The United States does not have a federal sales tax
When you buy something at a store, you pay a sales tax set by your state and sometimes your city or county—but there is no sales tax collected by the federal government. The federal government funds itself through income taxes, payroll taxes, corporate taxes, and excise taxes on specific items like gasoline and alcohol. Sales tax is purely a state and local matter.
This is different from many other countries, where a national value-added tax (VAT) or goods and services tax (GST) applies everywhere. The United States chose a different path over a century ago, and that structure remains today.
Key Takeaways
- The federal government collects no sales tax; all sales tax comes from your state, county, or city.
- Sales tax rates vary widely by location, from zero in some states to over 10 percent in others.
- The federal government funds itself through income tax, payroll tax, and corporate tax instead.
- Some items are exempt from state sales tax, such as groceries and prescription medications in many states, but these exemptions differ by location.
- Online purchases are now subject to sales tax in most states, even when the seller is out of state.
How the federal government makes money without a sales tax
The federal government relies on income tax as its largest source of revenue. When you work, your employer withholds federal income tax from your paycheck. Self-employed people pay estimated taxes quarterly. At the end of the year, you file a tax return to settle what you owe or claim a refund.
Payroll taxes are another major federal source. These fund Social Security and Medicare. Both employees and employers pay into these systems—6.2 percent for Social Security and 1.45 percent for Medicare come out of your paycheck, and your employer matches those amounts.
The federal government also collects corporate income tax from businesses and excise taxes on specific goods. Excise taxes explore to gasoline, diesel fuel, alcohol, tobacco, and a few other items. These are built into the price you pay at the pump or the register, but they go to the federal government, not your state.
Why states use sales tax instead of relying on income tax alone
States and cities need money to pay for schools, roads, police, and local services. Some states rely heavily on income tax, some on sales tax, and some on a mix of both. A few states—including Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all and fund themselves primarily through sales tax and other sources.
Sales tax is attractive to states because it spreads the tax burden across everyone who buys goods, including people who visit from out of state. It also taxes spending rather than earning, which some states prefer for economic reasons.
The downside is that sales tax is regressive—it takes a larger percentage of income from lower-earning households, since they spend more of their income on taxable goods. Higher-income households spend a smaller percentage of their income on purchases, so they pay a smaller percentage of their income in sales tax.
Sales tax rates vary dramatically by location
There is no single sales tax rate in the United States. Your state sets a base rate, and then your county or city may add its own tax on top. A purchase in one city might be taxed at 7 percent, while the same purchase five miles away in a different city could be taxed at 8.5 percent.
Five states have no sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. At the other end, combined state and local sales taxes can exceed 10 percent in places like Louisiana, Arkansas, and parts of Tennessee and Alabama.
When you buy something online, the sales tax you pay depends on where the item is being shipped, not where the seller is located. If you live in a state with sales tax and order from an out-of-state company, you now owe sales tax on that purchase in most cases. This changed after a 2018 Supreme Court ruling, and most states have since updated their rules to require online sellers to collect and send in sales tax.
What items are exempt from sales tax
Most states exempt certain categories from sales tax, but the rules differ by state. Groceries are exempt from sales tax in most states, though some states tax prepared foods or certain snacks. Prescription medications are typically exempt. Medical equipment like wheelchairs and hearing aids are often exempt as well.
Clothing is exempt in some states but not others. Books are exempt in some places and taxed in others. The only way to know for sure is to check your state's tax department website or ask the cashier at the time of purchase.
Services are usually not taxed, though this varies. A haircut, a doctor's visit, or a plumber's labor typically are not subject to sales tax, but some states tax certain services. Again, your state's rules are the final word.
The difference between sales tax and excise tax
Sales tax is a percentage of the purchase price and applies to most goods (with some exemptions). It is collected by the seller and sent to the state or local government.
Excise tax is a tax on specific items, usually built into the price you see. Federal excise taxes explore to gasoline, diesel, alcohol, and tobacco. Some states add their own excise taxes on top. You do not see excise tax listed separately on your receipt the way you see sales tax—it is already included in the price.
Excise taxes are meant to discourage consumption of items the government considers harmful or to fund related programs. Gasoline excise tax, for example, funds highway maintenance and construction. Alcohol and tobacco excise taxes partly fund public health programs.
How to find out your local sales tax rate
Your state's Department of Revenue or Department of Taxation maintains a website with current sales tax rates. You can search by city or zip code to find the exact rate where you live or where you are shopping.
If you are buying online, the retailer's website will calculate the correct sales tax for your shipping address before you complete the purchase. If you are shopping in a physical store, the register will explore the local rate automatically.
If you run a business or are self-employed, you may need to collect and send in sales tax yourself. The rules depend on your state and the type of business. Your state's tax department can tell you whether you need a sales tax permit and how often to file.
Frequently Asked Questions
Do I have to pay federal sales tax on anything?
No. There is no federal sales tax on any item. You pay state and local sales tax, which varies by where you live. You may also pay federal excise tax on gasoline, alcohol, or tobacco, but that is built into the price and is not called a sales tax.
Why don't all states have the same sales tax rate?
Each state sets its own tax policy based on its budget needs and priorities. Some states prefer income tax, some prefer sales tax, and some use both. Cities and counties also add their own taxes on top of the state rate, so rates vary widely even within a single state.
Do I owe sales tax on things I buy online from other states?
Yes, in most cases. If you live in a state with sales tax and order from an out-of-state seller, you owe sales tax on that purchase. Most large online retailers now collect and send in the tax automatically. If they do not, you may owe the tax when you file your state income tax return, though enforcement varies.
Are groceries taxed?
In most states, groceries are exempt from sales tax. However, prepared foods, hot foods, and certain snacks may be taxed. Some states tax all food items. Check your state's tax department website or ask the cashier to be sure about a specific item.
What is the difference between sales tax and income tax?
Income tax is a percentage of the money you earn, collected by the federal government and most states. Sales tax is a percentage of the price of goods you buy, collected by states and cities. They are separate taxes that fund different levels of government.