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What is Sales Tax? | Complete Guide
A sales tax is a type of consumption tax levied by governments on the sale of goods and services. Typically, the seller collects the tax from the buyer at the time of purchase. Globally, sales tax may appear as Value-Added Tax (VAT) or Goods and Services Tax (GST), depending on the country.
In some countries, listed prices exclude sales tax, which is added at checkout.
In other countries, prices are inclusive of sales tax, showing the final amount paid by the consumer.
Sales Tax in the United States
The U.S. does not have a federal sales tax. Instead, sales taxes are imposed at the state and local levels, except in five states:
No statewide sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon
States with sales tax often have different rates, and local governments may add additional taxes. Unlike VAT, U.S. sales tax is usually applied only to retail purchases, not business-to-business transactions.
Sales Tax Rates by State
| State | General State Sales Tax | Max Tax Rate with Local Tax |
|---|---|---|
| Alabama | 4% | 13.50% |
| Alaska | 0% | 7% |
| Arizona | 5.60% | 10.725% |
| Arkansas | 6.50% | 11.625% |
| California | 7.25% | 10.50% |
| Colorado | 2.90% | 10% |
| … | … | … |
Note: Each state has unique exemptions and rules. For example, Texas exempts prescription medicine and food seeds, while Vermont adds a 10% tax on alcohol consumed immediately.
Impact of Sales Tax
On average, sales tax accounts for about 2% of personal income in the U.S.
It contributes roughly one-third of state government revenue, second only to income taxes.
Reliance on sales tax varies: southern and western states, like Florida, Texas, and Washington, rely heavily on sales tax revenue, while New England states like New York rely less.
History of Sales Tax in the U.S.
Sales tax in the U.S. has roots in the colonial period, where British-imposed taxes led to the Boston Tea Party and the American Revolution.
State-level sales taxes became widespread during the Great Depression as governments sought revenue.
Mississippi was the first U.S. state to implement sales tax in 1930, paving the way for nationwide adoption.
Deducting Sales Tax
When filing federal income tax, taxpayers must choose between:
Standard deduction
Itemized deductions
Sales tax can only be deducted if itemizing, and taxpayers must maintain receipts. Taxpayers may also choose between deducting state income tax or sales tax, but not both.
Tip: Itemizing sales tax may benefit those who made large purchases like cars, appliances, or weddings. Fewer than 2% of Americans claim sales tax deductions annually.
Sales Tax vs VAT and GST
Value-Added Tax (VAT)
Used in over 160 countries outside the U.S.
VAT is an indirect tax applied at multiple stages of production whenever value is added.
Each participant in the supply chain—wholesalers, manufacturers, and retailers—pays VAT, not just the end consumer.
Pros: Difficult to evade, incentivizes cost control, generates more revenue at lower rates
Cons: Can be regressive, may inflate prices, affects exports
Learn more with our VAT Calculator.
Goods and Services Tax (GST)
GST is similar to VAT and used in countries like India, Canada, Singapore, Spain, and Malaysia.
Tax rates and structures vary widely, applying at multiple points in the supply chain.
Key Takeaways
Sales tax is a government-imposed tax on goods and services, usually collected by sellers.
In the U.S., sales tax is state-level; there is no federal sales tax.
Globally, VAT and GST are more common, affecting both businesses and consumers.
Sales tax rules, exemptions, and rates vary widely depending on jurisdiction.