Sales Tax Explained: Everything You Need to Know
Unlike income tax, which most people encounter only during filing season, sales tax affects you every time you make a purchase. The US does not have a national sales tax. Instead, sales tax is levied by states, counties, and cities, creating a patchwork of rates and rules that vary by location and even by the type of item you are buying. This guide covers how sales tax works, what is exempt, and how to minimize its impact.
Calculate the sales tax on any purchase with our sales tax calculator.
How Sales Tax Works
Sales tax is a consumption tax added to the price of goods (and sometimes services) at the point of sale. Unlike a value-added tax (VAT) used in most other countries, US sales tax is only collected once, at the final retail transaction. It is not included in the listed price; it is added at checkout.
Your total sales tax rate is the sum of:
- State sales tax: Set by the state legislature (0% to 7.25%)
- County sales tax: Set by the county (0% to ~2%)
- City/municipal sales tax: Set by the city (0% to ~3%)
- Special district taxes: Transit, stadium, or improvement districts (0% to ~1%)
States with No Sales Tax
Five states have no statewide sales tax at all:
- Delaware - No state or local sales tax
- Montana - No statewide tax, though some resort communities levy a small local tax
- New Hampshire - No general sales tax (meals and rooms tax of 8.5% exists)
- Oregon - No state or local sales tax
- Alaska - No state sales tax, but local jurisdictions can levy up to ~7.5%
Highest Combined State and Local Rates
| State | State Rate | Avg. Local Rate | Avg. Combined |
|---|---|---|---|
| Tennessee | 7.00% | 2.55% | 9.55% |
| Louisiana | 4.45% | 5.07% | 9.52% |
| Arkansas | 6.50% | 2.97% | 9.47% |
| Washington | 6.50% | 2.79% | 9.29% |
| Alabama | 4.00% | 5.24% | 9.24% |
| Oklahoma | 4.50% | 4.47% | 8.97% |
| Texas | 6.25% | 1.95% | 8.20% |
| California | 7.25% | 1.57% | 8.82% |
| New York | 4.00% | 4.52% | 8.52% |
| Illinois | 6.25% | 2.58% | 8.83% |
Common Exemptions
Most states exempt certain categories of goods from sales tax, though the specifics vary widely:
Groceries
Most states exempt unprepared food from sales tax. However, some states tax groceries at the full rate or at a reduced rate:
- Fully exempt: California, New York, Texas, Florida, Pennsylvania, and most other states
- Taxed at reduced rate: Illinois (1%), Virginia (1%), Utah (3%), Arkansas (0.125%)
- Taxed at full rate: Alabama, Mississippi, South Dakota, Kansas (though Kansas is phasing this out)
The distinction between "groceries" and "prepared food" matters. A rotisserie chicken from the deli is usually taxable, while raw chicken from the meat counter is usually exempt. Candy and soft drinks are taxed in many states that otherwise exempt food.
Clothing
Only a handful of states exempt clothing from sales tax:
- Fully exempt: Pennsylvania, New Jersey, Minnesota
- Exempt under a threshold: New York (items under $110), Massachusetts (items under $175)
- Taxed at full rate: Most states
Prescription Medications
All states except Illinois exempt prescription drugs from sales tax. Most states also exempt over-the-counter medications, medical devices, and related healthcare items, though the specific items vary.
Other Common Exemptions
- Motor vehicles: Usually subject to sales tax or a separate motor vehicle tax at purchase
- Real estate: Not subject to sales tax (separate transfer taxes may apply)
- Services: Most states do not tax services, though this is changing. Hawaii, New Mexico, South Dakota, and West Virginia tax most services.
- Digital goods: Treatment varies widely; some states tax streaming services, downloads, and SaaS; others do not
Use Tax: The Sales Tax You Owe But Probably Don't Pay
Use tax applies when you purchase a taxable item without paying sales tax, typically when buying from an out-of-state seller who does not collect your state's tax. Legally, you owe use tax on these purchases at the same rate as your local sales tax.
Since the 2018 Supreme Court decision in South Dakota v. Wayfair, most online retailers now collect sales tax for all states where they have "economic nexus" (typically $100,000 in sales or 200 transactions). This has greatly reduced the use tax gap, but it still applies to purchases from small sellers, private party transactions, and items bought while traveling.
Many states include a use tax line on their income tax return, making it easier (and more visible) to report. Some states allow you to pay a flat amount based on your AGI instead of tracking individual purchases.
Sales Tax Holidays
Many states offer temporary sales tax holidays during which certain categories of purchases are exempt from sales tax. These typically occur in late summer before the school year and may include:
- Back-to-school: Clothing, footwear, school supplies, computers (usually with per-item caps)
- Severe weather preparedness: Generators, batteries, flashlights, weather radios (common in hurricane-prone states)
- Energy Star appliances: Some states offer exemptions on qualifying energy-efficient appliances
States with notable sales tax holidays include Texas, Florida, Ohio, Virginia, and South Carolina. The dates, eligible items, and price thresholds change annually, so check your state's department of revenue website for current details.
Origin vs. Destination Sourcing
When you buy something online or by phone, which location's sales tax rate applies? The answer depends on whether your state uses origin-based or destination-based sourcing:
- Origin-based sourcing: Tax is based on the seller's location. States include Texas, Ohio, Pennsylvania, Virginia, and Arizona for in-state sellers.
- Destination-based sourcing: Tax is based on the buyer's location. This is the more common method and applies to most interstate transactions.
For most online purchases from out-of-state sellers, destination-based sourcing applies, meaning you pay the sales tax rate for your shipping address.
Sales Tax Impact on Your Budget
Sales tax is often overlooked in budgeting because it is paid incrementally. But it adds up significantly over a year:
| Annual Taxable Spending | 5% Rate | 7% Rate | 9.5% Rate |
|---|---|---|---|
| $20,000 | $1,000 | $1,400 | $1,900 |
| $30,000 | $1,500 | $2,100 | $2,850 |
| $40,000 | $2,000 | $2,800 | $3,800 |
| $50,000 | $2,500 | $3,500 | $4,750 |
Sales tax is regressive, meaning it takes a larger percentage of income from lower-income households because they spend a higher share of their income on taxable goods. This is partly why most states exempt groceries and medications.
Sales Tax Deduction on Federal Returns
If you itemize deductions on your federal return, you can deduct either state income tax or state sales tax (but not both) as part of the SALT deduction (capped at $10,000). This is particularly beneficial for residents of no-income-tax states who can deduct their sales tax instead. The IRS provides optional sales tax tables based on income and state, or you can track actual receipts. For more on deductions, see our deductions vs. credits guide.
Bottom Line
Sales tax varies dramatically by where you live and what you buy. While you cannot avoid it entirely, understanding exemptions, taking advantage of sales tax holidays, and factoring sales tax into your state tax comparison can help you make informed financial decisions. Use our sales tax calculator for quick rate lookups, and see the bigger picture in our state tax comparison guide.