Sales tax is a charge on many purchases of goods and services, usually collected by a retailer when a customer pays. The rate can combine state, county and city taxes, so the same item may cost more in one location than another. Knowing which rate applies, and whether an exemption or use tax is relevant, helps explain the final bill.
How sales tax is charged and who pays it
A 4% state tax, a 2% county tax and a 1.5% city tax add up to 7.5% for a purchase in that city. In a conventional retail sales tax system, the shopper is the final customer responsible for the tax. The retailer collects it at checkout and sends it to the government. The amount is generally calculated as a percentage of the taxable price.
That final customer rule matters because many goods change hands several times before reaching a store. Consider wool sold by a sheep farmer to a yarn maker, then yarn sold to a clothing manufacturer, and socks sold to a retailer. If each business in the chain were taxed as an end user, the same product could be taxed repeatedly. Resale certificates help document that a business is buying goods to resell, rather than to consume. The retailer then collects sales tax when the socks are sold to a customer.
Rules are not uniform across jurisdictions. States, counties and municipalities may set separate rates, and the total can differ even between nearby communities. Exemptions also vary. Some states exempt certain food and beverages bought for home use. In some places, clothing and footwear priced below $110 are exempt, while a purchase above that threshold is taxable. The threshold and the list of exempt goods depend on the applicable rules, so shoppers should not assume an exemption applies everywhere.
State rates and local differences change the checkout total
California has a statewide sales tax of 7.25%, before any local sales taxes that may apply. Other figures show why it is useful to distinguish a state rate from a combined rate. Louisiana is listed with the highest combined state and average local rate, at 10.116%. Tennessee and Arkansas follow at 9.556% and 9.460%, respectively. Those combined figures are not the same measure as a state rate alone.
The comparison below groups the figures by what they describe. A rate that includes local taxes is not directly comparable to a state only figure. Local charges can change the amount a customer pays within a state, so a state level number cannot tell the whole story for a particular address.
| Jurisdiction or group | Reported figure | What it describes |
|---|---|---|
| California | 7.25% | Statewide sales tax rate |
| Colorado | 2.90% | One of the lowest average sales tax figures cited |
| Alabama, Georgia, New York and Wyoming | 4% | Other low average figures cited |
| Louisiana | 10.116% | State rate plus average local taxes, the highest combined figure cited |
| Tennessee | 9.556% | State rate plus average local taxes |
| Arkansas | 9.460% | State rate plus average local taxes |
Five states do not impose a statewide sales tax on consumers: Alaska, Delaware, Montana, New Hampshire and Oregon. Alaska is different from the other four because local governments may impose sales taxes. Hawaii also needs careful interpretation. It does not have a sales tax in the conventional sense, but it applies a 4% general excise tax to business activities.
For a real purchase, check the tax shown at checkout and compare it with the rate for the delivery or purchase location. If an item might be exempt, consult the relevant state or local tax authority’s current guidance. Keep the receipt, especially for a costly item or one bought outside your home state.
Use tax, business presence and special product charges
A Georgia resident who buys a car in Florida may still owe Georgia tax as if the purchase had taken place at home. That is an example of use tax, which generally applies when a buyer acquires an item outside the jurisdiction where it will be used. The rate is usually set to match the local sales tax, but enforcement can be difficult, except in cases involving large purchases of tangible goods.
Comparing prices across state lines therefore takes more than looking at the price before tax. A lower advertised price elsewhere may not produce a lower final cost if use tax is due at home. For a major purchase, check the rules in the place where the item will be used and account for any tax due there before deciding whether the out of state price is cheaper.
Businesses face a related question: where do they have to collect sales tax? A jurisdiction’s definition of a business connection, often called nexus, controls whether collection is required. A physical office or warehouse can establish nexus, but an employee in a state may count too. In some places, an affiliate that sends customers to a business in exchange for a share of profits can also create a tax connection.
New York adopted laws requiring online retailers such as Amazon to collect sales tax despite the retailers’ lack of a traditional physical presence in the state. The example reflects the difficulty of applying location based rules to online commerce. A business selling across state lines needs to check each relevant jurisdiction’s rules rather than assume that having no storefront means no collection duty.
Some products also carry excise taxes, which are separate from general sales taxes. A business pays the tax and may include its cost in the customer’s price. The charge can be a set amount or a percentage of a product’s value. New York City, for example, charges a local excise tax of $1.50 on a pack of 20 cigarettes, in addition to New York State’s excise tax of $5.35 per pack of 20.
How a value added tax differs from retail sales tax
Many countries outside the United States use a value added tax, or VAT, rather than a conventional retail sales tax. A sales tax is generally collected once, when a good or service is sold to its end user. A VAT applies at multiple stages of production, with each business paying tax on the value it adds.
In the wool example, a yarn maker would pay VAT on the difference between the price received for yarn and the cost of the wool. The clothing maker would calculate tax on the difference between the selling price of the socks and the amount paid for the yarn. The tax is therefore tied to each company’s added value, rather than being collected only at the final retail sale.
A central purpose of the VAT structure is to reduce tax being charged on tax as goods move through production. Retail sales tax instead relies on the final sale to the consumer and on documentation, such as resale certificates, to distinguish that transaction from business purchases for resale. For shoppers, the practical point is simple: the tax included in a price depends on the country, the location and the item being purchased. Checking the applicable local rate and any product exemption is the clearest way to understand what the checkout total includes.