What Is Sales Tax? How It Works and How Rates Vary by State
Last updated 05/19/2026 by
Ante Mazalin
Edited by
Andrew Latham
Summary:
Sales tax is a consumption tax collected by retailers at the point of sale on goods and certain services, then remitted to the state or local government.
It functions differently depending on jurisdiction, and what’s taxable, at what rate, varies widely across the United States.
- State sales tax: Set by individual states and applied statewide, ranging from 0% in states like Oregon and Montana to over 7% in Tennessee and Louisiana.
- Local sales tax: Added on top of state rates by counties, cities, or special districts, creating combined rates that can exceed 10% in some areas.
- Use tax: A companion tax applied when goods are purchased out-of-state or online without sales tax collected, requiring buyers to self-report.
- Excise tax: A targeted form of consumption tax applied to specific goods like fuel, alcohol, and tobacco, sometimes confused with general sales tax.
Most Americans encounter sales tax dozens of times each week without giving it much thought. But for businesses collecting it and consumers making major purchases, understanding how it works and where it applies can make a meaningful difference.
How sales tax works
When you buy a taxable item, the retailer adds the applicable sales tax to the sale price and collects it from you at checkout. The retailer then holds those funds and remits them to the appropriate government agency, typically monthly or quarterly, depending on sales volume.
According to the Tax Foundation, 45 states and the District of Columbia collect statewide sales taxes. The five states with no state-level sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon, though some of those allow local governments to impose their own.
State and combined sales tax rates
The rate you actually pay at checkout is usually a combination of state and local rates. Combined rates vary significantly across the country.
| State | State Rate | Avg. Local Rate | Avg. Combined Rate |
|---|---|---|---|
| Tennessee | 7.0% | 2.55% | 9.55% |
| Louisiana | 4.45% | 5.10% | 9.55% |
| Arkansas | 6.5% | 3.0% | 9.5% |
| California | 7.25% | 1.57% | 8.82% |
| Oregon | 0% | 0% | 0% |
| Delaware | 0% | 0% | 0% |
Source: Tax Foundation, 2024 State and Local Sales Tax Rates
What is and isn’t taxable
Not all purchases are subject to sales tax. Exemptions vary by state but commonly include groceries, prescription medications, and medical devices. Some states also exempt clothing, agricultural equipment, and manufacturing machinery.
Services are typically not taxed in most states, though this is changing. According to the Tax Foundation, states have been expanding sales tax to cover more digital services, software subscriptions, and streaming as traditional retail sales have declined.
Good to know: Many states offer sales tax holidays, typically in late summer before the school year, during which clothing, school supplies, or computers can be purchased tax-free. These windows are usually limited to specific product categories and price thresholds.
Pro Tip
If you make large purchases online and the retailer doesn’t collect your state’s sales tax, you are technically required to report and pay a “use tax” on those items in your state tax return. Most people don’t comply, but it is a legal obligation in 45 states. This matters most for high-value purchases like furniture, electronics, or equipment.
Sales tax and online purchases
The 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally changed online sales tax. Before that ruling, online retailers only had to collect sales tax in states where they had a physical presence. After the decision, states can require out-of-state sellers to collect and remit sales tax once they exceed an economic nexus threshold, typically $100,000 in sales or 200 transactions per year.
As a result, most major online retailers now collect sales tax in all states that have one.
How sales tax differs from income tax
Sales tax is a transaction tax, collected when money is spent. Federal income tax is collected on earnings, and deductions can reduce the amount owed. Sales taxes offer no equivalent mechanism, which is why economists often describe them as regressive, meaning they take a larger share of income from lower-income households who spend a higher proportion of what they earn.
Unlike federal income tax, sales tax revenue goes entirely to state and local governments. It funds public services including education, roads, and emergency services at the local level. According to our tax relief industry study, state and local taxes, including sales tax, represent a significant portion of the average American household’s total tax burden each year.
How to calculate sales tax on a purchase
- Find the applicable rate: Look up your state’s sales tax rate and add any local rates for your city or county. Many state revenue department websites provide combined rate lookup tools by ZIP code.
- Confirm the item is taxable: Check whether your purchase falls into a taxable category. Groceries, prescriptions, and some clothing are exempt in certain states.
- Multiply the pre-tax price by the rate: If the combined rate is 8% and the item costs $200, the tax is $200 × 0.08 = $16.
- Add tax to the pre-tax price: The total you’ll pay at checkout is $200 + $16 = $216.
Sales tax is one of the simpler taxes to calculate, but the variation across thousands of state and local jurisdictions makes it complex for businesses operating in multiple states.
Related reading on taxes
- Federal income tax — explains how the U.S. progressive income tax system works, tax brackets, and how withholding is calculated.
- Standard deduction — covers how the standard deduction reduces taxable income and how it compares to itemizing.
- Property tax — breaks down how local governments assess and levy taxes on real estate, separate from sales and income taxes.
- Estate tax — explains how wealth transferred at death is taxed at the federal and state levels, with applicable exemption thresholds.
Frequently asked questions
Is sales tax deductible on federal taxes?
Yes, but only if you itemize deductions. Under the SALT (state and local tax) deduction, you can deduct either state and local income taxes or state and local sales taxes, capped at $10,000 per year for individual filers. Most people take the standard deduction, which makes this deduction irrelevant for them.
Why do some states have no sales tax?
States without a sales tax typically generate revenue through other means, such as higher income taxes, property taxes, or in Alaska’s case, oil and gas revenues. The policy tradeoffs differ, but no-sales-tax states are not necessarily lower-tax states overall.
Do businesses pay sales tax?
Businesses generally don’t pay sales tax on items purchased for resale, as the tax is collected when the end consumer buys the product. However, businesses do pay sales tax on items purchased for their own use, such as office supplies or equipment not intended for resale.
What is a sales tax exemption certificate?
A sales tax exemption certificate is a document businesses present to suppliers to purchase goods without paying sales tax when those goods will be resold. The responsibility for collecting the tax shifts to the point of the final sale to an end consumer.
How does sales tax work for services?
Most states do not tax services by default, but this varies widely. States like Hawaii, New Mexico, and South Dakota tax a broad range of services, while others like California tax very few. The trend in recent years has been toward expanding sales tax to digital services and software subscriptions.
Key takeaways
- Sales tax is a consumption tax collected at the point of sale by retailers and remitted to state or local governments.
- 45 states and D.C. have a state sales tax; the five without one are Alaska, Delaware, Montana, New Hampshire, and Oregon.
- Combined state and local rates vary from 0% to over 10%, depending on where you make a purchase.
- The 2018 Supreme Court ruling in South Dakota v. Wayfair requires most online retailers to collect sales tax even without a physical presence in a state.
- Use tax applies to out-of-state or untaxed online purchases and must be self-reported by consumers in most states.
If you’re dealing with back taxes or tax debt that includes penalties from unreported use tax or business sales tax issues, compare professional options through SuperMoney’s tax relief reviews.
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