Sales tax: definition, important terms and how to calculate it
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When customers buy something in the US, the sticker price typically won’t be the final price they pay. Customers may need to pay an extra charge at the checkout called sales tax.
Calculating sales tax can be complex because the rate depends on your location and what product or service you’re selling. Some products are exempt, while others require a higher amount.
In this article, we’ll help you understand sales tax, a few more important terms and the obligations by state.
What is sales tax?
Sales tax is a percentage of a sale that goes to a governing body for goods and services sold within its jurisdiction.
In the US, sales tax is a one-time tax levied by state and county governments that is charged to the end consumer (the taxpayer) at the point of sale.
Most businesses must pay taxes to their state or municipality on top of their earnings, so they pass the amount on to the customer. If your business buys products for resale, you’ll pay general sales tax and recover the amount when you sell to the end consumer.
Each Department of Revenue governs these taxes at the state level, so the amounts differ depending on where you sell or buy from. Local counties may also add an extra percentage to a statewide “base rate” to create a “combined rate”.
For example, the base sales tax rate in Illinois is 6.25%. However, the overall combined rate can be as high as 11.5% in areas like Cook County, which has 5.25% added on top.
5 sales tax rate terms you need to know about
While sales tax may sound simple enough, there are a few other processes to get your head around.
Learn the meaning of these five sales tax rate terms.
Excise tax
Excise taxes are for specific goods and services (e.g., cigarettes, alcohol, airline tickets) that state and federal governments can levy.
For example, the US government’s Internal Revenue Service (the IRS) controls gasoline taxes.
The government may impose excise tax on products or services that are likely to cause unintended consequences (not reflected in the sale price).
For example, the medical impact and long-term cost of smoking mean cigarettes fall within this remit.
Tax situs
“Situs” is Latin for “site” or “position”. In tax terms, it means the location where a taxing event happens.
Before e-commerce and online marketplace sellers, this would refer to the point of sale. However, determining tax situs now involves multiple sites when dealing with digital purchases.
For example, customers may purchase products from stores outside of their residential state (e.g., a book from an online shop in Texas that gets shipped to a house in New York).
Tax situs get complicated when considering marketplaces like Amazon and eBay, so it’s wise to seek out an expert if you’re setting up a business that involves selling through one of these portals.
Economic nexus
While “nexus” usually means having a physical presence, it now refers to any business with an economic presence in a particular state.
Before the e-commerce and remote seller boom, only companies with stores, offices, warehouses or representatives in specific states were liable for sales tax.
However, governments were losing billions of dollars in tax collection.
In response, new precedents meant even online businesses were chargeable for sales tax after they hit a set number of transactions, total sales or level of selling activity.
Use tax
Use taxes are conditional sales taxes consumers must pay when purchasing goods or services from locations without sales tax.
A use tax rate is usually determined by where a buyer intends to use their purchases.
For example, if you buy a car in Montana (that has no statewide sales tax) and take it home (out of state) to North Carolina, you’ll pay North Carolina’s rate of sales tax for “using” the car there.
Value-added tax (VAT)
The US doesn’t use value-added tax (VAT) but it’s another way of calculating tax on the sale of goods and services. It’s important to know about if you do business overseas, such as with the United Kingdom.
Instead of consumers paying the total taxable amount at the point of purchase, different parties pay a flat amount (which works out as varying portions) throughout the supply chain.
Here’s how it can work:
A manufacturer pays 20% VAT on raw materials for a product
Another manufacturer pays 20% VAT for a more expensive small part made of those raw materials
A retailer pays 20% VAT when purchasing the finished product
Consumers pay 20% VAT when buying from the retailer at an inflated price
If your business uses European goods or suppliers, you may have an obligation to pay VAT, so be sure you understand how it works.
How to calculate sales tax in 17 US states
In the US, states charge sales tax on most goods and services to fund public schools, infrastructure, emergency services and public transportation.
No matter which state your business is operating in, the formula for calculating sales tax will be the same:
Product selling price × sales tax rate percentage
If a business bases itself in a state with a 7% sales tax rate and sells software for $1,000, every transaction will be liable for $70 in sales tax.
When the business adds tax to the final price, the customer will pay $1,070 for the software.
If your business operates in several states, you must also consider the sales tax nexus (the rule that states you may be subject to the rate of one state even if your headquarters are in another).
Whether you need to collect sales tax at all depends on what you’re selling, as not all products and services are subject to sales tax laws.
Most states provide exemptions for groceries and utilities, but they’ll tax items like restaurant food bills, consulting services and digital products.
Each state also has different sales tax return rules, which means you’ll need to check:
When to file. Depending on where your business operates, filing frequency for tax information will be monthly, quarterly or annually.
