Sales tax is a consumption tax imposed by state and local governments on the sale of goods and some services. There is no federal sales tax in the US. Every state sets its own rate, and most states allow counties and cities to add their own local rates on top. This is why the tax on a $100 purchase can vary by several dollars depending on where you buy it.
The Sales Tax Formula
Sales Tax = Purchase Price × (Tax Rate ÷ 100)
Example: A $50 item in a state with 7% sales tax. Tax: $50 × 0.07 = $3.50. Total: $50 + $3.50 = $53.50.
Reverse formula: Pre-Tax Price = Total ÷ (1 + Tax Rate ÷ 100). Example: $53.50 ÷ 1.07 = $50.00.
State Tax vs. Local Tax
Your total sales tax rate is almost always a combination of two components: a state rate set by the state legislature, and a local rate set by counties, cities, or special districts. For example, California's state rate is 7.25%. Los Angeles adds 2.25%, bringing the combined rate to 9.5%. A neighboring county might charge only 7.75% combined. The same item can cost different amounts in different cities within the same state.
What Is Taxed and What Isn't
Sales tax rules vary significantly by state. Common exemptions include:
- Groceries (food for home consumption) — exempt in many states, taxed at a reduced rate in others
- Prescription medications — exempt in most states
- Clothing — exempt in some states (New York, Pennsylvania) up to a per-item threshold
- Agricultural supplies and equipment — commonly exempt
- Digital goods and services — rules vary widely and are evolving rapidly
When in doubt, check your state's department of revenue website for the official rule.