Sales tax goes to your state and local governments, not the federal government

When you pay sales tax at a register, that money does not go to Washington. It goes to your state government first, then gets split between the state and your city or county—the exact split depends on where you live and what you buy. A few states do not collect sales tax at all. In states that do, the rate ranges from about 4 percent to over 10 percent, and the destination of that money is set by state law, not by the store.

The store itself does not keep the tax. It acts as a collector: you pay the tax to the store, the store holds it temporarily, and then the store sends it to the state tax authority on a schedule set by state law—usually monthly or quarterly. If a store fails to send in the tax it collected, that is tax evasion, and the store owner can face penalties and criminal charges.

Key Takeaways

  • Sales tax revenue is split between your state and your local government (city, county, or both) according to formulas set by state law.
  • The store collects the tax from you but does not keep it; it must send the money to the state tax authority on a regular schedule.
  • States use sales tax revenue for schools, roads, public safety, and other services, while local governments typically fund police, fire, libraries, and local infrastructure.
  • Some purchases are exempt from sales tax—groceries, prescription medications, and medical equipment in most states—because lawmakers decided those items should not be taxed.
  • Online purchases are now subject to sales tax in most states, even when the seller is out of state, though the rules vary by location and seller size.

How the money splits between state and local government

The split is not the same everywhere. In some states, the state keeps most of the sales tax and sends a portion to cities and counties. In others, the local government keeps most of it. Some states use a hybrid system where the state keeps a base rate and local governments add their own layer on top.

For example, in California, the state collects 7.25 percent sales tax, but cities and counties can add their own local tax on top of that. In Texas, the state collects 6.25 percent, and cities can add up to 2 percent more. In New York, the state collects 4 percent, and counties add their own rate. The store's register shows you the total, but behind the scenes, the tax gets divided according to state law and sent to different government accounts.

You can find your exact local rate and where it goes by searching your state's Department of Revenue website and your city or county government website. Both will have a tax rate lookup tool or a page that explains the breakdown.

What states use sales tax revenue for

States typically use sales tax revenue for education, transportation, and public safety. Many states dedicate a portion of sales tax specifically to K-12 schools or community colleges. Others use it to fund highway maintenance, bridge repairs, and public transit. Some states allocate sales tax to Medicaid, mental health services, or corrections.

The exact allocation depends on the state budget and state law. Some states pass laws that earmark certain sales tax revenue for specific purposes—for instance, a state might dedicate 1 percent of sales tax to road construction. Others put all sales tax into the general fund, where the legislature decides how to spend it each year.

During economic downturns, when sales tax revenue drops, states often face budget shortfalls because sales tax is less stable than income tax. People spend less when the economy slows, so sales tax revenue falls quickly. This is why many states have raised sales tax rates over the past two decades—to create a more predictable revenue stream.

What local governments use sales tax revenue for

Cities and counties use their share of sales tax to fund police departments, fire departments, libraries, parks, and local infrastructure like sidewalks and street lights. Some local governments use sales tax revenue to support public health departments, animal control, or planning and zoning offices.

The breakdown varies by city and county. A city council or county commission decides how to allocate the money in the annual budget. Some cities rely heavily on sales tax and keep property tax rates lower as a result. Others use sales tax as a smaller piece of their overall revenue and rely more on property tax or fees.

Local sales tax revenue is often more volatile than property tax because it depends on consumer spending. A shopping mall closure or a shift to online shopping can reduce a city's sales tax revenue significantly. This is why some cities have been concerned about the growth of online retail, which was not subject to sales tax in many states until recent years.

Why some items are exempt from sales tax

Most states do not tax groceries, prescription medications, or medical equipment because lawmakers decided these are necessities that should not be taxed. The logic is that taxing food or medicine places a burden on people with low incomes, who spend a larger share of their money on these items.

Exemptions vary by state. Some states exempt all food; others tax prepared food but not raw groceries. Some states exempt all medical devices; others have a narrower list. A few states exempt clothing, though this is less common. The state legislature decides which items are exempt, and those decisions can change.

Businesses that sell exempt items still have to track which sales are taxable and which are not. A grocery store, for instance, cannot straightforward not collect tax on everything—it has to know which items in its inventory are exempt. This is why a receipt from a grocery store sometimes shows tax on some items (like prepared deli food) and no tax on others (like bread).

How online sales tax works

For many years, online retailers did not have to collect sales tax unless they had a physical presence in the state where the buyer lived. This changed in 2018 when the U.S. Supreme Court ruled that states could require online sellers to collect sales tax even without a physical store in that state.

Today, most large online retailers collect sales tax on orders shipped to states that have a sales tax. The tax rate depends on the buyer's address, not the seller's location. If you buy something online and have it shipped to your address, the retailer should charge you the sales tax rate for your city and county.

Small sellers and marketplaces have different rules depending on the state. Some states require all sellers to collect tax; others have a threshold (for example, sellers with less than $100,000 in annual sales may not have to collect). Amazon, eBay, and other large marketplaces now collect sales tax on most items, but the rules are still evolving and vary by state.

What happens if a business does not send in the sales tax it collected

If a store collects sales tax from customers but does not send it to the state, that is considered tax evasion. The state tax authority can audit the business, assess penalties, and pursue criminal charges against the owner. The penalties are usually steep—often a percentage of the unpaid tax plus interest.

States have systems to track sales tax payments. Businesses file returns showing how much sales tax they collected and how much they sent in. If the numbers do not match, or if a business stops filing, the state will investigate. This is one reason why sales tax fraud is relatively rare among large, established businesses—the risk is high and the audit trail is clear.

Frequently Asked Questions

Does the federal government get any sales tax money?

No. Sales tax is collected and kept by state and local governments only. The federal government funds itself through income tax, corporate tax, and excise taxes. Sales tax revenue never goes to Washington.

Can a state change where sales tax money goes?

Yes. The state legislature can pass a law that changes how sales tax revenue is allocated. For example, a state might decide to dedicate more of its sales tax to education or transportation. These changes happen periodically as state budgets shift.

Why do some states not have sales tax?

Five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have a statewide sales tax. These states fund their governments through other taxes, such as income tax or property tax. Some of these states have local sales taxes in certain cities or counties, but there is no state-level sales tax.

If I buy something online from out of state, which state gets the sales tax?

The state where you live (where the item is shipped to) gets the sales tax. The retailer collects the tax based on your address and sends it to your state and local government, not to the state where the retailer is located.

Can I get a refund of sales tax I paid?

Generally, no. Sales tax is a final tax on the purchase. However, if you return an item and get a refund, the store will refund the sales tax as well. Some states also allow businesses to claim a refund of sales tax paid on items they later resell, but this is a business matter, not a consumer one.