Sales tax is one of the most common and important taxes that consumers and businesses encounter every day. Whether you are buying a cup of coffee, a pair of shoes, or a software subscription, you may have to pay a certain percentage of the price as sales tax to the government. But how does sales tax work, and how much do you actually have to pay?
In this guide, we will answer these questions and more. We will explain what sales tax rate is, how it is calculated, and how it differs across the states. We will also cover the different types of sales tax rates, and how they affect online and interstate sales. By the end of this guide, you will have a better understanding of sales tax and how it impacts your business.
What is sales tax rate
Sales tax rate is the percentage of the sales price that is charged as tax. For example, if the sales tax rate is 6%, and you buy a product for $100, you will pay $6 as sales tax, and the total amount will be $106. It is important to note that sales tax rates vary by state and locality, and sometimes by the type of product or service.
Sales tax rate can be composed of two parts: state sales tax rate and local sales tax rate.
1. State sales tax rate
This is the percentage of the sales price that the state government charges as tax on goods and services sold within the state.
For example, if the state sales tax rate is 6% and you sell a product for $100, you will pay $6 as state sales tax, and the total amount you will charge will be $106. The state sales tax rate varies from state to state, and some states do not have any state sales tax at all.
As of January 1, 2023, the highest state sales tax rate is 7.25% in California, and the lowest is 2.9% in Colorado. Some states also have special sales tax rates for certain products or services, such as food, clothing, gasoline, or lodging. These rates may be higher or lower than the general sales tax rate.
2. Local sales tax rate
This is the percentage of the sales price that the city, county, or district government charges as tax on goods and services sold within their jurisdiction. For example, if the state sales tax rate is 4% and the local sales tax rate is 2%, the total sales tax rate is 6%.
The local sales tax rate is added to the state sales tax rate to get the total sales tax rate. The local sales tax rate also varies from locality to locality, and some localities do not have any local sales tax at all.
As of January 1, 2023, the highest local sales tax rate is 8% in Colorado, and the lowest is 0.5% in Hawaii. Local sales taxes are usually collected by the state and distributed to the local governments according to a formula described in this article by Texas state government
What is total sales tax rate
Total sales tax rate is the sum of the state sales tax rate and the local sales tax rate. It is the rate that is actually applied to the sales price of a product or service. For example, if the state sales tax rate is 4% and the local sales tax rate is 2%, the total sales tax rate is 6%.
Total sales tax rate varies by location, as different localities may have different local sales tax rates. Some states also have special sales tax rates for certain products or services, such as food, clothing, gasoline, or lodging. These rates may be higher or lower than the general sales tax rate.
What is national sales tax percentage rate
There is no national sales tax percentage rate in the United States. Sales tax is a state and local matter, and the federal government does not impose any sales tax on goods and services.
However, some countries, such as Canada, Australia, and the United Kingdom, have a national sales tax, also known as a value-added tax (VAT) or a goods and services tax (GST). These taxes are applied at each stage of production and distribution and are included in the final price of the product or service.
Types of sales tax rates
There are two main types of sales tax rates: origin-based and destination-based. Origin-based sales tax rate is the rate that is based on the location of the seller. Destination-based sales tax rate is the rate that is based on the location of the buyer. The type of sales tax rate determines which jurisdiction collects the sales tax and how much sales tax is charged.
Origin-based sales tax rate
This is simpler to calculate and administer, as the seller only needs to know the sales tax rate of their own location. However, origin-based sales tax rate may create unfair competition among sellers in different locations, as buyers may prefer to buy from sellers with lower sales tax rates.
Destination-based sales tax rate
This is more complex to calculate and administer, as the seller needs to know the sales tax rate of every location where they sell their products or services. However, destination-based sales tax rate may create a more level playing field among sellers in different locations, as buyers pay the same sales tax rate regardless of where they buy from.
Most states use destination-based sales tax rate for interstate sales, meaning sales to buyers in other states. This is because the Supreme Court ruled in 2018 that states can require out-of-state sellers to collect and remit sales tax if they have a significant economic presence in the state, such as a certain amount of sales or transactions. This is known as the economic nexus rule.
However, some states use an origin-based sales tax rate for intrastate sales, meaning sales to buyers in the same state. This is because some states have a streamlined sales tax agreement, which is a voluntary initiative to simplify and harmonize sales tax rules and rates among participating states.
The agreement requires states to use an origin-based sales tax rate for intrastate sales, unless they have a local option to use a destination-based sales tax rate.
How to find sales tax rate
To find the sales tax rate of a location, you can use a sales tax rate lookup tool, such as the one provided by AtomicTax – sales tax rate calculator.
You just need to enter the address or zip code of the location, and the tool will show you the state sales tax rate, the local sales tax rate, and the total sales tax rate of that location. You can also see the breakdown of the local sales tax rate by city, county, and district.
