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What is sales tax?

Sales tax is a tax on the purchase of tangible goods and services imposed by some level of government. It is typically paid and collected by the seller from the consumer at the time of sale.

What are sales taxes like in the U.S.?

The U.S. does not have a federal sales tax. Instead, it is done on a state-by-state basis. Forty-five states and Washington D.C. have a statewide sales tax. Local governments (cities/county) also have their own sales tax to apply, resulting in thousands of rates and rules collectively across the nation.

Which states have no sales tax?

Alaska, Delaware, Montana, New Hampshire, and Oregon. (Note: Alaska allows local jurisdictions to impose sales taxes.)

What is the difference between Sales Tax and VAT?

U.S. Sales Tax: A sales tax is charged only once at the final retail level of sale (the consumer).

Value-Added Tax – Unlike a U.S. sales tax, a VAT is charged in over 160 countries at each production level of the product or service every time value is added. It is not just the final seller in the distribution who pays the tax, every business pays the VAT during their steps in the supply chain.

Consolidated & Improved Version (Combining clarity and detail)

• Sales Tax:  A Guide for the U.S. and Beyond a sales tax is a consumption tax applied to the sale of goods and services and is ultimately paid by the end consumer. The seller collects the sales tax from the buyer and pays the tax to the government. While the seller pays it to the government, it is ultimately an expense for the buyer. Sales taxes are called Value-Added Tax (VAT) or Goods and Services Tax (GST) in other countries.

• The U.S. Sales Tax System: In the United States, sales taxes are implemented as a convoluted, decentralized system at the state (and local) level of government and with no federal sales tax. Therefore, each state has developed its own class of sales tax regulation.

• Control in States/Locals: There are 45 states and Therefore, Washington, D.C. that impose a statewide sales tax; the five states that don’t are Alaska, Montana, Delaware, New Hampshire, and Oregon. Additionally, each city, county, and local government body may implement their own additional taxes, which may lead to scenarios where combined rates differ from point of sale to point of sale in the same zip code.

• What is Taxable?: Sales Tax is a type of transaction-based tax on retail sales or services. Almost all business-to-business sales are exempt from the sales tax. However, what is taxable and what is exempt is often specific to states. For example, groceries are exempt from sales tax in some states and taxable in others. Economically Significant: Sales tax is, on a state and local basis, eliminating income taxes, the second most significant revenue source. Economically, the importance of sales tax varies by state. For example, sales taxes comprise more than 50% of tax revenue for Washington, Florida, and Texas; other states may only partially implement it as a revenue generation strategy.

A Note on Deductions

Taxpayers who choose to itemize deductions on their federal income tax return are then allowed to deduct either their state and local income tax or their state and local sales tax, but not both. For most taxpayers, the deduction for income taxes will be more beneficial than the deduction for sales tax (e.g., sales tax may be more useful for taxpayers that made large purchases, such as cars, boats, major appliances, etc., because their total sales tax paid in that tax year would likely exceed their state income tax.)

 Sales Tax versus VAT and GST

Most of the world works on a different model: the sales tax is known as a Value-Added Tax (VAT) or a Goods and Services Tax (GST).

The key difference is that sales tax is only imposed on the final sale of items, while VAT/GST is applied to every step of the production and distribution process (again, every business pays tax on the “value” it adds).

 The upside is that VAT is harder to avoid and raises significantly more revenue, but the downside is that it is considered a regressive form of taxation (it affects lower-income individuals more) and can lead to tax admin challenges for businesses

Historical Context

American history demonstrates a proclivity for suspicion of sales taxes dating as far back as the colonial period, in which British taxes were levied on colonists without representation, adding to the list of grievances contributing to the onset of the revolution (the Boston Tea Party being a specific example). The legacy of such an event created a barrier for introducing a federal sales tax. State sales taxes were not generally adopted until the Great Depression, during the 1930s when states required a tool for generating revenue. The first of such taxes was introduced by Mississippi in 1930.