How to file. Some states will have electronic filing options in place, while others require you to send tax forms through the mail.
How to pay. Check to see if you can pay using a credit or debit card or if you’ll have to write a check.
The best way to ensure your tax filings are accurate is to research the state(s) your business operates in. Calculate any base or minimum combined sales tax rates and use tax returns you are liable for.
Otherwise, you can hire the help of a tax professional who can answer FAQs and more complex issues.
You can also try our sales calculator to quickly work out the price of your products pre- and post-sales tax.
How to calculate sales tax in California
California base sales tax rate: 6%
Mandatory local sales tax rate: 1.25%
Minimum combined sales tax rate: 7.25%
Return and payment due dates: Quarterly prepay, quarterly, monthly, fiscal yearly or yearly
The state of California has several sales tax rates to be aware of.
The base sales tax rate in the state is 6%, and there is also a mandatory 1.25% local rate in place, taking the total minimum combined sales tax rate to 7.25%.
The local tax rate to add to the base rate will depend on the county and city you’re in. Some have a higher rate than 1.25%.
For example, Los Angeles County has a minimum combined sales tax rate of 9.5%, but some municipalities within L.A. County, such as Santa Monica, charge 10.25%.
You may be exempt from California’s sales tax altogether, depending on what you sell. The state doesn’t require you to pay it for certain food products, groceries, prescription medicine or medical devices.
An example of how to calculate sales tax in Los Angeles, California:
Consultancy services ($1,000) ÷ 100 × L.A. sales tax rate (9.5%) + Original amount (1,000) = $1095.00
How to calculate sales tax in Florida
Florida base sales tax rate: 6%
Return and payment due dates: Monthly, quarterly, semi-annually or annually
Florida has base sales tax rates and local tax rates to consider if your business sells products there.
The state’s base sales tax rate is 6%, with local tax rates up to 2%.
Some localities don’t charge a combined sales tax rate, so if you are operating in one of these, you’ll only be liable to pay the 6% base rate.
Florida offers many exemptions and reductions to its sales tax.
Commercial real estate property leases are only subject to a 4.5% sales tax and amusement rides pay as little as 4%. Utilities like electricity and gas and even some custom software sales are exempt from the tax.
An example of how to calculate sales tax in Miami, Florida:
Haircut ($100) ÷ 100 × Miami sales tax rate (7%) + Original amount (100) = $107.00
How to calculate sales tax in Texas
Texas base sales tax rate: 6.25%
Return and payment due dates: Monthly, quarterly or annually
If your business operates in Texas, prepare to pay a base sales tax rate of 6.25%.
The state imposes tax on most items, including retail products, building leases and services.
Some cities and counties in Texas also have a local tax rate, taking the state’s maximum combined sales tax rate to 8.25%.
If you construct a new building, your labor may be exempt from sales tax. Like Florida, utilities like gas and electricity are exempt from Texas’s sales tax liabilities.
An example of how to calculate sales tax in Austin, Texas:
Burger and fries ($10) ÷ 100 × Austin sales tax rate (8.25%) + Original amount (10) = $10.83
How to calculate sales tax in New Jersey
New Jersey base sales tax rate: 6.625%
Return and payment deadlines: Monthly or quarterly
New Jersey puts a 6.625% base tax on most sales, including digital products and personal property.
Certain products like food, clothes, machinery and prescription drugs qualify for an exemption certificate from New Jersey’s sales tax.
The state taxes some services, like hotel rooms, at a lower rate of 5%, while the state’s Urban Enterprise Zones rate is 3.3125% to encourage private investment in urban areas.
An example of how to calculate sales tax in Atlantic City, New Jersey:
Box of saltwater taffy ($20) ÷ 100 × Atlantic City sales tax rate (6.625%) + Original amount (20) = $21.33
How to calculate sales tax in New York State
New York base sales tax rate: 4%
Return and payment deadlines: Monthly, quarterly or annually
New York has one of the lowest base sales tax rates for a large state at just 4%.
The caveat is the local tax rates charged by New York’s cities and counties. For example, sales tax in New York City can be as high as 8.875%, the highest in the state.
There’s also an additional sales tax rate of 0.375% for taxable sales made within the Metropolitan Commuter Transportation District (MCTD), taking in Manhattan, Brooklyn, Queens, Staten Island, Rockland, Nassau, Suffolk, Putnam, Orange, Dutchess and Westchester.
Most food and medicines are exempt from the tax, along with charitable organizations and government agencies.
An example of how to calculate sales tax in New York City, New York:
Broadway tickets ($100) ÷ 100 × NYC sales tax rate (8.875%) + Original amount (100) = $108.88
How to calculate sales tax in Virginia
Virginia base sales tax rate: 5.3% (in most locations)
Return and payment deadlines: Monthly or quarterly
As with other states, the amount of sales tax you’ll pay in Virginia will vary depending on the city you’re working in.
