How Does Sales Tax Work and Who Actually Pays It?
Understand what sales tax is, how it is calculated at the register, why rates vary so much by location, and which items are commonly tax-exempt.
What Sales Tax Is and Is Not
Sales tax is a percentage-based tax added to the purchase price of goods and certain services at the point of sale. In the United States, it is collected by the seller at the time of the transaction and then remitted to state and local governments. The buyer pays it, the seller collects it, and the government receives it.
Sales tax is distinct from income tax (based on what you earn), property tax (based on what you own), and VAT (based on value added at each production stage). It is a straightforward consumption tax levied once, at the retail level, on the final consumer's purchase.
The United States has no federal sales tax. Sales taxes are levied entirely at the state and local level, which is why rates and rules vary so dramatically from place to place. This decentralized structure means that what you pay in sales tax on a purchase depends entirely on where the transaction takes place.
How It Is Calculated at the Register
The calculation is straightforward: multiply the taxable purchase price by the applicable tax rate to find the tax amount, then add that to the pre-tax price to find the total. A $50 item in a location with a 8.5% sales tax rate generates $4.25 in tax, for a total of $54.25.
Most point-of-sale systems handle this automatically, so shoppers rarely need to do the math manually. But knowing the formula helps when shopping online, when comparing prices across state lines, or when budgeting for a large purchase where the tax amount is meaningful.
Combined sales tax rates — meaning state plus county plus city rates added together — can be surprisingly high in some locations. New York City, for example, has a combined rate of 8.875%. In Chicago, the combined rate can reach 10.25% or more depending on the specific location within the city.
Why Rates Vary So Much by State and City
Each state sets its own base sales tax rate independently. State rates range from 0% in states like Oregon, Montana, New Hampshire, and Delaware to 7.25% in California. Most states then allow counties and municipalities to add their own additional rates on top of the state rate.
The result is thousands of different combined tax rates across the country. According to the Tax Foundation, there are over 11,000 taxing jurisdictions in the United States. A single state might have a dozen or more different combined rates depending on which city and county you are in.
Local sales tax rates are set by local governments to fund services like roads, schools, transit systems, and public safety. Some cities have voter-approved temporary sales tax increases to fund specific projects. This democratic variation in local rates is part of why the US system is so fragmented compared to countries with a single national rate.
Items That Are Often Tax-Exempt
Most states exempt certain categories of purchases from sales tax. Groceries are among the most common exemptions. About a third of states fully exempt food for home consumption from sales tax. Others apply a reduced rate. This exemption recognizes that food is a necessity and that sales tax on groceries falls most heavily on low-income households.
Prescription medications are exempt from sales tax in almost every state. Over-the-counter drugs vary more by state, with some states exempting them and others taxing them at the standard rate. Medical devices may also be exempt, depending on the state and device type.
Clothing has interesting treatment. In some states like Pennsylvania and Minnesota, most clothing is exempt. In others, clothing is fully taxable. New York exempts clothing items under $110 per item but taxes more expensive garments. Some states use back-to-school sales tax holidays where clothing and school supplies are temporarily exempt to reduce costs for families.