Sales tax is a tax on purchases, collected at the point of sale
Sales tax is a percentage added to the price of goods and services when you buy them. Unlike income tax, which is based on what you earn, or property tax, which is based on what you own, sales tax is based on what you spend. The store or business collects it from you at checkout and sends it to the state or local government.
The tax rate varies by location. Some states have no sales tax at all. Others charge between 4 and 10 percent, depending on the state and sometimes the specific county or city. A few items are usually exempt—groceries in many states, prescription medications, and medical equipment—but most everyday purchases are taxed.
Key Takeaways
- Sales tax is collected by the business at the time you make a purchase, not calculated on your tax return later.
- The rate depends on your state and sometimes your county or city, and it can range from zero to over 10 percent.
- Sales tax applies to most goods and some services, though groceries and prescription drugs are often exempt.
- Sales tax is a consumption tax, meaning you pay it based on spending rather than income or property ownership.
- Businesses are responsible for collecting and sending sales tax to the government, not the individual buyer.
How sales tax differs from income tax
Income tax is taken from your paycheck or calculated when you file your tax return. It is based on how much money you earned during the year. Sales tax, by contrast, is charged at the moment of purchase and is based on the price of the item, not your income level.
This means two people buying the same item pay the same sales tax, regardless of how much money either of them makes. A person earning $30,000 a year and a person earning $300,000 a year both pay the same percentage on a $100 purchase in the same location.
How sales tax differs from property tax
Property tax is based on the value of real estate or other property you own. You pay it once or twice a year to your local government, and the amount depends on what your property is worth. Sales tax, by contrast, is paid every time you make a purchase, and the amount depends on the price of that single item.
Property tax is typically higher in dollar amount but paid less frequently. Sales tax is smaller per transaction but adds up across many purchases throughout the year. You also cannot avoid property tax if you own property in a taxing jurisdiction, but you can reduce sales tax by spending less.
What items are taxed and what items are exempt
Most states tax tangible goods—clothing, electronics, furniture, cars, and household items. Many states also tax services like haircuts, repairs, and restaurant meals. However, states often exempt certain categories to reduce the burden on essential purchases.
Groceries are exempt from sales tax in most states, though prepared foods and restaurant meals are usually taxed. Prescription medications and medical devices are exempt in nearly all states. Some states exempt clothing, though others tax it. A few states exempt services like labor or repairs. The rules vary significantly by state, so what is taxed in one state may be exempt in another.
Who collects sales tax and where it goes
The business selling the item—the store, restaurant, or service provider—is responsible for collecting sales tax from you and sending it to the state or local government. You do not file a separate form or send the money yourself. The business adds the tax to your bill, you pay it, and the business handles the rest.
The money collected goes to state and local governments to fund schools, roads, public safety, and other services. Some states keep all sales tax revenue. Others split it between the state and the county or city where the purchase was made. A few states allow local governments to add their own sales tax on top of the state rate, which is why the total rate can vary from one town to the next.
Sales tax on online purchases and out-of-state orders
For many years, online retailers did not collect sales tax on purchases shipped to states where the company had no physical location. This changed in 2018 when the U.S. Supreme Court ruled that states could require online sellers to collect sales tax even without a store or warehouse in that state. Most large online retailers now collect and send sales tax based on the address where the item is being shipped.
However, the rules are still complex for smaller sellers and marketplaces. Some online purchases may not have sales tax collected at checkout. If you buy something online and sales tax was not charged, you may owe "use tax" on your state income tax return—a tax on items you purchased out of state for use in your state. Most people do not report this, but technically it is required in states that have a use tax.
Why sales tax is called a consumption tax
Sales tax is classified as a consumption tax because it taxes spending rather than earning or owning. The more you buy, the more sales tax you pay. The less you buy, the less you pay. This is different from income tax, which you owe based on earnings whether you spend the money or save it.
Consumption taxes are sometimes criticized as regressive, meaning they take a larger percentage of income from lower-earning households than from higher-earning ones. A person earning $25,000 a year who spends most of their income on taxed purchases pays a higher percentage of their income in sales tax than a person earning $250,000 who saves much of their money. This is why some states exempt groceries and medications—to reduce the burden on households with lower incomes.
Frequently Asked Questions
Is sales tax the same in every state?
No. Some states have no sales tax at all. States that do charge sales tax set their own rates, which range from about 4 percent to over 10 percent. Some states also allow counties or cities to add local sales tax on top of the state rate, so the total can vary by location within the same state.
Do I have to pay sales tax on everything I buy?
No. Most states exempt groceries, prescription medications, and medical devices. Some exempt clothing or services. The exemptions vary by state, so an item that is taxed in one state may be tax-free in another. Restaurant meals and prepared foods are usually taxed even in states where groceries are not.
Can I get a refund of sales tax I already paid?
Generally, no. Sales tax is final at the point of purchase. However, if you return an item and receive a refund, the sales tax is usually refunded as part of that refund. Some states allow businesses to refund sales tax to certain groups like nonprofits or government agencies, but individual consumers cannot claim a refund on their tax return.
What is use tax and do I have to pay it?
Use tax is a tax on items you purchase outside your state for use within your state, when sales tax was not collected at the time of purchase. Technically, you owe it on your state income tax return. However, most states do not actively enforce it for individual purchases, and most people do not report it. Large purchases or business inventory are more likely to be subject to enforcement.
Why do some online purchases not have sales tax?
Smaller online sellers and some marketplaces may not be required to collect sales tax in all states. The rules depend on the seller's size, location, and the state's specific laws. If you buy from a small seller and sales tax is not charged, you may technically owe use tax on your state return, though enforcement is rare for individual consumers.