What is Sales Tax?

Sales tax is a consumption tax imposed on the sale of goods and services in the United States. In general, it is added onto the purchase price of taxable items and is collected by sellers at the point of sale. As of 2021, sales taxes are required in 45 states as well as the District of Columbia and Puerto Rico. Alaska, Delaware, Guam, Montana, New Hampshire, and Oregon do not impose a statewide or territorial sales tax. However, it is worth noting that these jurisdictions may still apply excise taxes on specific purchases such as alcohol.

Key Takeaways

• Sales tax is a form of consumption tax applied to the sale of goods and services in the United States.
• The main purpose of sales tax is to generate revenue for local and state governments.
• Exact sales tax rates depend on the specific state.
• Certain products or services may be exempt from sales tax, such as prescription medications, groceries or medical devices.

Understanding Sales Tax

In most cases, when you purchase something in the United States, you are paying more than the listed price. This is due to the fact that sales taxes are typically included in the cost. Sales taxes are calculated as a percentage of the price of a purchase. For example, assume that you are purchasing a pair of shoes in California, where the combined state and local sales tax rate is set at 9%. In this case, the sales tax amount would be $9. This would make your total cost for the shoes $109.

The primary goal and purpose of sales taxes are to generate revenue for state and local governments. These funds are used to support vital public services, infrastructure development and other important government programs. Simply put, sales tax revenue promotes the quality of life within communities.

Exemptions from Sales Tax

Certain products or services may be exempt from sales tax. The exact list of exemptions varies depending on the state. However, some general categories of items that are commonly exempt from sales tax in many states include prescription medications, grocery items, education and some utilities. 

Bottom Line

To summarize, sales taxes are applied to most goods and services sold in the United States. The revenue generated from sales tax is used to fund government programs, infrastructure development and other essential public services. Understanding the intricacies of sales tax exemptions and rates is important for both businesses and consumers to ensure compliance with tax laws and make informed purchasing decisions. If you have any additional questions about sales tax, or you are unsure regarding how to account for sales taxes on your tax return, reach out to one of our top tax attorneys today. Whether you are a business owner dealing with sales tax collection and reporting or an individual looking to understand sales tax deductions, one of our specialists would be more than happy to help.