Table of Contents
- What Is Sales Tax? Simple Economics Definition & Meaning
- How Does Sales Tax Work for Consumers and Retailers?
- What Are the Different Types of Sales Taxes?
- What Is the Average Sales Tax Percentage in the US?
- Why Are Sales Taxes Different in Every State?
- How Exactly Is Your Sales Tax Calculated?
- What Kinds of Items Are Taxed?
- What Are the Pros and Cons of Sales Tax?
- FAQ
Taxes are a reality of our financial lives: You likely have income taxes withheld from every paycheck; if you’re a homeowner, you pay property taxes; and when you tap your card at the register when shopping, you typically pay sales tax.
You may wonder what sales tax is exactly and why you have to fork over that extra bit of your hard-earned cash. This guide will help explain the sales tax meaning, how sales tax works, the sales tax rate in each state, and the pros (yes, there are some!) and cons of sales tax.
Key Points
• Sales tax is a percentage of the retail costs of eligible goods and services; it functions as a revenue source for state and local governments.
• Revenue from sales taxes typically funds public services including roads and schools.
• Five states currently do not charge sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon, with Alaska allowing local taxes.
• The average sales tax rate in the United States is 7.53%, with rates varying by state and local jurisdiction.
• Common exemptions from sales tax include prescription drugs, groceries, essential personal items, and certain services, with variations by state.
What Is Sales Tax? Simple Economics Definition & Meaning
Simply put, sales tax is a fee added to the sale price of goods and services. Sales tax is typically calculated as a percentage of the total cost at checkout. The tax is collected by retailers from consumers; retailers then pass the tax directly to the state and local government to help fund public services such as schools and roads.
Sales tax is a form of revenue for state and local governments. States and localities may levy sales taxes of their own. So a consumer might pay a 5% state sales tax and 2% local sales tax, for example.
Five states currently do not charge sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of those five, only one state (Alaska) has cities/counties that charge local sales taxes.
States without sales taxes may generate revenue from other types of taxes, like income taxes and property taxes.
And sometimes states with no sales tax, like Alaska, may have a higher cost of living.
How Does Sales Tax Work for Consumers and Retailers?
Prices on items in the store and for certain services you may use generally don’t display the sales tax. So how does sales tax work?
When you get to the register with your purchase you’ll see how much you owe in sales tax. When shopping online, e-commerce sites usually tabulate sales tax near the end of the transaction.
When you pay for the item or service, the retailer or service provider collects from you the sales tax owed. Then the retailer must submit the taxes to the state and local governments. That means it’s on the retailer, not you, to keep records of sales taxes.
However, although you don’t submit the sales taxes to the government yourself, you may want to keep track of sales taxes paid throughout the year when you’re preparing for tax season.
That’s because if you’re itemizing deductions when preparing your tax return for the IRS, you may be able to take the SALT (sales and local taxes) deduction. You can choose to deduct your state and local income taxes or your state and local sales taxes, whichever delivers a bigger tax benefit.
Beginning in tax year 2025, the One Big Beautiful Bill temporarily raises the SALT deduction from $10,000 to $40,000 annually for single and joint filers ($20,000 for those married and filing separately). The full deduction phases out for those with a modified adjusted gross income (MAGI) of more than $500,000 ($250,000 for individuals married and filing separately); for those with a MAGI of more than $600,000, the deduction reverts to $10,000.
Deductions can help to lower your taxable income and reduce your tax burden.
Working with an accountant or using tax software may help you make sure you capture all appropriate deductions and submit all the appropriate types of tax forms.
Recommended: Tax Deductions for Freelancers
What Sales Tax Means for Online Purchases (Economic Nexus)
What sales tax means when you shop online has changed in recent years. Previously, consumers generally only paid a tax for online purchases if the retailer had a physical presence (such as a store or warehouse) in their state. Otherwise, there was no sales tax on these items.
Today, however, online retailers that make a significant number of sales in any of the 45 states with “economic nexus” laws are legally required to add state and local taxes to the items consumers purchase. (“Economic nexus” essentially means that the retailer has an economic presence there.)
The amount of sales tax you’ll pay on online purchases that meet the economic nexus requirements depends on the state you live in and the state and local sales tax rates there. States without sales tax are generally exempt from economic nexus. So if you live in a state like Delaware or Montana, you typically won’t have to pay sales tax on items you buy online.
What Are the Different Types of Sales Taxes?
