Sales tax is a consumption tax that state and local governments charge on the retail sale of goods and certain services, calculated as a percentage of the purchase price. The seller collects it from you at checkout and forwards it to the taxing authority. There is no federal sales tax in the United States, so the rate you pay, and whether a particular item is taxed at all, depends entirely on where the sale happens. As of January 2026, the population-weighted average combined state and local rate is 7.53 percent, with actual rates running from zero in a handful of states to over 10 percent in the highest-tax areas.
How the Rate Is Built
The percentage on your receipt is usually several layers stacked together. A state sets a base rate. A county, city, or special taxing district adds its own percentage on top. Special districts often fund specific projects such as transit systems or sports venues, which is why the total rate in one neighborhood can differ from the rate a few blocks away.
Because the rate is tied to geographic boundaries, the exact location of a sale determines the total tax charged. Two businesses on opposite sides of a city line may collect different amounts on the same item. Rate changes can take effect throughout the year.
Sales tax is sometimes called an ad valorem tax because the amount owed depends on the dollar value of what you buy rather than a flat fee per item. It is an indirect tax: the government imposes it on the transaction, but the buyer pays it through the seller. Unlike income tax, which targets what you earn, sales tax targets what you spend.
Five States Without a Statewide Sales Tax
Forty-five states plus the District of Columbia impose a statewide sales tax. Five do not: Alaska, Delaware, Montana, New Hampshire, and Oregon. “No statewide sales tax” does not always mean “no sales tax at all.” Local jurisdictions in Alaska and Montana may impose their own sales taxes on purchases within their borders. Delaware offsets the absence of a consumer sales tax with a gross receipts tax on businesses, which can indirectly raise prices.
What Gets Taxed and What Doesn’t
Most states apply sales tax primarily to tangible personal property: physical items you can touch, like clothing, electronics, furniture, and vehicles. The treatment of services varies widely. Some states tax only a short list of services. Others tax most services unless a specific exemption applies.
Digital Products and Software Subscriptions
Digital goods and cloud-based software subscriptions (often called SaaS) are one of the fastest-moving areas of sales tax law. Roughly 25 jurisdictions now tax SaaS in some form, and that number continues to grow. States are increasingly treating digital downloads, streaming subscriptions, and cloud-hosted software the same as physical goods, though each state classifies them differently.
Common Exemptions
State laws frequently exempt certain categories to reduce the tax burden on necessities:
- Groceries intended for home preparation, though prepared meals from restaurants are typically still taxable
- Prescription medications and certain medical devices
- Purchases by qualifying nonprofit organizations and government agencies, which typically must present an exemption certificate at the time of sale
The Streamlined Sales and Use Tax Agreement, a cooperative effort among 24 member states, publishes standardized taxability matrices showing how each participating state treats hundreds of product categories.1Streamlined Sales Tax. State Taxability Matrix
Resale Purchases
If you buy goods specifically to resell them, you generally do not owe sales tax on that purchase. The tax is collected later when the end consumer buys the finished product. To claim this exemption, you give the seller a resale certificate showing your sales tax registration number and a description of your business. The Multistate Tax Commission publishes a uniform resale certificate accepted in most participating states.2Multistate Tax Commission. Uniform Sales and Use Tax Resale Certificate – Multijurisdiction
When a Business Has to Collect
Nexus is the legal connection a business must have with a state before that state can require it to collect sales tax. For decades, the rule required a physical presence: a store, office, warehouse, or employee inside the state.
That changed in 2018 when the U.S. Supreme Court decided South Dakota v. Wayfair, Inc. and overruled its earlier physical-presence requirement.3Supreme Court of the United States. South Dakota v. Wayfair, Inc. The Court held that states could establish “economic nexus” based on sales activity alone, even without a physical footprint.
Every state with a sales tax has now adopted some form of economic nexus threshold. The most common standard is $100,000 in sales into the state during a calendar year. Some states originally paired that with a 200-transaction threshold, matching the South Dakota law at issue in Wayfair, but roughly half of those states have since dropped the transaction count. About 18 jurisdictions still apply a transaction-based threshold alongside the dollar test. Once a business crosses a state’s threshold, it must register for a sales tax permit and begin collecting and remitting.
Marketplace Facilitator Laws
Every state with a sales tax has also enacted a marketplace facilitator law. These laws shift the collection obligation from individual sellers to the platform itself when sales are made through that platform. The marketplace calculates, collects, and remits sales tax on behalf of its third-party sellers for orders delivered to customers in that state. Marketplace sales may still count toward your economic nexus calculation in some states, which can trigger a separate registration obligation for any direct sales you make outside the platform.
Which Rate to Charge
Once a business has to collect, sourcing rules decide which rate applies:
- Destination-based sourcing, used in roughly 35 states, sets the rate by where the buyer receives the product. For online orders, that means the shipping address.
- Origin-based sourcing, used in about 11 states, sets the rate by where the seller is located. The same rate applies to every in-state sale.
Use Tax: What You Owe When the Seller Doesn’t Collect
When you buy something from an out-of-state seller that does not collect your state’s sales tax, you generally owe a complementary “use tax” at the same rate. Use tax prevents out-of-state sellers from undercutting local retailers with a tax-free price. Most states let individuals report and pay it on their annual state income tax return. With the spread of economic nexus laws and marketplace facilitator requirements, fewer purchases now escape collection at the point of sale, but use tax still applies whenever tax is not collected by the seller.
What Sellers Do With the Money
A retailer acts as a collection agent for the government. From the moment a business collects sales tax from a customer, that money belongs to the state; the business is simply holding it. Before collecting anything, a business must register for a sales tax permit (sometimes called a seller’s permit) with each state where it has a collection obligation. Registration is free in most states, though a few charge a small fee.
Ongoing obligations include:
- Applying the correct combined rate based on the state’s sourcing rules
- Filing returns on the schedule the state assigns, which may be monthly, quarterly, or annually depending on how much tax you collect
- Filing a return even during periods when you made no taxable sales and collected no tax; skipping a filing because you owe nothing can trigger penalties and jeopardize your permit
- Sending the money to the state by the due date for your filing period
States treat the mishandling of collected tax seriously. Owners or officers who knowingly collect sales tax and fail to send it to the state can be held personally responsible for the full amount, even if the business closes or files for bankruptcy. Knowingly keeping collected tax can also trigger criminal prosecution in some jurisdictions.