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Understanding Sales Tax in the United States

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and, in many cases, services. Unlike a value-added tax (VAT) used in most other countries, the US sales tax is collected only at the final point of sale to the consumer. There is no federal sales tax in the United States, which means rates and rules are determined entirely at the state and local level. This results in a patchwork of tax rates that can vary dramatically depending on where a purchase is made.

State vs. Local Sales Tax Rates

Each state sets its own base sales tax rate, and many states allow cities, counties, and special districts to add their own local taxes on top. For example, a state might impose a 6% base rate, while the county adds 1% and the city adds another 0.5%, resulting in a combined rate of 7.5% at the register. Five states currently have no state-level sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska does allow local jurisdictions to levy their own sales taxes, so shoppers in certain Alaskan cities may still pay sales tax. Combined rates across the country can range from 0% to over 11% in some municipalities, making it important for consumers and business owners to verify the exact rate for their specific location.

Tax-Exempt and Tax-Free Items

Not everything you buy is subject to sales tax. Most states exempt certain categories of goods that are considered necessities. Prescription medications are exempt in all states that impose a sales tax. Unprepared grocery food is exempt in roughly 30 states, though definitions of what qualifies as "unprepared food" can differ. Some states also exempt clothing below a certain price threshold. Additionally, many states hold annual sales tax holidays, typically before the back-to-school season, during which qualifying items like clothing, school supplies, and computers can be purchased tax-free for a limited time. Business buyers who purchase items for resale can usually present a resale certificate to avoid paying sales tax, since the tax will ultimately be collected from the end consumer.

Online Shopping and Economic Nexus

Following the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, states gained the authority to require out-of-state online sellers to collect and remit sales tax, even if the seller has no physical presence in the state. This concept is known as economic nexus. Most states now have economic nexus thresholds based on a seller's revenue or number of transactions in the state, commonly set at $100,000 in annual sales or 200 transactions. As a result, most major online retailers now collect sales tax based on the buyer's shipping address. If you purchase something online and no sales tax is collected, you may still owe a use tax to your state, which is technically the consumer's responsibility to report. Understanding these rules is important both for shoppers who want to budget accurately and for small business owners who need to remain compliant with multi-state tax obligations.