What is sales tax?
Sales tax is a state and local government-imposed tax added to the selling price of taxable goods and services at the time of sale at retail. In the United States, it is collected by the seller and then remitted to the state or local government. These funds support essential public services like schools, transportation infrastructure, and emergency response systems.
Who Sets Sales Tax Rates?
Unlike many other taxes in the US, sales tax is not controlled by the federal government. Instead, each state determines whether to impose a sales tax and sets its own rates and taxability rules. Additionally, cities and counties often levy their own sales taxes on top of the state rate. For example, California has a base state sales tax rate of 7.25%, but in some areas, local taxes increase the total rate to almost 17%! Find all the state rates using this chart.
Which States Do Not Have Sales Tax?
Five U.S. states—Delaware, Montana, New Hampshire, Oregon, and Alaska—do not impose a state-level sales tax. However, keep in mind that certain local governments within these states might still apply taxes. Learn more here.
What Items Are Subject to Sales Tax?
Not all items are taxed. The taxability of items varies widely by state. Essential items like groceries and prescription medicine are often exempt from sales tax, while luxury goods and non-essential services are usually taxable. Since definitions of taxable and non-taxable goods differ from state to state, understanding the specific rules in your area is crucial. In most states, services are exempt unless they are specifically taxed through an imposition.
Why Do Sales Tax Rates Vary?
Sales tax rates can vary significantly not only between states but also within the same state. This is due to additional local taxes imposed by cities or counties. Sales tax rates also vary based on other taxes imposed within the state. For example, Texas has a higher sales tax rate of 8.25% in most major cities and a fairly broad tax base due to the fact that it doesn’t have a personal income tax. Furthermore, sales tax rates and taxability are subject to change, so it’s essential to stay updated on the latest rates in your area to ensure compliance and accurate payment.