How Sales Tax Works

Sales tax is a percentage added to the price of most retail purchases. In the US it is set locally rather than nationally, which is why the same item can cost a different total a few miles down the road. Here is how it actually works.

How sales tax is calculated

Sales tax is a percentage of the pre-tax price. The total you pay at the register is:

total = price × (1 + rate)

where rate is the combined state and local rate written as a decimal. For a $50 item at a 7.5% combined rate:

• Tax = $50 × 0.075 = $3.75
• Total = $50 × 1.075 = $53.75

Most US receipts show the tax as a separate line because the listed shelf price is tax-exclusive — tax is added on top. In many other countries the listed price is tax-inclusive, meaning the tax is already baked into the sticker.

Why the rate varies: state + local

The US has no national sales tax. Each state sets its own base rate, and then counties, cities, transit authorities, and special districts can each add a small slice on top. The combined rate you actually pay is the sum of all of those layers.

This is why the rate can differ even between neighboring ZIP codes: one city added a local option tax to fund a project, and the next one over didn't. When someone quotes a "state sales tax rate," they mean only the state portion — your real rate is usually higher.

States with no sales tax

Five states have no statewide sales tax:

• Delaware — no state sales tax
• Montana — no state sales tax
• New Hampshire — no state sales tax
• Oregon — no state sales tax
• Alaska — no statewide rate, though local jurisdictions may charge one

Note that "no statewide tax" is not always "no tax at all." Alaska allows local sales taxes, and a few of the others permit narrowly scoped local levies. Always check the combined local rate for a specific address.

Backing tax out of a total

Sometimes you have a tax-inclusive total and need the pre-tax amount — for receipt reconciliation, expense reports, or comparing tax-inclusive to tax-exclusive prices. Reverse the original formula by dividing:

pre-tax = total / (1 + rate)

The tax portion is then total − pre-tax. A $107.50 total at 7.5% gives a pre-tax price of $107.50 / 1.075 = $100.00, with $7.50 of tax — the inverse of the earlier example.

What is and isn't taxed

States exempt categories they want to keep affordable. Groceries are untaxed or taxed at a reduced rate in most states, though a handful tax them fully. Prescription drugs are usually exempt, while clothing is exempt up to a price cap in some states. Digital goods and services are an evolving area — some states tax streaming and downloads, others don't yet. The exemptions are themselves state-specific, which is why a real receipt can look surprising.

Try it yourself

The Sales Tax by State Calculator applies the correct state base rate plus an optional local add-on to a price. The generic Sales Tax Calculator handles any rate you enter, and the Tip Calculator does the closely related job of adding a tip (often on a tax-inclusive restaurant total).