What Sales Tax Is and Who Collects It
Sales tax is a percentage added to the price of goods and some services at the point of sale. The person or business selling the item collects the tax from the buyer and sends it to the state or local government. The tax rate varies by state — it ranges from zero percent in states like Alaska, Delaware, Montana, New Hampshire, and Oregon, to as high as 7.25 percent or more in states like California and Tennessee. Some cities and counties add their own local sales tax on top of the state rate.
When you buy something at a store, the cashier or checkout system adds the sales tax to your total. Online purchases are more complicated: some online retailers collect sales tax based on where you live, while others do not, depending on state law and the retailer's physical presence in your state. The business collecting the tax is responsible for sending it to the government, not you.
Not everything is taxed. Most states do not tax groceries, prescription medications, or medical equipment. Clothing is taxed in most states but not all. Services like haircuts, repairs, and professional fees are often taxed, but the rules differ by state. Your state's revenue or taxation department publishes a list of what is and is not taxable in your area.
Key Takeaways
- Sales tax is collected by the seller at checkout and sent to the state or local government, not paid directly by you to the government.
- Tax rates vary by state and locality, ranging from zero to over seven percent, and apply only to certain items — groceries and prescription drugs are usually exempt.
- Online purchases may or may not be taxed depending on the retailer's location and your state's laws, so the final price can differ from the sticker price.
- Businesses that collect sales tax must register with their state and file returns showing how much tax they collected and when they sent it in.
- If you run a business, you may need to collect sales tax from customers and remit it on a schedule set by your state — monthly, quarterly, or annually.
How Sales Tax Rates Are Set and Vary by Location
Each state sets its own base sales tax rate through legislation. That rate applies statewide, but cities and counties can add local sales taxes on top of it. A purchase in one city might be taxed at 7 percent while the same purchase ten miles away in another city is taxed at 8.5 percent. The total rate you pay is the combination of state tax plus any local taxes that apply to your address.
Some states exempt certain items from sales tax entirely. Most states do not tax groceries, but a few do — and some tax only certain grocery items like candy or soda. Prescription medications are almost universally exempt, but over-the-counter drugs are often taxed. Clothing is exempt in states like New York and Pennsylvania but taxed in most others. Your state's department of revenue publishes a complete list of what is taxable and what is not.
Tax rates change when legislatures pass new laws. A state or city might raise or lower its rate, or add new categories of items to the taxable list. These changes are announced in advance, but they do not always make headlines. If you run a business or want to know the current rate in your area, check your state's revenue department website — it is the authoritative source and is updated when rates change.
What Happens When You Buy Something in a Store
At checkout, the register calculates the sales tax based on the items you are buying and the tax rate for your location. The tax is added to your subtotal, and you pay the combined amount. The store keeps a record of the sale and the tax collected. At the end of each day, week, or month — depending on the store's accounting system — the store totals up all the sales tax it collected and sets that money aside.
The store then files a sales tax return with the state (or sometimes the county or city, depending on where the tax is owed). The return shows how much the store sold, how much tax it collected, and when it is sending the money in. Most stores file monthly or quarterly. If a store collects $10,000 in sales tax in a month, it sends that $10,000 to the government by the deadline — usually 15 to 30 days after the end of the reporting period.
If a store fails to collect sales tax when it should, or fails to send it in on time, the state can impose penalties and interest. If a store deliberately does not collect sales tax to undercut competitors, that is tax evasion and can result in fines or criminal charges. This is why the price tag you see in a store is usually not the final price — the final price includes the tax the store will collect and remit.
How Online and Mail-Order Purchases Are Taxed
Online sales tax rules have changed significantly in recent years. Before 2018, many online retailers did not collect sales tax unless they had a physical location (a warehouse, office, or store) in your state. That meant buying online was often cheaper than buying in person. In 2018, the Supreme Court ruled that states could require online retailers to collect sales tax even without a physical presence in the state.
Today, most large online retailers collect sales tax based on your shipping address. Amazon, Walmart, Target, and most other major retailers now collect sales tax on orders shipped to states that have a sales tax. However, some smaller retailers and marketplaces still do not, especially if they are based in a state with no sales tax or if they have not yet registered to collect tax in your state. The tax rate applied is the rate for your address, which may include local taxes.
