What is a sales tax? It is a charge governments apply to purchases of goods and services, usually as a percentage of the price at checkout. The retailer collects it from the customer and sends it to the government. Because state and local rules differ, the same item can cost different amounts depending on where it is bought.
How sales tax is collected and passed along
A conventional sales tax is charged when a product or service is sold to the person who will use it. The business making the sale collects the tax as part of the transaction, then is responsible for remitting it to the relevant government. The customer sees the charge on the receipt, while the seller handles the reporting and payment process.
That final sale can come after several business to business transactions. Consider wool turned into yarn, then made into socks. If the yarn maker paid sales tax when buying wool and the garment maker paid it again when buying yarn, the same product could be taxed repeatedly before reaching a shopper. Resale certificates address that problem. A qualifying business obtains a certificate showing that it is buying goods for resale, rather than as the final consumer.
In this example, the yarn maker provides a resale certificate when buying wool, and the garment maker does the same when purchasing yarn. The retail store then charges sales tax when it sells the socks to a customer. The certificate does not remove tax from the eventual retail sale. It records why tax was not collected on an earlier purchase intended for resale.
For shoppers, the practical point is that the listed price may not be the amount paid. State, county and city governments can each set a rate, and those charges may be added together. A rate of 4% from a state, 2% from a county and 1.5% from a city would produce a combined rate of 7.5% for a purchase subject to all three taxes.
Exemptions also affect the checkout total. Some states exclude certain food and drinks bought for home use. Rules can also depend on the price of an item: under the example in the source material, clothing and footwear costing less than $110 are exempt, while purchases above that amount are subject to state and local taxes. Eligibility depends on the jurisdiction and the product, so a shopper should check the rules where the purchase is taxed rather than assume an exemption applies everywhere.
A receipt is a useful first check. It can show the rate charged and whether the seller separated the tax from the price. If the total seems unexpected, compare the receipt with the applicable state and local rules, and confirm whether the item qualifies for an exemption.
Rates vary by state and local jurisdiction
California has a statewide sales tax rate of 7.25%, and municipalities may add local sales taxes. State rates alone do not always reveal the full cost: Louisiana has the highest combined rate listed here, at 10.116% after average local sales taxes are included. Local rates and exemptions can change, so use the figures as comparisons and verify the rate for a specific purchase.
| Place or measure | Rate reported | What it tells shoppers |
|---|---|---|
| California state rate | 7.25% | Local sales taxes may add to the statewide charge. |
| Colorado state rate | 2.90% | Lowest state rate listed among states that impose sales tax. |
| Alabama, Georgia, New York and Wyoming state rates | 4% | These states are also listed among those with the lowest state rates. |
| Tennessee, Mississippi and Indiana state rates | 7% | Each is listed among the states with the highest state rates. |
| Louisiana combined rate | 10.116% | Highest combined rate listed, including average local taxes. |
| Tennessee combined rate | 9.556% | Second highest combined rate listed. |
| Arkansas combined rate | 9.460% | Third highest combined rate listed. |
| Hawaii general excise tax | 4% | Not a sales tax. It applies to business activities. |
Five states do not impose a statewide sales tax on consumers: Alaska, Delaware, Montana, New Hampshire and Oregon. Alaska allows local governments to impose sales taxes, so a shopper there may still face a local charge. Hawaii is a separate case. It does not have a sales tax, but its 4% general excise tax applies to business activity.
When comparing prices across state lines, look at the final cost rather than the pre tax sticker price. A lower advertised price can be offset by a higher local rate, and an exemption in one state may not exist in another. For a specific transaction, identify the delivery or purchase location, check the applicable rate and confirm whether the item is taxable.
Use tax, business nexus and special product taxes
A purchase made outside a person’s home jurisdiction does not necessarily avoid tax. Use tax generally applies to goods bought elsewhere and brought into the buyer’s jurisdiction. Its rate is usually the same as the local sales tax rate, though enforcement can be difficult, particularly for lower value purchases.
For example, a Georgia resident who buys a car in Florida is required to pay the local Georgia sales tax as if the car had been purchased in Georgia. The sales tax paid at the time of purchase and any amount due under the use tax rules can affect the final cost. This is why comparing only the seller’s listed price can give an incomplete picture. For a large purchase, check the rules in the place where the buyer lives before deciding what the transaction will cost.
Businesses have a separate question: where must they collect sales tax? Governments use the term nexus for a connection that creates a collection obligation. A physical office or warehouse can establish that connection, but it is not the only possible basis. An employee in a state, or an affiliate website that sends customers to a seller in exchange for a share of profits, may also count, depending on that jurisdiction’s law.
Those rules have mattered for online sellers. New York passed laws requiring internet retailers such as Amazon to collect sales taxes even without a traditional physical location in the state. The result for a business depends on how the relevant government defines nexus, so a seller operating across state lines needs to check the rules in each place where it does business. A retailer should also keep resale certificates and transaction records that support why tax was or was not collected.
Excise taxes are another charge shoppers may encounter. They apply to particular products or services, and the business generally pays the tax before passing its cost to consumers. An excise tax can be calculated as a fixed amount or as a percentage of value, and it may already be included in the purchase price rather than shown as a separate checkout line.
Cigarettes illustrate how these charges can stack. New York City charges a local excise tax of $1.50 per pack of 20 cigarettes, in addition to New York State’s excise tax of $5.35 per pack of 20. That is separate from the general sales tax system. A shopper comparing prices should check whether special product taxes are already built into the displayed price.
How sales tax differs from a value added tax
The United States uses a conventional sales tax system, while many countries outside the country rely on a value added tax, or VAT. The main difference is when the tax is collected. Sales tax is generally charged once, at the retail sale to the final customer. A VAT is charged at several stages as a product moves through production and distribution.
Return to the wool and socks example. Under a VAT system, the yarn maker pays tax on the value added when turning wool into yarn, measured as the difference between the amount charged for yarn and the amount paid for wool. The garment maker pays tax on the value added when turning yarn into socks. Each business accounts for tax on its contribution, rather than waiting for a single charge at the retail stage.
The VAT structure is intended to prevent tax from accumulating on top of tax as goods move through production. In the US sales tax system described here, the absence of a VAT means tax can apply to the value of goods and business margins at different points in production. Those costs can carry through to the final price paid by consumers. For shoppers, the useful distinction is simple: a sales tax usually appears at the final sale, while a VAT is collected along the production chain.