How Sales Tax Works: A State-by-State Guide

Sales tax is a percentage added to the price of goods (and some services) at the point of retail sale. It is collected by sellers and passed on to the state and local governments. In the United States, sales tax is a state-level tax — there is no federal sales tax — so rates and rules vary significantly by state, county, and city.

Unlike income tax, which is based on earnings, sales tax is a consumption tax: you pay it when you spend money. The seller does the administrative work of collecting it, but the economic burden falls on the buyer.

Sales tax is the largest single revenue source for state governments after income taxes. Most states fund education, infrastructure, and public services primarily through income and sales tax revenue.

Sales tax rates in the U.S. have two components that stack together:

• State rate — set by the state legislature and applies statewide. For example, California's state rate is 7.25%; Texas is 6.25%.
• Local rate — additional taxes levied by counties, cities, and special districts. These can add 0% to 5%+ on top of the state rate. A single location in California can have a combined rate exceeding 10.75%.

The combined rate — state plus local — is what you actually pay as a consumer. National averages mask the wide variation within states. Tennessee has a 7% state rate, but combined with typical local taxes, most Tennesseans pay 9–10%.

Rates also differ by product category. Many states apply full tax to most goods but exempt or reduce the rate on groceries, prescription drugs, clothing, and agricultural supplies.

The following ranges reflect combined (state + average local) rates as of 2025–2026. Rates change frequently; always check current rates for specific transactions.

• Highest combined rates: Tennessee (~9.5%), Louisiana (~9.5%), Arkansas (~9.4%), Washington (~9.3%), Alabama (~9.2%)
• Lowest combined rates (among states with sales tax): Colorado (~2.9% state, but with local adds), Hawaii (~4.4%), Wisconsin (~5.4%), Wyoming (~5.4%)
• Largest state-only rates: California (7.25%), Indiana (7%), Mississippi (7%), New Jersey (6.625%), Rhode Island (7%)
• No statewide sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon

Use state-specific calculators for accurate figures. The rates above are averages — your actual rate depends on exactly where the purchase occurs.

Five states — often remembered by the acronym NOMAD — have no statewide sales tax:

• New Hampshire — no state or local sales tax. Generates revenue primarily through property and business taxes.
• Oregon — no sales tax at any level. Has higher income and property taxes to compensate.
• Montana — no state sales tax, though some resort areas charge local sales taxes on specific goods.
• Alaska — no statewide sales tax, but municipalities can and do levy local sales taxes. Rates vary widely by city.
• Delaware — no state or local sales tax. This is why many large U.S. corporations are incorporated there and why shoppers cross from neighboring states for major purchases.

Even in no-sales-tax states, you may owe use tax — a legally equivalent tax on goods purchased in other states and brought in for use. Use tax is widely unenforced for individual consumers but technically due in most states.

Nexus is the legal term for a sufficient connection between a seller and a state that creates a sales tax collection obligation. For decades, nexus required physical presence — a store, warehouse, office, or employee in the state.

That changed in 2018 when the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. that states can require out-of-state sellers to collect sales tax based on economic activity alone. Every state with a sales tax quickly adopted economic nexus thresholds, typically:

• $100,000 in sales into the state, OR
• 200 or more separate transactions into the state per year

This means most online businesses that sell across the country are now obligated to register, collect, and remit sales tax in dozens of states — not just their home state. The compliance burden is significant, which is why sales tax automation software (Avalara, TaxJar) became major industries overnight.

For consumers, the practical effect is that nearly all online purchases from major retailers now include sales tax. Small marketplace sellers and individual imports may still arrive without tax, but the legal obligation (as use tax) still exists.

For a detailed breakdown of nexus obligations, see the sales tax nexus guide.

Sales tax is not applied uniformly to every purchase. Every state carves out exemptions for specific categories. The most common:

• Prescription drugs — exempt in virtually every state. Over-the-counter medications are taxed in most states.
• Groceries (unprepared food) — exempt or reduced-rate in most states. Exceptions include Mississippi, Kansas, and Alabama, which tax groceries at the full or a reduced rate.
• Clothing — exempt in several northeastern states including New York (under $110 per item), Pennsylvania, New Jersey, and Minnesota. Most states do tax clothing.
• Agricultural inputs — feed, seeds, and farm equipment are frequently exempt to avoid taxing the food production chain.
• Manufacturing machinery — many states exempt equipment used directly in manufacturing to keep production costs competitive.
• Resale certificates — businesses purchasing goods for resale (not for their own use) can use a resale certificate to buy tax-free. Tax is collected when the end consumer buys the product.

Sales tax holidays — short periods when specific items like school supplies, clothing, or emergency preparedness goods are temporarily tax-exempt — are offered by about a dozen states, typically in late summer.

The calculation is straightforward once you know the applicable rate:

Tax amount = purchase price × (tax rate ÷ 100)

Total price = purchase price × (1 + tax rate ÷ 100)

Example: $250 purchase in a city with 8.5% combined sales tax:

• Tax = $250 × 0.085 = $21.25
• Total = $250 + $21.25 = $271.25

To reverse-calculate from a tax-inclusive total:

Pre-tax price = total ÷ (1 + tax rate ÷ 100)

Example: $271.25 total with 8.5% tax → $271.25 ÷ 1.085 = $250 pre-tax.

The tricky part is knowing the right rate for your location, which is where state and city-specific calculators help.

Because rates vary by state and even by city, a specific calculator is more reliable than a generic percentage calculation. Use the tools below for the most accurate results:

• California Sales Tax Calculator — includes district-level rates for Los Angeles, San Francisco, and other cities
• Texas Sales Tax Calculator — destination-based rates for all major Texas cities
• New York Sales Tax Calculator — includes NYC's special rates and county-level variations
• Florida Sales Tax Calculator — state rate plus county surtax rates

For the full story on how nexus affects multi-state selling obligations, read the sales tax nexus guide and the sales tax by state guide.