If you buy from a retailer that did not collect sales tax, you may owe use tax — a tax on items you purchased out of state and brought into your state. Use tax is the same rate as sales tax, but you are responsible for paying it yourself, usually when you file your state income tax return. Most people do not pay use tax, but states have the legal right to collect it. If you run a business and buy supplies from out-of-state retailers without paying sales tax, your state may pursue you for use tax.
What Businesses Need to Do to Collect and Remit Sales Tax
If you own a business that sells taxable goods or services, you must register with your state's revenue department to collect sales tax. Registration is usually free and can be done online. Once registered, you receive a sales tax permit or certificate, which you must display at your place of business. You are then legally required to collect sales tax from customers on all taxable sales.
After you register, your state assigns you a filing schedule — monthly, quarterly, or annually, depending on how much tax you collect. You file a sales tax return showing your total sales, the amount of tax you collected, and the amount you are sending to the state. Most states require payment by the 15th or 20th of the month following the reporting period. If you collect $5,000 in sales tax in January, you might file a return and pay by February 20th.
Keeping accurate records is essential. You need to track every sale, the tax collected on each sale, and any exemptions you granted (for example, if a customer showed you a resale certificate, you would not collect tax on that sale). Many businesses use point-of-sale systems that automatically calculate and track sales tax. If you do not collect and remit sales tax when you are supposed to, the state can assess penalties, interest, and back taxes, and may revoke your business license.
Sales Tax Exemptions and Special Situations
Certain buyers and sellers are exempt from sales tax in specific situations. Resellers — businesses that buy goods to resell them — do not pay sales tax on their purchases if they provide a resale certificate to the seller. The end consumer pays the tax when they buy the finished product. A clothing store does not pay sales tax when it buys shirts from a manufacturer, but the customer pays tax when they buy a shirt in the store.
Nonprofits and government agencies may be exempt from sales tax on certain purchases, but the rules vary by state and by item. A nonprofit might be exempt from tax on office supplies but not on vehicles. To claim an exemption, the buyer usually must provide a tax exemption certificate to the seller. The seller keeps the certificate on file as proof that they did not collect tax.
Some states offer temporary sales tax holidays — usually a week in August before school starts — when clothing, school supplies, and sometimes computers are not taxed. These holidays are announced by the state and apply to specific items only. If you are buying during a tax holiday, the register should automatically remove the tax, but it is worth double-checking your receipt.
How to Find Out the Sales Tax Rate in Your Area
The easiest way to find your sales tax rate is to visit your state's department of revenue website. Every state has one, and they all publish current tax rates by county or city. You can search by your zip code or address and see the exact rate that applies to your location. The state website also lists which items are taxable and which are exempt.
If you are buying online and want to know what tax will be charged, check the retailer's website or contact their customer service. Most major retailers show the tax amount before you complete your purchase. If you are buying from a small retailer and are unsure whether they will collect tax, you can ask them directly or check their state's revenue department to see if they are registered to collect tax.
If you run a business and need to know the rate you should be charging, your state's revenue department can provide it. Many states also offer free training and resources for new business owners on how to register, collect, and remit sales tax. Some states have a small business hotline you can call with questions.
Frequently Asked Questions
Why is the price at checkout different from the price on the tag?
The price on the tag is the base price before sales tax. At checkout, the store adds the sales tax for your location, which increases the total. The tax rate depends on your state and city, so the same item might have different final prices in different locations.
Do I have to pay sales tax if I buy something online from out of state?
Most large online retailers now collect sales tax based on your shipping address, so you pay tax at checkout. If a retailer does not collect tax, you may owe use tax to your state, though most people do not pay it. Check the retailer's website to see whether tax is included in the price.
What is the difference between sales tax and use tax?
Sales tax is collected by the seller at the point of sale. Use tax is a tax you owe on items you bought out of state without paying sales tax. They are the same rate, but with use tax, you are responsible for paying it yourself, usually on your state income tax return.
Can a business refuse to collect sales tax?
No. If a business is registered to collect sales tax, it is legally required to do so on all taxable sales. Failing to collect or remit sales tax can result in penalties, interest, and loss of the business license. If you believe a business is not collecting tax when it should, you can report it to your state's revenue department.
Do I need to collect sales tax if I sell items online as a side business?
Yes, if you sell taxable items, you must register with your state and collect sales tax from buyers in states where you have a sales tax obligation. The rules depend on your state and the amount you sell. Contact your state's revenue department or a tax professional to understand your specific obligations.