Sales tax is added to the price of goods at checkout, and you pay it to the retailer, who then sends it to the state

When you buy something in a store or online, sales tax is a percentage added to the item's price. The retailer collects that tax from you and forwards it to the state government. The tax rate depends on where you live and what you are buying — it is not the same everywhere, and not all items are taxed the same way.

The amount you owe is calculated by multiplying the item's price by the tax rate for your location. If you buy a $20 shirt in a state with 7% sales tax, you pay $1.40 in tax, for a total of $21.40. The retailer keeps the $20 and sends the $1.40 to the state.

Sales tax applies to most physical goods, but the rules vary by state. Some states tax groceries, others do not. Some tax clothing, others exempt it. A few states have no sales tax at all. The retailer is responsible for knowing the tax rate where the sale happens and charging you the correct amount.

Key Takeaways

  • Sales tax is a percentage of the purchase price that varies by state and sometimes by county or city, ranging from 0% to over 10%.
  • The retailer collects sales tax from you at the point of sale and is responsible for sending it to the state government.
  • Different categories of goods are taxed differently — groceries, medicine, and clothing may be exempt or taxed at different rates depending on your state.
  • When you buy online, the retailer must collect sales tax based on the address where the item is being shipped, not where the retailer is located.

How the tax rate is set and where it comes from

Each state legislature sets its own sales tax rate. As of now, rates range from 0% (in states like Alaska, Delaware, Montana, New Hampshire, and Oregon) to over 10% when you combine state and local taxes. Most states fall between 5% and 8%.

Many states also allow counties and cities to add their own local sales tax on top of the state rate. So if your state has 6% sales tax and your county adds 1%, the total rate where you shop is 7%. This is why the same item costs different amounts in different parts of the same state.

The money collected goes into the state's general fund or is earmarked for specific purposes like education or transportation. Local taxes collected by cities and counties stay in those jurisdictions. Retailers do not keep any of the tax they collect — they act as the collection agent for the government.

Which items are taxed and which are not

Most states exempt certain categories from sales tax. Groceries are the most common exemption — in most states, food you buy at a supermarket to cook at home is not taxed. However, prepared food, restaurant meals, and food bought at convenience stores often are taxed.

Prescription medicines are exempt from sales tax in all states. Over-the-counter medicines vary by state — some tax them, others do not. Clothing is taxed in most states, but a handful exempt it or exempt items below a certain price point.

Services are usually not subject to sales tax, though this varies. A haircut, car repair, or plumbing service typically is not taxed. Digital goods like e-books, streaming subscriptions, and software have inconsistent treatment across states — some tax them, others do not, and the rules change frequently.

How online purchases are taxed

When you order something online, the retailer must collect sales tax based on where the item is being shipped, not where the retailer is located or where you live. If you live in California and order from a New York company, you pay California's sales tax rate.

Large online retailers like Amazon, Walmart, and Target collect sales tax on most orders. Smaller sellers and marketplaces have different rules. Some collect tax on all sales; others do not, depending on whether they have a physical presence in your state or meet certain sales thresholds.

If you buy from an out-of-state seller who does not collect sales tax, you may owe use tax to your state. Use tax is the same rate as sales tax but is paid directly to the state by the buyer rather than collected by the retailer. Most people do not pay use tax, but states are increasingly trying to enforce it.

What happens when you return an item

When you return a taxed item for a refund, the retailer refunds both the price and the sales tax you paid. If you bought a $50 item with $3.50 in tax and returned it, you get back $53.50.

If you return an item and exchange it for a different one, the tax is recalculated based on the new item's price. If the new item costs more, you pay the difference in price and tax. If it costs less, you receive a refund of the difference.

How sales tax differs from income tax

Sales tax and income tax are two separate taxes that fund different things. Income tax is based on what you earn and is collected by your employer or paid directly to the federal government and your state. Sales tax is based on what you spend and is collected by retailers.

You pay income tax once on your earnings. You pay sales tax every time you buy something taxable. A person earning $50,000 per year pays federal and state income tax on that amount. That same person pays sales tax on every purchase they make throughout the year.

Some states have no income tax but higher sales tax rates to make up the difference. Others have both. A few states have neither — they fund government through other means like corporate taxes or natural resource revenues.

Why sales tax rates vary so much between states and cities

States set their own tax rates based on their budget needs and political choices. States with no sales tax often have higher income taxes or other revenue sources. States with high sales tax rates may have lower income taxes or use sales tax revenue for specific programs.

Local taxes vary because cities and counties have different spending needs. A city that funds schools through sales tax may have a higher rate than a neighboring city that funds schools through property tax. Counties with large tourist industries sometimes add extra sales tax to distribute the tax burden to visitors.

Tax rates also change over time. States and cities raise or lower rates when their budgets change. A rate that was 7% five years ago might be 7.5% now, or it might have stayed the same. Checking your current local rate before budgeting for a large purchase is useful because rates do shift.

Frequently Asked Questions

Is sales tax included in the price shown on the shelf?

No. The price on the shelf or online is the pre-tax price. Sales tax is added at checkout. This is why your receipt total is higher than the price tag. A few states require retailers to show the total tax-included price, but most do not.

Do I pay sales tax on used items?

It depends on the state and where you buy it. Used items sold by retailers are usually taxed the same as new items. Private sales between individuals often are not taxed, though some states require tax on used car sales. Check your state's rules for the specific category.

Can I get sales tax back if I move to a state with no sales tax?

No. Sales tax is final once you pay it. Moving to a different state does not refund taxes you paid in your previous state. However, you will not pay sales tax on future purchases in your new state if it has no sales tax.

Why do some online orders show sales tax and others do not?

Retailers are only required to collect sales tax in states where they have a physical presence or meet certain sales thresholds. A small seller may not collect tax on orders shipped to your state, even though you may owe use tax. Large retailers collect tax on nearly all orders.

Does sales tax explore to gift cards?

No. When you buy a gift card, you do not pay sales tax on the card itself. When the recipient uses the card to buy something, sales tax is charged on that purchase. The tax is based on what is bought, not on the card.