What is Sales Tax?
A sales tax is a consumption tax paid to a government on the sale of certain goods and services. Usually, the vendor collects the sales tax from the consumer at the point of purchase. In many countries around the world, the overarching sales tax system is referred to as a Value-Added Tax (VAT) or Goods and Services Tax (GST), which applies taxation slightly differently than traditional sales tax.
In some regions, the listed shelf price for goods already includes the final after-tax value. In others, such as the United States, the listed price represents the before-tax value, and the sales tax is only applied dynamically at the register.
U.S. Sales Tax System
In the United States, there is no federal sales tax. Instead, taxation relies on a combination of state and local jurisdiction rules. Of all fifty states (including the District of Columbia, Puerto Rico, and Guam), five do not have any statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.
States that do impose a sales tax have vastly varying base rates. Additionally, local counties and cities often impose their own distinct sales taxes on top of the state rate. The total combined sales tax rate in the U.S. typically ranges from 0% to nearly 11% depending on the specific zip code and the type of product being purchased. Certain goods—like unprepared groceries, prescription medicine, and clothing—may be tax-exempt depending entirely on the state.
History of the Sales Tax
When the U.S. was a British colony in the 18th century, the English King imposed a tax on various items for American colonists. This "taxation without representation" was a major driving force behind the Boston Tea Party and, eventually, the American Revolution.
Modern sales tax as we know it today, however, didn't truly take form in the U.S. until the Great Depression. State governments struggled significantly to raise revenue to stay afloat. Mississippi was the first to implement a modern sales tax in 1930, and the system was quickly adopted across the nation as an effective means of funding state and local programs.
Formulas and Mathematics
Calculating sales tax manually is straightforward. Our calculator does the heavy lifting, but the core formulas used to maneuver between the three variables (Before-Tax Price, Tax Rate, and After-Tax Price) are:
Tax Amount = Before Tax Price × (Sales Tax Rate / 100)
After Tax Price = Before Tax Price + Tax Amount
Before Tax Price = After Tax Price / [ 1 + (Sales Tax Rate / 100) ]
Sales Tax Rate = [ (After Tax Price - Before Tax Price) / Before Tax Price ] × 100
How to Deduct Sales Tax in the U.S.
When filing federal income taxes, U.S. taxpayers must choose between taking a standard deduction or itemizing their deductions. If you itemize, you have the option of claiming either state and local income taxes OR state and local general sales taxes, but not both.
Most taxpayers choose to deduct their state income taxes because it typically yields a larger deduction. However, deducting sales taxes may be more beneficial for individuals who live in a state with no income tax (like Texas or Florida) or those who made significant major purchases during the year, such as a vehicle, boat, or materials to build a home.
VAT vs. GST
Outside of the U.S., most of the world uses a Value-Added Tax (VAT) or Goods and Services Tax (GST). VAT applies tax at every stage of the supply chain—from raw material extraction to final retail sale—wherever "value is added." Ultimately, the end consumer still bears the burden of the tax, but businesses along the chain are taxed and refunded accordingly, making tax evasion much more difficult.
The term GST is largely functionally identical to VAT and is utilized by nations like Canada, India, Australia, Singapore, and New Zealand to refer to their consumption tax networks.
Frequently Asked Questions
Yes, there are five U.S. states that do not impose a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Note that while Alaska does not have a state tax, some municipalities within Alaska do impose local city sales taxes.
To find the original price from a total that already includes tax, you cannot simply subtract the tax percentage from the total. Instead, you must divide the final price by 1 plus the tax rate in decimal form. For example, if the total is $105 and the tax rate is 5% (0.05), you divide 105 by 1.05 to get the original $100 price.
This depends entirely on the state. Some states require merchants to charge sales tax on the shipping and handling costs as well as the items, considering shipping a taxable service. Other states only require tax to be collected on the cost of the tangible goods themselves.
Businesses can generally write off the sales tax paid on items purchased for their day-to-day operations as an ordinary business expense. However, sales tax collected from customers on behalf of the state is not considered revenue and thus is not deductible, as it simply passes through the business to the government.
The effective tax rate in this context is the actual percentage of the before-tax price that is paid in taxes. In straightforward retail scenarios, the effective tax rate is identical to the nominal sales tax rate. However, if a bill contains both taxable and non-taxable items, the effective rate on the entire bill will be lower than the local tax rate.