Sales tax is a percentage added to the price of goods and some services at the point of sale
When you buy something in a store or online, sales tax is a tax the seller collects from you and sends to the state or local government. The tax rate varies by state — it ranges from 0% in states like Alaska, Delaware, Montana, New Hampshire, and Oregon, to as high as 7.25% in California. Most states fall somewhere between 4% and 7%. Some cities and counties add their own local sales tax on top of the state rate, which can push the total to 10% or higher in certain areas.
The seller is responsible for collecting the tax from you at checkout, holding it temporarily, and then sending it to the appropriate tax authority — usually the state revenue department. You do not send the money yourself. The tax appears on your receipt as a separate line item so you can see exactly how much you paid.
Sales tax applies to most physical goods you buy: clothing, groceries (in most states), electronics, furniture, and cars. Services are treated differently depending on the state. A haircut might be taxed in one state but not in another. Prescription medications are usually exempt, while over-the-counter drugs are often taxed.
Key Takeaways
- Sales tax rates vary by state and can range from 0% to over 10% when local taxes are included.
- The seller collects sales tax at checkout and sends it to the state or local government on your behalf.
- Most physical goods are taxed, but groceries, prescription medications, and some services may be exempt depending on where you live.
- Online purchases are now subject to sales tax in most states, even when the seller is located out of state.
- Your receipt shows the sales tax amount separately so you can see the total cost before and after tax.
Why states use sales tax instead of other taxes
Sales tax is a way for states and local governments to fund schools, roads, public safety, and other services. Unlike income tax, which is collected from paychecks, sales tax is collected at the moment you spend money. This spreads the tax burden across many transactions rather than concentrating it on wages.
States without income tax — like Texas, Florida, and Washington — rely heavily on sales tax to fund their operations. States with both income tax and sales tax use the combination to balance their budgets. The federal government does not collect sales tax; that power belongs to the states.
How sales tax rates are set and where the money goes
Each state legislature sets its own state sales tax rate. Cities and counties can then add local sales taxes on top of that, which is why the total rate varies so much even within a single state. For example, Tennessee has a state rate of 9.55%, but some cities add additional local tax, bringing the total above 10%.
The money collected goes into state and local budgets. A portion typically funds education, transportation infrastructure, and local services. Some states dedicate sales tax revenue to specific purposes — for instance, a portion might go to a transportation fund or a school construction fund. The exact breakdown depends on state law.
What is and is not taxed
Most items you buy in stores are taxed: clothing, shoes, electronics, furniture, toys, and household goods. However, groceries — fresh produce, meat, dairy, and bread — are exempt from sales tax in most states. This is because groceries are considered necessities.
Prescription medications are almost always exempt. Over-the-counter medicines like pain relievers and cold medicine are taxed in some states but not others. Services vary widely: a restaurant meal is taxed, but a doctor's visit is not. A haircut is taxed in some states but exempt in others. Gas and electricity are usually taxed, though the rate may be lower than the standard sales tax rate.
Online purchases were once a gray area, but as of 2021, most states now require sellers to collect sales tax on online orders, even if the seller is located out of state. This means buying from an online retailer is now taxed the same way as buying in a physical store in your area.
Sales tax on cars and major purchases
When you buy a car, sales tax is calculated on the purchase price and collected at the time of sale, usually by the dealership. The rate is the same as the general sales tax rate in your state, though some states offer exemptions or reduced rates for trade-ins. If you trade in your old car, the sales tax is typically calculated on the difference between the new car's price and the trade-in value, not the full purchase price.
Other major purchases like boats, motorcycles, and RVs are also subject to sales tax. The process is the same: the seller collects it at the point of sale and sends it to the state.
How to find the sales tax rate in your area
Your state's revenue or taxation department website lists the current state sales tax rate. To find the total rate including local taxes, search for your city or county name plus "sales tax rate." Many tax software websites and calculators also show combined rates by zip code.
Sales tax rates can change, though not frequently. When they do, the state usually announces the change well in advance. Checking your receipt is the simplest way to confirm what rate was applied to your purchase.
The difference between sales tax and use tax
Use tax is a tax on items you buy outside your state but use inside your state. For example, if you live in a state with sales tax and you buy something from a seller in a state without sales tax, you technically owe use tax to your home state. However, use tax is rarely enforced for individual consumers — it is mainly collected from businesses that buy goods out of state for resale.
The purpose of use tax is to prevent people from avoiding sales tax by shopping in neighboring states with lower rates. In practice, most individual shoppers do not pay use tax because states do not have a practical way to track and collect it from consumers. It remains on the books in most states but is not actively collected from individuals.
Frequently Asked Questions
Do I have to pay sales tax on everything I buy?
No. Groceries, prescription medications, and certain services are exempt in most states. Some states also exempt clothing or have lower tax rates on specific items. Check your state's revenue department website for a full list of what is and is not taxed in your area.
Why is the price on the shelf different from what I pay at checkout?
The shelf price does not include sales tax. The tax is added at checkout based on your location and the item's tax status. This is why the final price is higher than the labeled price.
Can I get a refund of sales tax I paid?
Generally, no. Sales tax is a final tax on the purchase. If you return an item and get a refund, the sales tax is refunded as part of that refund. Visitors from other countries may be able to reclaim sales tax in some states through a tourist tax refund program, but this is rare and varies by state.
Do I owe sales tax on items I buy online from other states?
Yes, in most cases. As of 2021, most states require online sellers to collect and send sales tax, even if the seller is located out of state. The rate applied is based on your delivery address, not where the seller is located.
What happens if a seller does not collect sales tax?
The seller is responsible for collecting and sending sales tax to the state. If they fail to do so, that is a violation of state tax law and the state will pursue the seller, not you. You are not liable for sales tax that the seller failed to collect.