Sales tax is a state or local tax charged on the sale of certain goods and services. It's usually calculated as a percentage of the purchase price, collected by the seller at checkout, and then sent to the appropriate tax authority.
If you've ever looked at a receipt and noticed the final total was higher than the sticker price, sales tax is often the reason.
Who Pays Sales Tax?
The customer ultimately pays the sales tax. However, businesses play an important role in the process:
- The buyer pays the tax as part of the purchase.
- The seller collects the tax at the time of sale.
- The seller then remits the tax to the state or local government.
In other words, the business acts as the tax collector, while the consumer bears the cost.
Where Does Sales Tax Apply?
Sales tax is generally imposed at the state and local level.
Because each state creates its own sales tax rules, rates can vary widely across the country. Some states allow cities, counties, or other local jurisdictions to add their own taxes on top of the state rate.
As a result, the amount of sales tax charged on the same item may be different depending on where it's purchased.
What Purchases Are Subject to Sales Tax?
Sales tax commonly applies to:
- Tangible personal property, such as:
- Electronics
- Clothing
- Furniture
- Household goods
- Certain services, depending on state law, such as:
- Repair services
- Cleaning services
- Installation services
Not every state taxes the same products or services, so it's important to check the rules where the purchase occurs.
Common Sales Tax Exemptions
Many states provide exemptions or reduced tax rates for items considered necessities. Common examples include:
- Groceries
- Prescription medications
- Medical devices
Keep in mind that exemptions vary by state and locality. An item that is exempt in one state may be taxable in another.
## Sales Tax vs. Use Tax
Sales tax and use tax are closely related, but they're not the same thing.
Sales Tax
- Applies to taxable purchases made within a state.
- Collected by the seller at the time of purchase.
- Remitted to the state or local tax authority by the seller.
Use Tax
- Generally applies when sales tax was not collected on a taxable purchase.
- Often relates to out-of-state or online purchases.
- Is typically reported and paid directly by the purchaser.
Use tax helps ensure that taxable purchases are subject to tax even when a seller does not collect sales tax at checkout.
Sales Tax Example
Let's say you purchase a laptop for $1,000 in a location with a 6% sales tax rate.
Purchase price: $1,000
Sales tax:
$1,000 × 6% = $60
Total amount paid:
$1,000 + $60 = $1,060
The seller collects the $60 in sales tax and remits it to the appropriate tax authority.
How Sales Tax Affects Taxpayers
Sales tax is generally paid throughout the year as you make purchases. While sales tax itself is not typically reported on your federal income tax return, some taxpayers who itemize deductions may be able to deduct certain state and local taxes, subject to IRS limits and eligibility requirements.
If you're preparing your tax return, tax software can help you determine whether any state and local tax deductions apply to your situation.