For example, Central and Northern Virginia have a sales tax rate of 6%, while James City County, Williamsburg and York County tax at a higher rate of 7%.
There are some statewide exemptions to the tax.
The state caps groceries and personal hygiene products at 1%, and businesses operating in industries like agriculture or running a nonprofit may be completely exempt.
An example of how to calculate sales tax in Richmond, Virginia:
Laptop ($1,000) ÷ 100 × Richmond sales tax rate (6%) + Original amount (1,000) = $1,060.00
How to calculate sales tax in Massachusetts
Massachusetts base sales tax rate: 6.25%
Return and payment deadlines: Monthly, quarterly or annually
The sales tax in Massachusetts is 6.25% and is the same rate across the state.
Consumers won’t pay any sales tax on products like groceries, gas and clothing (under $175). However, businesses must charge sales taxes on tangible personal property, even if a customer orders online or over the phone.
An example of how to calculate sales tax in Springfield, Massachusetts:
Pair of jeans purchased online ($70) ÷ 100 × Springfield sales tax rate (6.25%) + Original amount (70) = $74.38
How to calculate sales tax in Pennsylvania
Pennsylvania base tax rate: 6%
Return and payment deadlines: Monthly, quarterly or semi-annually (business owners must opt for quarterly tax due dates in their first year of business)
Pennsylvania’s base sales tax rate is 6%. However, there are some exceptions.
By law, purchases in Allegheny County are subject to a 1% local tax and in Philadelphia, it’s 2%.
Products like furniture, motor vehicles and home appliances are subject to the sales tax, while most clothes, medical supplies and groceries are exempt.
An example of how to calculate sales tax in Philadelphia, Pennsylvania:
Television ($1,000) ÷ 100 × Philadelphia sales tax rate (8%) + Original amount (1,000) = $1,080.00
How to calculate sales tax in Arizona
Arizona base tax rate: 5.6%
Return and payment deadlines: Depending on tax liability, businesses can file monthly, quarterly, seasonally or annually.
Arizona’s sales tax rates can be one of the more difficult states to calculate. Along with a base sales tax rate of 5.6%, cities also assess use tax through the state transaction privilege tax (TPT).
The rate depends on where you are selling products from. Phoenix has one of the highest minimum combined sales tax rates in the state at 8.6% and some areas are as high as 11.2%.]
There are some benefits to operating in Arizona. Nonprofit organizations are generally exempt from the TPT, and groceries, medicine and some types of research and development won’t pay the sales tax.
An example of how to calculate sales tax in Superior, Arizona:
iPad Mini ($500) ÷ 100 × Superior sales tax rate (11.2%) + Original amount (500) = $556.00
How to calculate sales tax in Connecticut
Connecticut base sales tax rate: 6.35%
Return and payment deadlines: Monthly, quarterly or annually
The base sales tax rate in Connecticut is 6.35%. Unlike many other states on our list, there are no local tax rates added on top of it.
The state’s sales tax applies to retail sales, taxable services and rental leases, while the sales of groceries and prescriptions are exempt.
Connecticut does require businesses to pay sales tax on labor, like building contractors or computer specialists, when they are part of a “taxable service”.
An example of how to calculate sales tax in Hartford, Connecticut:
Plumber ($200) ÷ 100 × Hartford sales tax rate (6.35%) + Original amount (200) = $212.70
How to calculate sales tax in Georgia
Georgia base sales tax rate: 4%
Return and payment deadlines: Monthly, quarterly or annually
Georgia has one of the lower base sales tax rates on our list at 4%.
However, depending on the county, local tax rates range from 0% up to 5%, meaning businesses could be liable for a combined sales tax rate of 9%.
Many services, such as repair labor, are subject to a sales tax exemption in Georgia, but individual transport, accommodation and sales of property are all liable.
For example, if your business sells a $100 item and charges $20 for delivery, Georgia imposes sales tax on the entire $120.
An example of how to calculate sales tax in Savannah, Georgia:
Refrigerator ($1,000) ÷ 100 × Savannah sales tax rate (7%) + Original amount (1,000) = $1,070.00
How to calculate sales tax in Tennessee
Tennessee base sales tax rate: 7%
Return and payment deadlines: Monthly, quarterly or annually
Tennessee’s base sales tax rate is 7% and local tax rates can climb as high as 2.75%.
The sales tax is usually applied to services like hotels, telecommunications and specified digital products such as computer software and maintenance contracts.
Small businesses earning less than $10,000 in taxable sales in a county or municipality are exempt from the state tax where they operate.
