Which Kind of Tax Is Paid When Purchasing Consumer Goods?

When purchasing goods in the United States, consumers encounter several types of taxes that increase the final purchase price. These are broadly categorized as consumption taxes, which are levied on spending for goods and services. The specific taxes, rates, and items subject to them can differ significantly depending on the product and the location of the transaction, which explains why the price at the register is often higher than the price on the tag.

The State and Local Sales Tax

The most common tax consumers experience is the state and local sales tax, a percentage-based fee added to the final price of many goods and some services at the point of sale. This tax is a primary revenue source for the 45 states and the District of Columbia that impose it. Since there is no federal sales tax, rates and rules are determined at the state and local levels, leading to wide variation. State-level rates generally range from 2.9% to over 7%, but many states also permit cities and counties to levy their own sales taxes, which can push the combined rate higher.

The seller is responsible for calculating, collecting, and remitting this tax to government authorities. While most tangible personal property is subject to sales tax, states create specific exemptions. These exemptions often include items considered necessities to lessen the tax burden on lower-income households.

Commonly exempt items include unprepared food like groceries, prescription medications, and, in some jurisdictions, certain types of clothing. The taxability of services also varies greatly, as some states tax a broad range of services while others tax only a few specific ones. This complex web of rules means that the same item can be taxed differently just by crossing a city or county line.

The Complementary Use Tax

A less familiar consumption tax is the use tax. This tax complements the sales tax and applies to goods purchased for use, storage, or consumption within a state where no or insufficient sales tax was paid at the time of purchase. The primary scenario for this is online or out-of-state purchases from a vendor that does not have a physical or significant economic presence—known as nexus—in the buyer’s state and therefore does not collect sales tax.

The responsibility for remitting the use tax falls directly on the consumer. The tax rate is the same as the sales tax rate in the consumer’s home state and locality. For example, if a person buys furniture from an online retailer that doesn’t collect sales tax and has it shipped to their home, they are legally required to report and pay the use tax to their state’s tax agency.

Many states include a line on their annual income tax returns for residents to report and pay their use tax liability for the year. The growth of e-commerce has prompted states to increase awareness and enforcement efforts. The 2018 Supreme Court decision in South Dakota v. Wayfair expanded states’ ability to require remote sellers to collect sales tax, but the consumer’s use tax obligation remains for purchases from non-collecting sellers.

Federal and State Excise Taxes

A different category of tax on consumer goods is the excise tax, levied on a specific set of products rather than on general consumption. Unlike sales tax, which is calculated as a percentage of the retail price and added at checkout, excise taxes are often a flat amount per unit, such as per gallon or per pack. These taxes are paid by the manufacturer or importer and are included in the product’s sticker price, making them less visible to the consumer.

Excise taxes are imposed at both the federal and state levels, meaning a single product can be subject to multiple layers of this tax. Well-known examples include taxes on gasoline, tobacco products, and alcoholic beverages. For instance, the federal government imposes an excise tax of 18.4 cents per gallon of gasoline, and states add their own excise tax on top of that.

These taxes are often implemented to generate revenue for specific purposes, such as funding highway construction through gasoline taxes, or to discourage consumption of goods deemed harmful, like cigarettes and alcohol. Other items subject to federal excise taxes include airline tickets, heavy trucks, and certain sporting equipment. The embedded nature of these taxes means consumers pay them without a separate line item on their receipt.