Sales and use tax is a state and local tax on purchases, collected at the point of sale

Sales tax is a percentage added to the price of goods and some services when you buy them. The seller collects it at checkout and sends it to the state or local tax authority. Use tax is a companion tax you owe on items you buy from out-of-state sellers who did not collect sales tax — it exists so people cannot avoid the tax by ordering online instead of shopping locally.

The two taxes are meant to work together. If you buy something in your state, sales tax applies. If you buy the same thing from an out-of-state seller and no sales tax was charged, use tax applies to you. In practice, most online retailers now collect sales tax in states where they have a physical presence or meet certain sales thresholds, so use tax is less common than it once was.

Sales and use tax rates vary by state and sometimes by county or city. A state might have a base rate of 5 percent, but your county might add 1 percent and your city another 0.5 percent, bringing your total to 6.5 percent. The rate you pay depends on where the item is delivered or used, not where you live or where the seller is located.

Key Takeaways

  • Sales tax is collected by the seller at the time of purchase and varies by state, county, and city.
  • Use tax is a self-reported tax you owe on out-of-state purchases when the seller did not collect sales tax.
  • The tax applies to most goods and some services, but groceries, prescription medications, and medical devices are often exempt.
  • Tax rates range from zero percent in some states to over 10 percent in others, depending on your location.
  • You report use tax on your state income tax return or a separate form, though most people do not because enforcement is limited.

What items are taxed and what are exempt

Sales and use tax applies to tangible goods — physical items you can touch and hold. Clothing, furniture, electronics, groceries, and gas are all subject to tax in most states, though the rate and exemptions vary. Some states tax groceries at the full rate, others at a reduced rate, and a few exempt them entirely.

Services are usually not taxed, with specific exceptions. A haircut, a plumber's labor, or a doctor's visit is generally not subject to sales tax. However, some states tax certain services: repairs, installation, cleaning, and telecommunications may be taxed depending on where you live. A few states also tax digital goods like e-books, streaming subscriptions, or software downloads.

Common exemptions across most states include prescription medications, medical devices, and items bought for resale by a business. Some states exempt items for people with disabilities, such as prosthetics or mobility aids. A handful of states exempt clothing or shoes. The best way to know what is taxed in your state is to check your state's revenue or tax department website, which publishes a list of taxable and exempt items.

How sales tax is calculated at checkout

Sales tax is calculated as a percentage of the purchase price before tax. If an item costs $100 and the sales tax rate is 7 percent, you pay $7 in tax for a total of $107. The seller's register or checkout system calculates this automatically based on the tax rate for your location.

When you buy multiple items, each taxable item is taxed separately at the same rate. If some items are exempt — such as groceries in a state that exempts them — those items are not taxed, and the tax is applied only to the taxable items in your cart. The total tax you see at checkout is the sum of tax on all taxable items.

Online retailers determine your tax rate based on the shipping address you provide. If you order something to be delivered to a state with a 6 percent tax rate, that rate applies even if the seller is in a state with a different rate. This is why the same item can cost different amounts depending on where it is being shipped.

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 directly to the state on purchases where sales tax was not collected. The two are meant to be mutually exclusive — you pay one or the other, not both.

Use tax applies most often when you buy from an out-of-state seller who does not collect sales tax. If you order an item from a seller in a state with no sales tax, or from a seller who is not required to collect tax in your state, you technically owe use tax on that purchase. The tax rate is the same as your state's sales tax rate for your location.

In theory, you report use tax on your state income tax return or on a separate use tax form. In practice, most individuals do not report use tax, and states have limited resources to enforce it against consumers. Some states ask you to estimate your use tax based on a percentage of your income; others provide a line on the income tax form where you can report it. Businesses are more likely to be audited for use tax than individuals.

Sales tax rates by state

Sales tax rates range from zero to over 10 percent depending on where you live. Five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — have no state sales tax. However, some cities and counties in Alaska do collect local sales tax, so the rate is not zero everywhere in that state.

States with sales tax range from 2.9 percent (Colorado) to 7.25 percent (California) at the state level. When you add local taxes, the combined rate can exceed 10 percent. Tennessee, Louisiana, and Arkansas have some of the highest combined rates, often between 9 and 9.5 percent depending on the city.

Your actual tax rate depends on the specific address where the item is delivered or used. Two cities in the same state can have different rates if they impose different local taxes. If you move or order something to a different address, the tax rate may change. You can find your exact rate by entering your address on your state's tax department website or by checking with your local tax assessor.

Who collects and where the money goes

The seller collects sales tax at the point of sale and holds it temporarily. The seller then sends the collected tax to the state tax authority, usually monthly or quarterly, depending on the state's rules and the seller's sales volume. Large retailers send payments more frequently; small businesses may send quarterly.

Once the state receives the sales tax, it is distributed according to state law. Most states keep a portion for the state general fund and distribute the rest to counties, cities, and special districts like schools or transit authorities. The exact split varies by state. Some states keep 100 percent; others split it 50-50 with local governments.

Use tax collected by the state goes through the same distribution process. When you report use tax on your income tax return, it is treated the same way as sales tax revenue and distributed to state and local budgets.

How to know what you owe on online purchases

Most major online retailers now collect sales tax automatically at checkout based on your shipping address. Amazon, Walmart, Target, and other large sellers are required to collect in most states. When you see the tax added to your order total, that is sales tax being collected by the seller.

Some smaller sellers or specialty retailers may not collect sales tax, particularly if they are based in a state with no sales tax or if they do not meet the sales threshold that triggers collection requirements in your state. If you buy from a seller and no tax was added to your order, check whether the seller is required to collect in your state. If they are not, you may owe use tax.

To determine whether you owe use tax on a specific purchase, ask yourself: Did the seller collect sales tax? If yes, you do not owe use tax. If no, and the seller is not required to collect in your state, you owe use tax at your state's rate. The amount is the same percentage as your state's sales tax rate applied to the purchase price.

Frequently Asked Questions

Do I have to pay sales tax on items I buy in person at a store?

Yes, unless the item is exempt in your state. The store's register calculates and collects the tax at checkout based on your location. You cannot avoid sales tax by paying cash or using a different payment method — the tax applies regardless.

What happens if I do not report use tax on my income tax return?

Most individuals who do not report use tax are not audited or penalized. States focus enforcement efforts on businesses rather than consumers. However, if you are audited for other reasons, the auditor may ask about use tax on large purchases. Reporting it is the legally correct approach, even though enforcement is rare.

Can I get a refund of sales tax if I return an item?

Yes. When you return a taxable item, the store refunds both the purchase price and the sales tax you paid. If you return a partial order, only the tax on the returned items is refunded. Keep your receipt to show the tax amount if the refund is not clear on your receipt.

Is sales tax the same in every city in my state?

No. Each city and county can set its own local tax rate in addition to the state rate. Two cities 20 miles apart can have different total rates. Your exact rate depends on the address where the item is delivered or used, not where you live or work.

Do I owe sales tax on services like haircuts or repairs?

It depends on your state and the specific service. Most states do not tax services, but some tax specific ones like repairs, installation, or cleaning. Check your state's tax department website for a list of taxable services, or ask the service provider whether tax will be added to your bill.