What Is Sales Tax?
In plain English
Sales tax is a percentage-based tax added to the price of goods and services at the point of purchase. It is collected by the seller and remitted to the appropriate state or local government. Rates vary widely — from 0% in states with no sales tax to over 10% when state and local levies are combined — and exemptions differ for food, medicine, and clothing.
How Do State and Local Sales Tax Rates Work Together?
Most states set a base sales tax rate, and counties, cities, or special districts add local rates on top. The combined rate is what consumers pay. For example, a state might charge 6% while the city adds 2%, resulting in an 8% total. No two jurisdictions have the same combined rate, making compliance complex for businesses operating across state lines.
What Items Are Typically Exempt From Sales Tax?
Common exemptions include unprepared grocery food, prescription medications, and certain medical equipment. Some states exempt clothing below a price threshold. Services are generally not taxed, though many states have expanded to tax digital goods and streaming subscriptions. Tax holidays — brief periods with no sales tax on qualifying items — occur in some states before the school year.
Can You Deduct Sales Tax on Your Federal Income Tax Return?
Taxpayers who itemize may be able to deduct either state and local income taxes or state and local sales taxes — but not both — subject to the $10,000 SALT cap. The sales tax deduction is useful for residents of states with no income tax. The IRS provides tables to estimate annual sales tax paid, or taxpayers can deduct actual receipts for major purchases.
Frequently asked questions
Do I owe sales tax on online purchases?
Yes. Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, states can require out-of-state online retailers to collect and remit sales tax. Most major online retailers now charge sales tax based on your delivery address.
What is use tax?
Use tax is a complementary tax owed when you buy goods from an out-of-state seller who does not collect sales tax and bring them into your state. Most states technically require you to self-report and pay use tax on such purchases on your state income tax return.
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Related terms
Property Tax
Property tax is an annual tax levied by local governments on the assessed value of real estate and, in some jurisdictions, personal property like vehicles. It is a primary funding source for schools and public services.
Itemized Deductions
Itemized deductions let you list specific qualifying expenses to reduce taxable income instead of taking the standard deduction. They benefit taxpayers with large mortgage interest, medical bills, or charitable contributions.
Tax Deduction
A tax deduction reduces your taxable income, lowering the amount of income subject to tax. The actual tax savings depend on your marginal tax bracket.
Tax Filing Status
Your tax filing status determines your tax bracket thresholds, standard deduction amount, and eligibility for various credits and deductions. Choosing the correct status is one of the most impactful decisions in tax planning.
Tax Bracket
Tax brackets are the income ranges at which different marginal rates apply under the U.S. progressive tax system. Only income within each bracket is taxed at that bracket's rate.