While you may think of sales tax as a single entity, there are actually several different kinds that you might encounter, including:
• General sales tax: This is the amount added to everyday purchases, such as a case for your laptop or a rug for your hallway.
• Excise tax: This is imposed on things like cigarettes, alcohol, and gambling, as well as gasoline, among other goods, activities, and services. These taxes may be applied by the government to reduce consumption of certain things or as a kind of user fee.
• Value-added tax (VAT): This is a tax that is imposed at various stages of production when an item or service is created. In the U.S., this tax isn’t levied separately; it’s rolled into the cost of a product. However, you may hear VAT referred to when you travel overseas, where this tax may be added onto the price of goods or services.
What Is the Average Sales Tax Percentage in the US?
The average combined (state plus local) sales tax percentage in the United States is 7.53%, according to 2026 information from the Tax Foundation. This number is subject to change as states and cities update their tax code.
The table below, based on July 2026 data from the Tax Foundation, shows state sales tax rates, average local sales tax rates per state, and combined sales tax rates for each state and Washington, D.C.
| State | State Sales Tax Rate | Average Local Sales Tax Rate | Combined Sales Tax Rate |
|---|---|---|---|
| Alabama | 4.00% | 5.46% | 9.46% |
| Alaska | 0.00% | 1.82% | 1.82% |
| Arizona | 5.60% | 2.94% | 8.54% |
| Arkansas | 6.50% | 2.98% | 9.48% |
| California | 7.25% | 1.78% | 9.03% |
| Colorado | 2.90% | 4.99% | 7.89% |
| Connecticut | 6.35% | 0.00% | 6.35% |
| Delaware | 0.00% | 0.00% | 0.00% |
| Florida | 6.00% | 0.98% | 6.98% |
| Georgia | 4.00% | 3.56% | 7.56% |
| Hawaii | 4.00% | 0.50% | 4.50% |
| Idaho | 6.00% | 0.03% | 6.03% |
| Illinois | 6.25% | 2.73% | 8.98% |
| Indiana | 7.00% | 0.00% | 7.00% |
| Iowa | 6.00% | 0.94% | 6.94% |
| Kansas | 6.50% | 2.21% | 8.71% |
| Kentucky | 6.00% | 0.00% | 6.00% |
| Louisiana | 5.00% | 5.13% | 10.13% |
| Maine | 5.50% | 0.00% | 5.50% |
| Maryland | 6.00% | 0.00% | 6.00% |
| Massachusetts | 6.25% | 0.00% | 6.25% |
| Michigan | 6.00% | 0.00% | 6.00% |
| Minnesota | 6.88% | 1.26% | 8.14% |
| Mississippi | 7.00% | 0.06% | 7.06% |
| Missouri | 4.23% | 4.22% | 8.44% |
| Montana | 0.00% | 0.00% | 0.00% |
| Nebraska | 5.50% | 1.48% | 6.98% |
| Nevada | 6.85% | 1.39% | 8.24% |
| New Hampshire | 0.00% | 0.00% | 0.00% |
| New Jersey | 6.63% | -0.02% | 6.60% |
| New Mexico | 4.88% | 2.80% | 7.68% |
| New York | 4.00% | 4.54% | 8.54% |
| North Carolina | 4.75% | 2.35% | 7.10% |
| North Dakota | 5.00% | 2.09% | 7.09% |
| Ohio | 5.75% | 1.54% | 7.29% |
| Oklahoma | 4.50% | 4.56% | 9.06% |
| Oregon | 0.00% | 0.00% | 0.00% |
| Pennsylvania | 6.00% | 0.34% | 6.34% |
| Rhode Island | 7.00% | 0.00% | 7.00% |
| South Carolina | 6.00% | 1.49% | 7.49% |
| South Dakota | 4.20% | 1.91% | 6.11% |
| Tennessee | 7.00% | 2.61% | 9.61% |
| Texas | 6.25% | 1.95% | 8.20% |
| Utah | 6.10% | 1.32% | 7.42% |
| Vermont | 6.00% | 0.43% | 6.43% |
| Virginia | 5.30% | 0.47% | 5.77% |
| Washington | 6.50% | 3.07% | 9.57% |
| Washington, D.C. | 6.00% | 0.00% | 6.00% |
| West Virginia | 6.00% | 0.60% | 6.60% |
| Wisconsin | 5.00% | 0.72% | 5.72% |
| Wyoming | 4.00% | 1.39% | 5.39% |
Source: Tax Foundation; rates are subject to change
Why Are Sales Taxes Different in Every State?