Alternatively, you can use a sales tax rate table, such as the one provided below. You can choose any state and see the base statewide sales tax rate, the range of local sales tax rates, and the average combined sales tax rate of that state. You can also see the local sales tax rates of specific cities and counties within each state.
How to calculate sales tax rate with different examples
To calculate sales tax, you need to multiply the sales price by the sales tax rate. For example, if you buy a product for $100 and the sales tax rate is 6%, you need to multiply $100 by 0.06, which gives you $6. Then you need to add the sales tax to the sales price, which gives you $106 as the total amount.
Here are some examples of how to calculate sales tax with different sales prices and sales tax rates:
| Sales Price | Sales Tax Rate | Sales Tax | Total Amount |
|---|---|---|---|
| $50 | 5% | $2.50 | $52.50 |
| $75 | 7% | $5.25 | $80.25 |
| $150 | 8% | $12 | $162 |
| $200 | 9% | $18 | $218 |
Different sales tax rate formula
There are different ways to express the sales tax rate formula, depending on what you want to find out.
Here are some common sales tax rate formulas:
To find the sales tax, use the formula:
Sales Tax = Sales Price x Sales Tax Rate
To find the total amount, use the formula:
Total Amount = Sales Price + Sales Tax
To find the sales price, use the formula:
Sales Price = Total Amount / (1 + Sales Tax Rate)
To find the sales tax rate, use the formula:
Sales Tax Rate = Sales Tax / Sales Price
How is the state sales tax rate determined?
The state sales tax rate is determined by the state legislature, which has the authority to set, change, or eliminate the sales tax rate. The state legislature may also grant local governments the power to impose their own sales tax rates, within certain limits.
The state sales tax rate may vary depending on the type of product or service, the purpose of the purchase, or the status of the buyer or seller. The state sales tax rate may also be affected by temporary or permanent sales tax holidays, which are periods when certain products or services are exempt from sales tax.
What are sales tax holidays in the US
Sales tax holidays are limited-time periods when certain states allow you to sell some products or services without charging sales tax to your customers. Sales tax is a tax that you normally collect from your customers and then pay to the state or local government.
Sales tax holidays can benefit both you and your customers. Your customers can save money by paying less for the items they buy from you. You can attract more customers and increase your sales by offering tax-free deals.
However, sales tax holidays also have some rules and challenges that you need to follow and prepare for. Not all states have sales tax holidays. And even in the states that do, not all items are exempt from sales tax. You need to know which items qualify for the tax exemption and which ones don’t.
You also need to keep track of the dates and durations of the sales tax holidays, as they can vary by state and by year. You may need to adjust your point-of-sale system, your accounting software, and your sales tax returns to reflect the sales tax holidays.
US States and local sales tax rate lookup chart comparison
| State | State Sales Tax Rate | Average Local Sales Tax Rate | Combined Sales Tax Rate |
|---|---|---|---|
| Alabama | 4.00% | 5.22% | 9.22% |
| Alaska | No Sales Tax | 1.76% | 1.76% |
| Arizona | 5.60% | 2.80% | 8.40% |
| Arkansas | 6.50% | 2.98% | 9.48% |
| California | 7.25% | 1.41% | 8.66% |
| Colorado | 2.90% | 4.75% | 7.65% |
| Connecticut | 6.35% | No Local Sales Tax | 6.35% |
| District of Columbia | 6.00% | No Local Sales Tax | 6.00% |
| Florida | 6.00% | 1.05% | 7.05% |
| Georgia | 4.00% | 3.33% | 7.33% |
| Hawaii | 4.00% | 0.44% | 4.44% |
| Idaho | 6.00% | 0.03% | 6.03% |
| Illinois | 6.25% | 2.52% | 8.77% |
| Indiana | 7.00% | No Local Sales Tax | 7.00% |
| Iowa | 6.00% | 0.83% | 6.83% |
| Kansas | 6.50% | 2.23% | 8.73% |
| Kentucky | 6.00% | No Local Sales Tax | 6.00% |
| Louisiana | 4.45% | 5.10% | 9.55% |
| Maine | 5.50% | No Local Sales Tax | 5.50% |
| Maryland | 6.00% | No Local Sales Tax | 6.00% |
| Massachusetts | 6.25% | No Local Sales Tax | 6.25% |
| Michigan | 6.00% | No Local Sales Tax | 6.00% |
| Minnesota | 6.88% | 0.59% | 7.47% |
| Mississippi | 7.00% | 0.07% | 7.07% |
| Missouri | 4.23% | 3.93% | 8.16% |
| Nebraska | 5.50% | 1.42% | 6.92% |
| Nevada | 6.85% | 1.29% | 8.14% |
| New Jersey | 6.63% | 0.03% | 6.66% |
| New Mexico | 5.13% | 2.81% | 7.94% |
| New York | 4.00% | 4.52% | 8.52% |
| North Carolina | 4.75% | 2.22% | 6.97% |
| North Dakota | 5.00% | 1.90% | 6.90% |
| Ohio | 5.75% | 1.42% | 7.17% |
| Oklahoma | 4.50% | 4.48% | 8.98% |
| Pennsylvania | 6.00% | 0.34% | 6.34% |
| Rhode Island | 7.00% | No Local Sales Tax | 7.00% |
| South Carolina | 6.00% | 1.46% | 7.46% |
