporations and LLCs can often deduct sales tax paid on business inventory and equipment.

If you are registered to collect sales tax, you typically cannot deduct the tax you collect from customers — that money belongs to the state. You can deduct sales tax paid on items you purchase for resale or for business operations. Keep receipts for all business purchases, as you will need them if the state audits your returns. A tax professional can help you determine what qualifies as a deductible business expense in your situation.

How sales tax affects your budget

Sales tax increases the final cost of what you buy. If an item is priced at $100 and your local sales tax rate is 8 percent, you pay $108. Over time, this adds up — a family that spends $20,000 a year on taxable goods in an 8 percent tax jurisdiction pays $1,600 in sales tax annually.

Some people factor sales tax into their budgeting by calculating the after-tax cost of major purchases before they buy. Others use the price tag as a rough guide and account for tax at the register. Knowing your local rate helps you estimate the true cost of purchases, especially for big-ticket items like furniture or appliances.

Frequently Asked Questions

Do I have to pay sales tax on everything I buy?

No. Most states exempt groceries, prescription medications, and certain services. Some states also exempt clothing or utilities. The exemptions vary by state, so check your state's Department of Revenue website for a complete list of what is and is not taxed where you live.

Why do online retailers charge different sales tax rates?

Online retailers calculate sales tax based on your shipping address, not where the retailer is located. Your zip code determines your state, county, and local tax rates. If you order to a different address, the tax rate changes. This is why the same item may cost different amounts depending on where it is shipped.

What is use tax and do I have to pay it?

Use tax is a tax on items you purchase out of state for use in your state. It is owed when a seller does not collect sales tax. Most people do not pay it voluntarily, but states are increasing enforcement for high-value purchases. The rate is usually the same as your local sales tax.

Can I deduct sales tax on my income tax return?

Individual taxpayers cannot deduct sales tax on personal purchases. However, business owners may deduct sales tax paid on business inventory and equipment. If you own a business, consult a tax professional about what qualifies as a deductible business expense.

Which states have no sales tax?

Alaska, Delaware, Montana, New Hampshire, and Oregon do not charge state sales tax. However, some cities and counties in Alaska still collect local sales tax. If you live in or order to one of these states, you may pay little to no sales tax, depending on local rules.