Sales taxes are levied at the state and local levels. Because each state is permitted to form its own tax code, sales taxes can vary depending on which state you live in or visit.
In many states, cities and counties can also leverage their own sales taxes.
Where to Find Accurate State and Local Sales Tax Information
To find the most up-to-date, accurate information on state and local sales tax in your area, check your state’s Department of Revenue website. You can also get state and local tax information by going to USA.gov for links to your state’s tax agency website and your local government website.
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How Exactly Is Your Sales Tax Calculated?
To see how sales tax is calculated, let’s look at a hypothetical example. Suppose you want to buy a new cell phone charger for $20. The combined (state and local) sales tax rate is 7.5%. At the register, you’d pay $21.50. The store keeps its $20, and the $1.50 (7.5% of the sale price) goes to the government.
Here’s that math broken down:
| Sale Price | $20 |
|---|---|
| Total Sales Tax Rate | 7.5% |
| Sales Tax Calculation | $20 x 0.075 = $1.50 |
| Total Price | $20 + $1.50 = $21.50 |
What Kinds of Items Are Taxed?
Many goods and services have sales taxes, although in most states there are exemptions for prescription drugs, and in many states there are exemptions for groceries you buy and essential personal items like diapers and feminine hygiene products.
Increasingly, states are also taxing digital services, such as streaming services, Software-as-a-Service (SaaS), and AI-enabled software. Approximately 40 states have taxes on some digital products, and tax laws for digital services are changing frequently.
In addition, certain items may have an excise tax, which is different from the typical sales tax rate. Common excise tax goods include alcohol, tobacco, and gasoline.
States may also have sales tax holidays, when certain goods are sold tax-free (such as school supplies during the back-to-school season).
Recommended: Small Business Tax Deductions
What Are the Pros and Cons of Sales Tax?
There are benefits and drawbacks to sales tax. The pros and cons include:
• Pro: They’re easy to calculate. Compared to income taxes (from estimating tax withholdings to finding missing tax documents), the process of paying and collecting sales taxes is simple and straightforward.
• Con: It puts a heavier tax burden on low-income taxpayers. Income taxes in the U.S. are a progressive system: The more you make, the more you pay. Opponents of higher sales taxes — especially in states without income taxes — argue that this disproportionally puts the burden on low-income earners, since the sales tax rate is the same no matter how much money you have.
• Pro: Sales tax provides revenue for your state and city. Sales taxes fund essential services like the fire department, public education, and road construction as well as parks and recreation, among other things.
• Con: Sales taxes take more money out of your pocket. If you already pay income and property taxes, shelling out more money to the government in addition to what you pay when you file your tax return might feel painful.
The Takeaway
Sales taxes are a common way for states and municipalities to generate revenue to fund programs and departments that serve the public. In most states, you pay a sales tax every time you purchase goods and services, though there are exceptions. Certain items, such as groceries and prescription drugs are typically exempt from sales tax. Increasingly, digital services are subject to sales taxes as well.
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FAQ
What states do not have a statewide sales tax?
The five states that do not have a statewide sales tax are Alaska, Delaware, New Hampshire, Montana, and Oregon. In Alaska, however, cities and counties can charge local sales taxes.
Does the federal government collect a national sales tax?
No, the U.S. federal government does not collect a national sales tax. Sales taxes are levied at the state and local levels only.
How does a sales tax differ from a value-added tax (VAT)?
The main difference between a sales tax and a value-added tax (VAT) is the way these two taxes are applied and collected. Sales tax is applied and collected from consumers at the end of a sale, while VAT is applied at every point along the way, from the production of an item to the item’s sale. In the U.S., VAT is not charged to consumers separately; instead it is rolled into the cost of a product. Overseas, however, VAT may be added onto the price of goods or services when you pay for them.
What does sales tax mean for peer-to-peer marketplace shoppers?
Peer-to-peer (P2P) marketplace shoppers will typically see sales tax added to their purchases at checkout. The tax is calculated based on the shopper’s mailing address. How much sales tax a shopper will pay depends on the sales tax rate where they live. Most P2P marketplaces such as Amazon, Etsy, and Wayfair, are required to collect this tax in 45 states.
Are essential items like groceries and medicine subject to sales tax?
Most states do not tax essential items like groceries and prescription drugs. However, over-the-counter (OTC medications) typically do have a sales tax in many states.
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