| South Dakota | 4.50% | 1.93% | 6.43% |
| Tennessee | 7.00% | 2.55% | 9.55% |
| Texas | 6.25% | 1.94% | 8.19% |
| Utah | 6.10% | 1.23% | 7.33% |
| Vermont | 6.00% | 0.18% | 6.18% |
| Virginia | 4.30% | 1.00% | 5.30% |
| Washington | 6.50% | 2.79% | 9.29% |
| West Virginia | 6.00% | 0.37% | 6.37% |
| Wisconsin | 5.00% | 0.46% | 5.46% |
| Wyoming | 4.00% | 1.42% | 5.42% |
Sales tax FAQs
What state has the highest sales tax rate
The state with the highest sales tax rate is California, which has a base statewide sales tax rate of 7.5%. However, this does not include the local sales tax rates, which can be as high as 2.5%, bringing the total sales tax rate to 10%. The state with the highest average combined sales tax rate is Louisiana, which has an average combined sales tax rate of 9.550%, according to the Tax Foundation
What is federal sales tax rate
There is no federal sales tax rate in the United States. The federal government does not impose any sales tax on goods and services. However, the federal government does impose other types of taxes, such as income tax, payroll tax, excise tax, and tariffs. These taxes are collected by the Internal Revenue Service (IRS) and used to fund various federal programs and services.
What state has a 7% sales tax rate?
Indiana and Rhode Island have a state sales tax rate of 7%, which is the highest among all states. However, they do not have any local sales taxes, so the combined rate is also 7%, according to TaxFoundation
Which state has no sales tax?
There are five states that do not have any state or local sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska allows localities to charge their own sales taxes, which can range from 0% to 7.5%.
Is sales tax federal or state
Sales tax is not a federal tax, but a tax levied by state and local governments on the sale of goods and services 3. The federal government does not collect any sales tax from consumers or businesses. Each state has its own rules and rates for sales tax, and some states also allow local governments to impose their own sales taxes.
What is the sales tax rate on amazon
The sales tax rate on Amazon depends on the identity of the seller, the type of item or service purchased, the time and location of fulfillment, and the shipment or delivery address of the order.
Amazon calculates, collects, and remits sales tax on behalf of sellers in states that have enacted marketplace facilitator, marketplace fairness, or similar laws. These laws shift the collection responsibility from the seller to the marketplace that facilitates the sale. As of January 1, 2022, Amazon collects sales tax in all states that have a sales tax, except for Florida and Missouri.
What is the average sales tax rate in the US
The average sales tax rate in the US is the weighted average of the combined state and local sales tax rates in each state. As of January 1, 2022, the average sales tax rate in the US is 7.12%, according to the Tax Foundation. This is slightly lower than the previous year’s average of 7.16%.
The states with the lowest average combined rates are Hawaii (4.44%), Wyoming (5.33%), and Wisconsin (5.43%). The states with the highest average combined rates are Louisiana (9.55%), Tennessee (9.547%), and Arkansas (9.48%).
U.S. sales tax rate by states details
| Alabama | Alaska | Arizona | Arkansas | California | Colorado |
| Connecticut | Delaware | Florida | Georgia | Hawaii | Idaho |
| Illinois | Indiana | Iowa | Kansas | Kentucky | Louisiana |
| Maine | Maryland | Massachusetts | Michigan | Minnesota | Mississippi |
| Missouri | Montana | Nebraska | Nevada | New Hampshire | New Jersey |
| New Mexico | New York | North Carolina | North Dakota | Ohio | Oklahoma |
| Oregon | Pennsylvania | Puerto Rico | Rhode Island | South Carolina | South Dakota |
| Tennessee | Texas | Utah | Vermont | Virginia | Washington |
| Washington, DC | West Virginia | Wisconsin | Wyoming |
Conclusion
To sum up, sales tax is very important for both people who buy and sell things because it affects how much they pay or earn. In this guide, we have explained how sales tax rates work, shown the difference between state and local rates, and how they add up to the total rate. We also talked about two ways of deciding which rate to use, depending on where the sale happens or where the product goes. Each way has its pros and cons.
In this guide, we also gave some tips on how to find and calculate sales tax rates, stressing that they need to be correct for both buyers and sellers.
Besides, in the blog, we answered some common questions about sales tax, such as why there is no national sales tax in the US and how each state has its own rules and exceptions. We shared some information on sales tax holidays, which are times when some products are tax-free. With this knowledge, businesses can deal with sales tax better, following the law and making things easier for everyone.