How sales tax is calculated
Sales tax is a consumption tax levied by US states (and many local jurisdictions) on the sale of goods and some services. The tax is calculated as a percentage of the purchase price and is typically collected by the seller at the point of sale.
State + local combined rates
The rate you actually pay at checkout is usually a combination of the state rate plus a county, city, or special district rate. Tennessee, Louisiana, Arkansas, and Washington average the highest combined state-plus-local rates in the US — often above 9%. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) levy no state sales tax at all.
Reverse sales tax
If you have a receipt showing the total paid and need to back out the tax portion (common for expense reports and accounting), use the reverse mode. The formula is: base = total / (1 + rate).
Sales tax is regressive — it takes a larger percentage of income from low-earners than high-earners. Many states offset this by exempting groceries, prescription drugs, and clothing.
Frequently asked questions
Which US state has the highest sales tax?
Tennessee has the highest combined state-plus-average-local sales tax rate at 9.55%. Louisiana (9.52%) and Arkansas (9.51%) are close behind. California has the highest state-only rate at 7.25%.
Which states have no sales tax?
Five states levy no state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Alaska allows local sales taxes, so some areas still charge tax.
Are groceries subject to sales tax?
It varies. Most states exempt groceries or charge a reduced rate. However, 13 states (including Mississippi, Alabama, and South Dakota) tax groceries at the full rate, which is regressive.
Do I owe sales tax on online purchases?
Yes. Following the 2018 Supreme Court decision South Dakota v. Wayfair, online sellers must collect sales tax based on the buyer's location, regardless of where the seller is headquartered. This applies if the seller exceeds a state's economic nexus threshold.
What is a 'use tax'?
Use tax is owed when you buy items tax-free (e.g., from an out-of-state online retailer that doesn't collect sales tax) and use them in your home state. Most consumers ignore this, but states increasingly enforce it.
Are services subject to sales tax?
Most states tax goods but exempt services. However, an increasing number of states tax specific services like landscaping, dry cleaning, software-as-a-service (SaaS), and digital downloads.
How do sales tax holidays work?
Some states offer temporary sales tax exemptions on specific categories (back-to-school supplies, hurricane supplies, Energy Star appliances) during designated periods, usually in late summer. Plan major purchases around these dates.
Glossary of key terms
- Combined Sales Tax Rate
- State rate plus local county/city rate. The actual rate charged at checkout.
- Nexus
- A connection between a seller and a state that creates a tax-collection obligation. Can be physical (store, warehouse) or economic (sales above a state threshold).
- Excise Tax
- A per-unit tax on specific goods like gasoline, alcohol, and tobacco. Added to the price before sales tax is calculated.
- Sales Tax Holiday
- A temporary period when specific items can be purchased sales-tax-free, typically for back-to-school or emergency preparedness.
- Use Tax
- Companion to sales tax — owed by consumers on out-of-state purchases when no sales tax was collected at checkout.
Common mistakes to avoid
- Confusing state rate with combined rate — many cities add 1-3% on top of the state rate
- Forgetting to budget for sales tax on big purchases — a $1,000 TV in Tennessee actually costs $1,096
- Not checking whether online purchases include sales tax in the displayed price
- Ignoring use tax obligations on out-of-state purchases — states increasingly audit this
- Assuming services are tax-free — many states now tax SaaS, digital goods, and certain professional services
Pro tips
- Buy big-ticket items during state sales tax holidays — many states offer these in August for back-to-school items.
- For online purchases, check whether the retailer has nexus in your state — if not, you may save sales tax (but technically owe use tax).
- If you live near a state border, consider whether driving across saves enough sales tax to justify the trip.
- Business owners: track sales tax collected separately from revenue — it's not your money, it belongs to the state.
- Some states exempt manufacturing equipment, agricultural inputs, and resale inventory from sales tax — businesses should confirm they're not overpaying.
Results are estimates for educational purposes only and not financial advice. Consult a licensed professional for advice specific to your situation.