How Sales Tax Works
Sales tax is a consumption tax charged at the point of purchase, collected by the seller and passed to the government. In the United States there is no federal sales tax; it is levied by states, counties, cities and special districts, which is why the rate can change from one side of a street to the other.
Tax amount = Price × Rate ÷ 100
Total = Price × (1 + Rate ÷ 100)
Working Backwards from a Total
This is where most people make an error. To find the pre-tax price from a total that already includes tax, you must divide, not subtract:
Pre-tax price = Total ÷ (1 + Rate ÷ 100)
A $107.25 total at 7.25% tax has a pre-tax price of 107.25 ÷ 1.0725 = $100.00. Subtracting 7.25% from $107.25 gives $99.47, which is wrong by 53 cents — and the error grows with the amount. The reason is that the tax was calculated on $100, not on $107.25, so the percentage is not being taken from the same base.
U.S. State Sales Tax Rates
State-level base rates. Local jurisdictions add their own on top, so the rate you actually pay is often several points higher.
| State | State rate | Typical combined |
|---|---|---|
| Alaska | 0.00% | up to 7.5% (local only) |
| Delaware | 0.00% | 0.00% |
| Montana | 0.00% | 0.00% |
| New Hampshire | 0.00% | 0.00% |
| Oregon | 0.00% | 0.00% |
| Colorado | 2.90% | ~7.8% |
| Alabama | 4.00% | ~9.2% |
| Georgia | 4.00% | ~7.4% |
| Hawaii | 4.00% | ~4.4% |
| New York | 4.00% | ~8.5% |
| Wyoming | 4.00% | ~5.4% |
| Louisiana | 4.45% | ~9.5% |
| Oklahoma | 4.50% | ~9.0% |
| North Carolina | 4.75% | ~7.0% |
| Ohio | 5.75% | ~7.2% |
| Florida | 6.00% | ~7.0% |
| Texas | 6.25% | ~8.2% |
| Illinois | 6.25% | ~8.8% |
| Washington | 6.50% | ~9.4% |
| Nevada | 6.85% | ~8.2% |
| Indiana | 7.00% | 7.00% |
| Tennessee | 7.00% | ~9.5% |
| California | 7.25% | ~8.8% |
Rates change; always confirm the current combined rate for the specific address before relying on it for anything official.
What Is Usually Exempt
Most states exempt certain categories, though the details vary enormously:
- Groceries — exempt or taxed at a reduced rate in most states, but fully taxed in a handful. Prepared food is almost always taxable even where groceries are not.
- Prescription medication — exempt nearly everywhere. Over-the-counter medicine is often taxable.
- Clothing — exempt in a few states such as Pennsylvania and Minnesota, and exempt below a price threshold in others.
- Services — historically untaxed, though states are increasingly taxing digital services and subscriptions.
- Sales for resale — a business buying inventory does not pay sales tax, since the tax applies at the final sale.
Sales Tax vs. VAT
| U.S. sales tax | Value-added tax (VAT) | |
|---|---|---|
| Charged at | Final sale only | Every stage of production |
| Shown in the price? | Usually added at checkout | Usually included in the displayed price |
| Typical rate | 0–10% | 15–27% |
| Collected by | The retailer | Every business in the chain, with credits for tax already paid |
| Used in | United States | Over 170 countries |
The practical difference for a shopper is visibility: a European price tag is what you pay, while a U.S. price tag is not. This is also why the "remove the tax" calculation above is far more commonly needed outside the U.S.
Where Sales Tax Applies
Since the Supreme Court's 2018 South Dakota v. Wayfair decision, states can require out-of-state online sellers to collect sales tax once they exceed a threshold of sales into that state. Tax is generally charged at the destination rate — where the buyer receives the goods — in most states, though a handful use origin-based sourcing for in-state sales.
Frequently Asked Questions
How do I calculate the tax on a discounted item?
Apply the discount first, then the tax on the reduced price. A $100 item at 20% off in an 8% tax state costs $80 × 1.08 = $86.40.
Is sales tax charged on shipping?
It depends on the state. Some tax shipping charges, some do not, and some tax them only when shipping is not separately stated on the invoice.
Can I get a refund of sales tax as a foreign visitor?
Generally not in the United States, unlike VAT refunds in Europe. Louisiana and Texas run limited programs for goods exported by international visitors.
What is a sales tax holiday?
A short period, usually before the school year, when a state suspends sales tax on defined categories such as clothing, school supplies or computers below a price cap.