Complete Guide to US Sales Tax
How US sales tax works
US sales tax is a consumption tax collected by retailers at the point of sale and remitted to state and local governments. Unlike income tax (collected by the federal government), sales tax is entirely a state and local system — there is no federal sales tax. Each state sets its own base rate, and local governments (counties, cities, special districts) may add their own rates on top. The combined rate at any given location is the sum of all applicable rates. The taxable base and exemptions also vary by state — most states tax physical goods but exempt services; some extend tax to digital products and services.
Sales tax rates by state: a comparison
No sales tax states: Oregon, Montana, New Hampshire, Delaware. Alaska has no state tax but allows local taxes. Lowest combined rates (state + average local): Hawaii (4.44%), Wisconsin (5.43%), Wyoming (5.34%), Maine (5.5%), Virginia (5.65%). Highest combined rates: Louisiana (9.56%), Tennessee (9.55%), Arkansas (9.46%), Washington (9.38%), Alabama (9.25%). These averages hide significant local variation — in some Louisiana parishes, the combined rate exceeds 12%. For exact rates, check your state's department of revenue website.
Economic nexus and online sales tax
Before 2018, online retailers only collected sales tax in states where they had a physical presence (employees, warehouse, or office). The South Dakota v. Wayfair decision changed this: states can now require out-of-state sellers to collect sales tax if they exceed an economic nexus threshold. Most states set this at $100,000 in sales or 200 transactions per year in that state. As a result, most online purchases now include sales tax. Small sellers may still be exempt if they fall below the threshold, but shoppers are technically required to self-report and pay 'use tax' on untaxed purchases in most states.
Business sales tax compliance
If you operate a business that sells taxable goods or services, you must: (1) Register for a sales tax permit in each state where you have nexus (physical presence or exceed economic nexus thresholds). (2) Collect the correct rate at each sale location. (3) File sales tax returns on schedule (monthly, quarterly, or annually depending on volume). (4) Remit collected taxes by the due date. Missing deadlines incurs penalties. Sales tax software (TaxJar, Avalara, Vertex) automates rate calculation and filing for multi-state sellers. For small businesses with simple operations, manual filing to one or two states is manageable; for e-commerce businesses shipping to many states, automation is worth the cost.
Sales tax holidays
Many states offer annual sales tax holidays — periods when specific categories are exempt from state sales tax (and sometimes local taxes). Common types: back-to-school (clothing and school supplies, usually August), emergency preparedness (generators, flashlights, batteries — often before hurricane season in coastal states), energy efficiency (appliances meeting certain standards), firearms and ammunition (in some states). Holiday dates and eligible items vary by state and year. Some states have eliminated their holidays due to budget constraints. Check your state's department of revenue for current holiday schedules before making large planned purchases.
Reverse sales tax: finding the pre-tax price
If you have a receipt showing the total price paid and want to find the pre-tax amount, use the reverse calculation: pre-tax = total ÷ (1 + tax rate). This is more accurate than multiplying the total by the tax rate, which slightly overstates the tax. For example, at 10% tax: $110 total ÷ 1.10 = $100 pre-tax (correct), versus $110 × 0.10 = $11 assumed tax (wrong — this gives a $99 pre-tax price). The reverse calculation is useful when comparing prices that include tax to prices that exclude tax, or when doing expense reporting from receipts.
Sales tax on services and digital goods
Sales tax on services varies widely by state. Some states tax almost no services; others tax most services. New York taxes services that modify physical property (repair, cleaning) but not most professional services. Texas taxes many services including data processing and information services. Hawaii's general excise tax applies to virtually all transactions including services. Digital goods (software, streaming subscriptions, e-books, digital downloads) are increasingly taxable — over 35 states now tax at least some digital goods. If you sell services or digital products, verify taxability in each state where you have customers and nexus, as the rules change frequently and vary significantly.