An example of how to calculate sales tax in Memphis, Tennessee:
Computer technician ($100) ÷ 100 × Memphis sales tax rate (9.75%) + Original amount (100) = $109.75
How to calculate sales tax in Colorado
Colorado base sales tax rate: 2.9%
Return and payment deadlines: Depending on tax liability, businesses can file monthly, quarterly or annually
Colorado has a low base sales tax rate of 2.9%.
The combined tax rates in the state can be as high as 11.2%. A business operating in Denver, for example, must charge a combined sales tax rate of 8.81%.
Colorado grants exemptions for several services and products from sales tax, including food, farm equipment, energy and machinery.
An example of how to calculate sales tax in Denver, Colorado:
Headphones ($100) ÷ 100 × Denver sales tax rate (8.81%) + Original amount (100) = $108.81
How to calculate sales tax in Minnesota
Minnesota base sales tax rate: 6.875%
Return and payment deadlines: Monthly, quarterly or annually
Minnesota’s base sales tax rate sits at 6.875%, with local tax rates falling anywhere from 0% to 2.15%.
Some services and nonprofits in Minnesota are exempt from the tax, while physical products like clothes, gasoline and vehicles are subject to it.
An example of how to calculate sales tax in Minneapolis, Minnesota:
New sofa ($1,000) ÷ 100 × Minneapolis sales tax rate (9.025%) + Original amount (1,000) = $1090.25
How to calculate sales tax in Washington
Washington base sales tax rate: 6.5%
Return and payment deadlines: Monthly, quarterly or annually
Washington’s base state sales tax rate is 6.5%, with combined sales tax rates reaching 10.5%, depending on where you live.
The state places tax on most items, including sales of tangible personal property, and there are also fairly new requirements around remote sales (e.g. products sold online).
Services like consultants and hairdressers can apply for an exemption certificate to avoid this tax. However, others, like hotels, are liable to pay it.
An example of how to calculate sales tax in Seattle, Washington:
E-book ($10) ÷ 100 × Seattle sales tax rate (10.25%) + Original amount (10) = $11.03
How to calculate sales tax in Illinois
Illinois base sales tax rate: 6.25%
Return and payment deadlines: Monthly, quarterly or annually
Illinois’s base sales tax rate is 6.25%, but it’s nearly double in some localities.
The state’s minimum combined tax rates range from 6.25% to 11.5%.
The sales tax in Chicago is 10.25% for general merchandise, while businesses operating in River Grove are liable for 11% sales tax.
Real estate, stocks and bonds are all exempt from the tax, along with real estate development materials, machinery and newspapers.
An example of how to calculate sales tax in Chicago, Illinois:
Washing machine ($500) ÷ 100 × Chicago sales tax rate (10.25%) + Original amount (500) = $551.25
How to calculate sales tax in Nevada
Nevada base sales tax rate: 4.6%
Return and payment deadlines: Monthly or quarterly
Nevada’s base sales tax rate is 4.6%, with localities adding on additional taxes up to 3.775%.
The minimum combined sales tax rate in Las Vegas is the highest in the state at 8.375%.
Like other states, Nevada has exemptions on specific products and services. People buying machinery, groceries and medicine are all exempt from paying the tax.
An example of how to calculate sales tax in Las Vegas, Nevada:
Car rental ($1,000) ÷ 100 × Las Vegas sales tax rate (8.38%) + Original amount (1,000) = $1,083.80
States without statewide sales tax rates
Most states have sales tax to help generate tax revenue for operations, but there are some exceptions.
Five US states currently have no statewide sales tax:
Alaska. Local governments in Alaska decide whether to impose sales taxes instead of a statewide tax. Depending on the location, the tax rate ranges between 1% to 7%.
Montana. Montana doesn’t have a statewide imposed sales tax, but some municipalities with a large tourism industry impose a local tax on sales of goods. The state does have higher property taxes (1.35% for residential and 1.89% for commercial) as an alternative way to raise funds.
Delaware. Delaware, including individual taxing jurisdictions, does not impose a statewide sales tax. However, the state implements a Gross Receipts Tax on businesses, which applies to most goods and services.
Oregon. While Oregon has no statewide sales tax, it has one of the highest income tax rates in the country, along with hefty property tax rates to raise funds.
New Hampshire. Businesses operating in New Hampshire are exempt from sales tax, but they may still feel the pinch with one of the highest property tax rates in the country.
Final thoughts
US sales tax laws can be complicated, but it’s important to do your research to know what your business is liable for.
While some states like Connecticut have a blanket sales tax rate, others like California have multiple base and combined rates you need to be aware of.
Calculating sales tax and your business’s liabilities comes down to the products and services you’re selling and the municipality you’re operating in.
If you are liable for sales tax, our quick sales tax calculations will help you figure out what your business needs to pay when it’s time to file.
