What is Sales Tax?
Sales tax is a consumption tax imposed by governments on the sale of goods and services. It's calculated as a percentage of the purchase price and is typically collected by the retailer at the point of sale, then remitted to the government.
In the United States, sales tax is primarily a state and local tax, with rates and regulations varying significantly across jurisdictions. There is no federal sales tax.
How Sales Tax Works
Point of Sale Collection
Retailers add sales tax to the purchase price and collect it from customers. The tax amount appears as a separate line item on receipts.
Tax Remittance
Businesses regularly remit collected sales tax to state and local tax authorities, typically monthly or quarterly depending on sales volume.
Use Tax
When sales tax isn't collected (e.g., out-of-state purchases), consumers may owe "use tax" directly to their state, though compliance is often low.
States with No Sales Tax
Five states don't impose a statewide sales tax, though some allow local sales taxes:
- Alaska: No state tax, but localities may impose up to 7.85%
- Delaware: No sales tax at any level
- Montana: No general sales tax (some resort areas have local taxes)
- New Hampshire: No general sales tax (9% on prepared meals and rentals)
- Oregon: No sales tax at any level
Common Sales Tax Exemptions
- Groceries: Many states exempt or reduce tax on unprepared food
- Prescription Medications: Generally exempt in most states
- Clothing: Some states exempt clothing under certain price thresholds
- Business Purchases: Items for resale or manufacturing often exempt
- Agricultural Supplies: Farm equipment and supplies often exempt
- Educational Materials: Textbooks and school supplies sometimes exempt
Online Sales Tax (Post-Wayfair)
The 2018 Supreme Court decision in South Dakota v. Wayfair dramatically changed online sales tax collection:
Economic Nexus
States can require out-of-state sellers to collect sales tax if they exceed certain thresholds (typically $100,000 in sales or 200 transactions annually).
Marketplace Facilitators
Platforms like Amazon, eBay, and Etsy often collect and remit sales tax on behalf of third-party sellers.
Sales Tax Holidays
Many states offer temporary sales tax exemptions during specific periods:
- • Back-to-School: Tax-free weekends for school supplies and clothing
- • Emergency Preparedness: Tax exemptions on safety equipment
- • Energy Star: Reduced taxes on energy-efficient appliances
- • Second Amendment: Some states offer tax holidays on firearms and hunting supplies
Tips for Managing Sales Tax
For Consumers
- • Factor sales tax into your budget when making purchases
- • Take advantage of sales tax holidays for major purchases
- • Consider shopping in neighboring states with lower rates for big-ticket items
- • Keep receipts for business expenses that may be deductible
For Businesses
- • Use automated sales tax software for multi-state compliance
- • Register for sales tax permits in all required jurisdictions
- • Maintain detailed records of all transactions
- • Stay updated on changing nexus laws and tax rates
- • File returns on time to avoid penalties and interest
International Comparison: Sales Tax vs. VAT
While the US uses sales tax, most other countries use Value Added Tax (VAT):
US Sales Tax
- • Single-stage tax at retail
- • Prices shown exclude tax
- • Varies by state/locality
- • Typically 0-10% combined
VAT System
- • Multi-stage tax at each level
- • Prices shown include tax
- • Uniform national rates
- • Often 15-25% rates