What Is Included in the Sales Tax Rate?

Sales tax is a percentage added to the price of goods and services at the point of sale, with rates varying by location. It funds public services such as schools, infrastructure, and emergency response. Consumers typically see only the final total on their receipts, but sales tax consists of multiple components set by different levels of government.

Components of the Rate

Sales tax rates include multiple layers, with different authorities imposing their own charges. While the total percentage appears as a single figure on receipts, it combines various taxes collected at different levels, leading to variations depending on where a purchase is made.

State Rate

The base level is set by states, with each determining its own percentage. As of 2024, 45 states and the District of Columbia impose a statewide sales tax, while Alaska, Delaware, Montana, New Hampshire, and Oregon do not. Rates vary widely; California has the highest base rate at 7.25%, while Colorado’s is among the lowest at 2.9%.

Businesses collect this tax at the point of sale and remit it to state agencies, which allocate the revenue to public services. Some states apply a uniform rate across all purchases, while others tax certain goods, such as groceries or prescription medications, at lower rates. Missouri, for example, taxes groceries at 1.225% instead of the standard 4.225%. Some states also offer exemptions for specific businesses or transactions, affecting the total tax collected.

Local Levies

Many local governments—counties, cities, and special districts—impose additional sales taxes on top of the state rate. Tennessee, for example, has a statewide rate of 7%, but local jurisdictions can add up to 2.75%, bringing the total to as high as 9.75% in some areas.

Local governments use these funds for services such as public transportation, law enforcement, and road maintenance. Businesses collect the combined rate and forward the appropriate portions to state agencies, which then distribute the local share. Some municipalities cap taxable purchases, meaning only a portion of a transaction is subject to local sales tax. Alabama, for instance, limits local sales tax on vehicle purchases to the first $25,000 of the sale price.

Special Assessments

Some jurisdictions impose additional taxes for specific projects or services, such as transit district taxes, tourism-related levies, or environmental fees. Arizona, for example, charges a transportation excise tax to fund highway improvements, while Florida applies surtaxes to support local health care services.

These assessments often target specific industries. Hotel stays, rental cars, and restaurant meals frequently carry extra taxes beyond the general sales tax rate. Some special assessments are temporary, expiring once a funding goal is met, while others remain in place indefinitely. San Francisco’s 1.5% transportation sales tax, for example, funds public transit projects and has been repeatedly extended by voters.

Exempt and Non-Taxable Items

Many states exempt certain goods and services from sales tax. Groceries, prescription medications, and medical devices are often excluded to reduce costs for consumers. Texas exempts most unprepared food items, while Illinois taxes groceries at a reduced 1% instead of the standard 6.25%.

Certain professional services are also exempt. While tangible goods are typically taxable, many states do not tax legal, accounting, or medical services. However, some states, such as Hawaii and New Mexico, apply a general excise or gross receipts tax that functions similarly to sales tax on services.

Manufacturing and resale exemptions allow businesses to avoid sales tax on goods purchased for production or resale. Retailers do not pay sales tax when buying inventory, as the tax is collected when the final consumer makes a purchase. Manufacturers often receive exemptions on raw materials and equipment used directly in production. Ohio, for example, exempts machinery used primarily in manufacturing to prevent double taxation.

Educational and nonprofit organizations frequently qualify for tax-exempt status. Schools, religious institutions, and charities can avoid sales tax on purchases related to their operations if they meet specific criteria. In New York, qualifying nonprofits must apply for a tax exemption certificate, which they present to vendors to avoid sales tax charges.

Frequency of Rate Changes

Sales tax rates change frequently due to legislative decisions, voter-approved measures, or economic conditions. States adjust rates to address budget needs, sometimes raising them to cover deficits or lowering them to encourage consumer spending. California temporarily increased its statewide sales tax by 1% from 2009 to 2011 during a budget crisis, while South Dakota reduced its state sales tax from 4.5% to 4.2% in 2023 after a budget surplus.

Local governments also modify rates, often through ballot initiatives funding specific projects such as public transit expansions or school improvements. In 2022, Los Angeles County voters approved a continuation of a half-cent sales tax for transportation projects. Because these changes occur at the municipal or county level, neighboring jurisdictions within the same state may have different rates, requiring businesses to track multiple tax structures.

Temporary sales tax increases are sometimes introduced for emergencies or one-time expenditures. Florida has periodically imposed disaster-related surtaxes after hurricanes to support rebuilding efforts. These temporary rates often have expiration dates but can be extended if additional funding is needed. Businesses operating in multiple locations must stay informed about such changes to ensure compliance.