What is U.S. Sales Tax?

You know that little extra amount added to your total when you buy something? That’s sales tax! It is a consumer tax that goes straight to the government.

Most of the time, the shopkeeper collects it from you right when you make your purchase. Now, in lots of other places around the world, they call this a Value Added Tax or a Goods and Services Tax.

Those work a bit differently from our sales tax here. Sometimes, the price tag shows you the cost before tax, and the sales tax gets added on at checkout. Other times, the price already includes all the tax.

Sales Tax Across the United States

Here in the US, things are a bit unique. Our federal government does not charge a sales tax. Instead, it is up to each state to decide. Most states have their own sales tax rates.

However, if you live in Alaska, Delaware, Montana, New Hampshire, or Oregon, you will not see a statewide sales tax. Even in states that have one, local towns or cities can add their own sales tax too.

Unlike how Value Added Tax works in many countries, our sales tax usually only applies to retail purchases. Most transactions between businesses are not taxed this way.

The sales tax rate can really vary, from zero all the way up to sixteen percent, depending on where you are and what you are buying. Every state has its own specific rules.

For example, in Texas, you might find that prescription medicines and food seeds are exempt. Vermont has a general sales tax, but if you buy an alcoholic drink and consume it right away, there is an additional tax on top of that.

These are just a few examples that show how much the rules can change from one place to another.

On average, sales tax takes about two percent of what Americans earn. It is a big deal for state governments, making up almost a third of their total income.

You will notice it is much more important for states in the south and west compared to places like New England. States like Florida, Washington, Tennessee, and Texas often get more than half of their tax money from sales tax alone. New York, on the other hand, gets a much smaller portion from it.

Below this explanation, you will find a detailed overview of the sales tax rates for various states.

History Of Sales Tax in the US

It is pretty interesting that our country’s very beginning had a lot to do with fighting over taxes!

Back when the US was a British colony, the English King put sales taxes on many items, even though the colonists had no say in the British government.

This whole idea of “taxation without representation” helped spark the Boston Tea Party and ultimately led to the American Revolution. So, sales tax has always been a bit controversial here!

That is probably why we have never had a federal sales tax. Earlier attempts at sales tax faced a lot of problems. It was not until the Great Depression that sales tax really took off. State governments desperately needed ways to raise money.

Out of many ideas they tried, sales tax became popular because the economy in the 1930s was all about selling things. Mississippi was the first to adopt it in 1930, and it quickly spread across the nation. Today, most states use sales tax as a necessary and effective way to fund state and local services.

Can You Deduct Sales Tax in the US?

When you are doing your federal income taxes, you usually have a choice: take the standard deduction or list out all your itemized deductions.

Most Americans go with the standard deduction because it is simpler. You can only deduct sales tax if you choose to itemize your deductions. For most people, if sales tax is your only itemized expense, it probably is not worth the extra time and effort.

Itemizing also means keeping really good records, because the IRS might ask for proof like a whole year of purchase receipts. So, if you plan to itemize, keep those detailed records handy!

After you decide between standard or itemized deductions, you have another choice. You can claim either your state and local income taxes OR your sales taxes, but you cannot do both.

Most people choose income taxes because that usually adds up to a bigger deduction. However, if you made some really big purchases during the year like a new car, a wedding ring, a fancy vacation, or several major appliances, your total sales tax paid might actually be more than your state income tax.

In those specific cases, deducting sales tax could save you more money. But honestly, less than two percent of Americans actually claim sales tax as a deduction each year.

If you are curious about income tax calculations, we have an Income Tax Calculator you can visit.

Value Added Tax (VAT) and Goods and Services Tax (GST)

You might have heard of Value Added Tax, or VAT. It is basically the version of sales tax that is super common outside the US, used in over 160 countries. VAT is an indirect tax that gets applied at various points throughout a product’s journey, whenever its value increases.

Countries that use VAT can also apply it to things bought from other countries or sold to them. Everyone in the supply chain, like wholesalers, manufacturers, and retailers, usually pays VAT, not just the final customer, which is different from our US sales tax.

VAT is figured out by taking the selling price and subtracting the cost of materials that were already taxed.

Back in 1979, a study pointed out some interesting things about VAT compared to sales tax. One of the best parts about VAT is that because tax applies at every step of production, it is really tough to avoid paying it.

Also, it encourages everyone in the supply chain to control their costs since they are all getting taxed. VAT also tends to bring in more money at a given rate than sales tax. On the flip side, VAT can hit lower income folks harder because it takes a bigger slice of their money proportionally.

It can also be tough on new businesses, might make prices go up, and sometimes hurts exports. If you want to dive deeper into VAT, check out our VAT Calculator!

Similar to VAT, the Goods and Services Tax (GST) is another type of indirect sales tax. It also gets applied to certain goods and services at multiple points in the supply chain.

The way these taxes work can be so different across countries that the terms “GST” and “VAT” do not always perfectly describe them. Countries like Spain, Greece, India, Canada, Singapore, and Malaysia are some that refer to their sales tax system as GST.