Sales tax at the register typically goes to three recipients: the state where the sale happens, the city and county where the store or delivery address sits, and sometimes a voter-approved special district with a dedicated purpose like transit or schools. The state almost always takes the largest slice, sets the rules for what gets taxed, and acts as the clearinghouse that routes local shares back to the jurisdictions that earned them. A combined rate can run anywhere from zero to nearly 10 percent depending on the address.
The State’s Share
Every state that imposes a sales tax sets a base rate by statute, and that rate feeds the state general fund. General fund dollars are flexible. Legislators can point them at whatever the budget needs in a given year, which in practice means public education, Medicaid, state police, corrections, and the transportation departments that maintain highways and bridges.
Because the state controls the framework, it decides what is taxable, what is exempt, and how high the base rate climbs. Roughly a third of states have adjusted their sales tax rate at least once in the past decade. That same authority makes the state responsible for the administrative side: processing returns, auditing retailers, and cutting checks back to local governments for their portions.
There is no federal sales tax. Proposals surface from time to time, including the FairTax Act reintroduced in 2025, but none has been enacted.
City and County Add-Ons
Most states let cities and counties stack their own rates on top of the state’s. A shopper paying 9 percent total might be sending 6.25 percent to the state, 1.5 percent to the county, and 1.25 percent to the city. Local governments do not run parallel collection systems for this; they piggyback on the state’s existing infrastructure.
The money collected under a local rate stays local. Cities put their share toward municipal police and fire, parks, libraries, street maintenance, and water and sewer systems. Counties fund regional courts, social services, and roads outside city limits. Because these dollars follow local retail activity, a city with a busy shopping corridor collects more per resident than a neighboring one without, and the gap shows up in service levels.
How a local rate gets adopted varies. Some states require voter approval through a ballot measure for any new local sales tax. Others let a city council or county board enact an increase by resolution, often within a cap set by state law. Either way, the state legislature controls the ceiling. A local government cannot exceed the maximum local rate the state authorizes.
Special Purpose Districts
Beyond general-purpose city and county government, voters in many regions have approved dedicated sales tax districts that fund a single mission. A regional transit authority, a school district’s capital improvement plan, or a flood control system might each carry its own fraction of a cent inside the local rate. Those budgets are walled off from other spending, so the money cannot be redirected to unrelated projects.
The Metropolitan Atlanta Rapid Transit Authority is one recognizable example. MARTA runs on a one-percent sales tax collected in the counties it serves, along with federal formula funds and passenger fares. Similar arrangements fund light rail systems, community college districts, and convention centers around the country. Ballot measures usually spell out what the tax will pay for and how long it lasts. Some sunset after a fixed number of years; others run indefinitely until voters repeal them.
How the Money Moves From the Register
The retailer collects, but the money never belongs to the store. Legally, a business holds collected sales tax in trust for the government. That trust label matters. If an owner spends sales tax receipts on payroll or inventory instead of remitting them, the owner can face personal liability for the missing funds, not just the business entity. Penalties for failing to remit range from percentage surcharges on the unpaid balance to criminal prosecution when evasion is willful.
Retailers file returns with the state revenue department on a monthly, quarterly, or annual schedule depending on sales volume. The state agency then acts as the clearinghouse. It calculates how much of each dollar belongs to the state general fund, the county, the city, and any special district based on where the sale took place, and it redistributes those shares to the appropriate local treasuries on a set schedule. A small retailer in a rural county and a national chain in a metro area go through the same channel. File with the state, and the state sorts the money out.
What Doesn’t Feed the System
Not every purchase generates revenue for any of these governments. States carve out exemptions for categories they consider essential or want to encourage. Common ones include:
- Groceries. A majority of states exempt unprepared food for home consumption, covering staples like bread, meat, produce, and dairy but excluding prepared meals, candy, and soft drinks.
- Prescription drugs. Nearly every sales-tax state exempts prescription medication, and many also exempt over-the-counter drugs or tax them at a reduced rate.
- Clothing. A handful of states exempt clothing entirely or below a price threshold, though most tax it at the full rate.
- Resale purchases. Businesses buying inventory to resell do not pay sales tax on those purchases; the tax attaches later when the item reaches the final consumer. Retailers document this with resale certificates.
Nonprofit organizations can often buy tax-free as well, but the rules vary. Most states require a federal 501(c)(3) determination plus separate registration with the state revenue department, and the organization usually has to present an exemption certificate at the register. Being a nonprofit is not automatic.
More than a dozen states also suspend sales tax on specific items during short windows each year. Back-to-school holidays in July or August are the most common, covering clothing, school supplies, and sometimes computers below a price cap. Others run for hurricane preparedness supplies, Energy Star appliances, or hunting gear. These holidays trim state and local revenue for a few days but stay popular enough to be renewed.
Online Purchases
Before 2018, a retailer generally had to have a physical presence in a state before that state could require it to collect sales tax. The U.S. Supreme Court changed that in South Dakota v. Wayfair, holding that a state can require out-of-state sellers to collect when they have a substantial economic connection to the state. The threshold South Dakota used, which most states have since adopted in some form, is $100,000 in sales or 200 separate transactions delivered into the state per year.
All 45 states with a sales tax, plus the District of Columbia, now require remote sellers to collect once they cross the applicable threshold, though the exact numbers and definitions vary. Some states measure gross sales; others count only retail or taxable sales, and lookback periods differ.
To handle collection from millions of small third-party sellers, nearly every sales-tax state has also passed a marketplace facilitator law. These require platforms like Amazon, eBay, and Etsy to collect and remit on behalf of the sellers using their marketplace. The platform registers, collects, and files, so individual sellers on that platform generally do not collect on those facilitated sales, though they may still need to report them on their own returns. For a buyer, the practical result is that an online order carries sales tax about as reliably as an in-store purchase, and it flows to the same state, city, county, and district recipients based on the delivery address.
States Where Nobody Collects
Five states impose no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Residents and visitors in those states do not pay sales tax at the register on most purchases. Alaska is a partial exception. It allows local governments to levy their own sales taxes even without a state-level tax, and some Alaska municipalities charge rates above 7 percent. The other four generally do not permit local sales taxes either.
These states fund their governments through other means: higher income or property taxes, excise taxes on specific goods, or, in Alaska’s case, oil revenue. Whether that makes a state cheaper to live in depends on what fills the gap.