Understanding Sales Tax: Rates, Rules, and Exemptions
Sales tax is a consumption tax imposed by state and local governments on the sale of goods and most services, collected by the seller at the point of purchase and remitted to the government.
Unlike income tax which is based on earnings, sales tax is based on spending, making it a regressive tax that disproportionately affects lower-income households who spend a larger percentage of their income on taxable goods.
The United States has no federal sales tax, but 45 states plus Washington DC impose state-level sales tax, with rates ranging from 2.9% (Colorado) to 7.25% (California) as of 2025.
Local jurisdictions often add their own sales tax on top of the state rate, resulting in combined rates as high as 10.5% in some areas.
Five states have no sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon, though Alaska allows local governments to impose sales taxes.
Sales tax applies to most tangible goods but the treatment of services, groceries, clothing, and other categories varies dramatically by state.
Some states exempt groceries from sales tax (recognizing food as a necessity), while others tax groceries at the full rate or a reduced rate.
Clothing tax rules also vary: some states exempt all clothing, others exempt clothing under a certain price threshold, and some tax all clothing.
For businesses, sales tax compliance is complexโyou must collect and remit sales tax in every state where you have "nexus" (physical or economic presence), and rules changed dramatically after the 2018 South Dakota v.
Wayfair Supreme Court decision allowed states to require sales tax collection from out-of-state online sellers.
For consumers, sales tax significantly impacts purchasing decisions: a 10% sales tax on a $30,000 car adds $3,000 to the price.
Savvy shoppers take advantage of sales tax holidays (special periods when certain items are tax-exempt), shop in states with lower rates for big purchases, or buy online from sellers without nexus in their state (though technically you owe "use tax" on such purchases).