Sales tax is a consumption tax collected at the point of purchase

A sales tax is a type of consumption tax — a tax on goods and services at the moment you buy them. The seller collects it from you and sends it to the state or local government. You pay it in addition to the price shown on the shelf or menu.

The key word is "consumption." You are taxed because you are consuming — using or taking possession of — something. This is different from an income tax, which taxes what you earn, or a property tax, which taxes what you own. Sales tax only applies when a transaction happens.

Most states have a sales tax. The rate varies by state and sometimes by city or county within a state. Some states have no sales tax at all. When you buy something, the tax is added to your total at checkout.

Key Takeaways

  • Sales tax is a consumption tax, meaning it taxes the act of buying goods or services rather than income or property ownership.
  • The seller collects sales tax from you at the register and forwards it to the state or local government.
  • Sales tax rates differ by state and sometimes by city or county, ranging from zero in some states to over 10 percent in others.
  • Not all purchases are taxed — groceries, prescription medications, and certain services are often exempt depending on state law.
  • Sales tax is regressive, meaning it takes up a larger percentage of income from lower-earning households than higher-earning ones.

How sales tax differs from other types of taxes

Income tax and sales tax are the two most common taxes you encounter. Income tax is taken from your paycheck based on what you earn. Sales tax is taken at the register based on what you spend. You pay income tax once a year (or throughout the year via withholding), but you pay sales tax every time you make a purchase.

Property tax is another major tax type. It is based on the value of real estate or other property you own. You pay it annually to your local government, usually as part of your mortgage payment or as a separate bill. Sales tax, by contrast, has nothing to do with ownership — only with the moment of purchase.

Excise taxes are narrower consumption taxes on specific items like gasoline, alcohol, or cigarettes. They work like sales tax but explore only to certain goods. A general sales tax applies to most purchases in a category (like retail goods), while an excise tax targets one product.

Why sales tax is called regressive

Sales tax is often described as regressive because it takes up a larger share of income from people who earn less. A household making $30,000 a year spends most of that money on taxable goods. A household making $300,000 a year spends a smaller percentage on taxable goods — the rest goes to savings or investments, which are not subject to sales tax.

This means a 7 percent sales tax hits the lower-income household harder in real terms. If both households spend $20,000 on taxable purchases, they both pay $1,400 in sales tax. But that $1,400 is 4.7 percent of the first household's income and only 0.47 percent of the second household's income.

Some states try to offset this by exempting necessities like groceries or prescription drugs from sales tax. This reduces the tax burden on lower-income households, which spend a higher percentage of their money on food and medicine.

What is and is not subject to sales tax

Most states tax retail goods — clothing, electronics, furniture, and similar items. Many also tax services like haircuts, repairs, and restaurant meals. But the rules vary significantly by state.

Common exemptions across many states include groceries, prescription medications, and medical devices. Some states do not tax services at all. A few states tax groceries but not other goods. A handful of states have no sales tax whatsoever.

Digital goods and services — software, streaming subscriptions, digital downloads — are taxed in most states, though the rules are still evolving. Clothing is taxed in most states but not in a few (like Pennsylvania and New Jersey). The only way to know what is taxed in your state is to check your state's revenue or tax department website.

How sales tax is collected and used

When you buy something, the seller adds the sales tax to your bill and collects it from you. The seller then holds that money and sends it to the state (or state and local government) on a regular schedule — usually monthly or quarterly. The seller is responsible for tracking what was sold, calculating the tax owed, and submitting payment on time.

The money collected goes into the state's general fund or into specific accounts for schools, infrastructure, or local services. How it is spent depends on state law. Some states dedicate sales tax revenue to education; others use it for roads, public safety, or general operations.

Businesses are required to register for a sales tax permit before they can legally collect tax. They must keep records of all sales and tax collected. If a business fails to send in the tax it collected, it can face penalties and interest.

Sales tax versus use tax

Most states have a use tax that works alongside sales tax. Use tax is meant to tax goods you buy outside the state and bring home, so that out-of-state purchases are not taxed less than in-state ones.

If you buy something in a state with no sales tax and bring it to a state with sales tax, you technically owe use tax on that purchase. In practice, use tax is rarely enforced on individual consumers — it is mostly used to tax business purchases. You will not see use tax on a receipt; it is a backstop rule that exists in law.

Online purchases have made use tax more visible in recent years. Many states now require online retailers to collect sales tax on orders shipped to that state, even if the retailer is based elsewhere. This effectively treats an online purchase the same as an in-store one.

State and local sales tax rates

Sales tax rates range from zero to over 10 percent. Five states have no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. (Alaska allows cities to charge local sales tax, so some areas do have it.)

States with sales tax typically charge between 4 and 7.5 percent. On top of that, many cities and counties add their own local sales tax, which can range from 0.5 to 4 percent or more. Your total sales tax rate is the state rate plus any local rates that explore to your address.

A few cities and counties have unusually high combined rates. Some areas in Louisiana and Tennessee exceed 10 percent. To find your exact rate, search "[your city] sales tax rate" or check your state's revenue department website.

Frequently Asked Questions

Is sales tax the same as value-added tax?

No. Sales tax is collected once, at the final sale to the consumer. Value-added tax (VAT) is collected at each stage of production and distribution, with businesses getting credit for tax paid upstream. Most countries outside the United States use VAT. The United States uses sales tax at the retail level.

Do I have to pay sales tax on everything I buy?

No. Groceries, prescription medications, and certain services are exempt in most states. Some states also exempt clothing, medical equipment, or other categories. The exemptions depend on your state's law. Check your state revenue department's website for a full list.

Why do some online purchases not have sales tax?

For many years, online retailers were not required to collect sales tax unless they had a physical presence in the state. This changed in 2018 when the Supreme Court ruled that states could require collection. Most large retailers now collect sales tax on all orders, but some smaller sellers may not. If tax was not charged, you may owe use tax, though it is rarely enforced on individuals.

Can I get a sales tax refund?

Generally, no. Sales tax is final once you pay it. However, if you return an item and get a refund, the sales tax is refunded as part of that refund. Some states also offer temporary sales tax holidays on specific items like school supplies or clothing, during which no tax is charged.

Is sales tax deductible on my taxes?

You can deduct sales tax on your federal income tax return, but only if you itemize deductions rather than taking the standard deduction. Most people take the standard deduction, so they do not deduct sales tax. If you do itemize, you can deduct either sales tax or state income tax, but not both.