We all pay sales tax nearly daily, yet many are confused about how it works.
Sales tax is a percentage paid on top of the base cost of most goods and services. So if I buy a new watch, I pay the base price to the store – what it says on the price tag – and a set percentage of that amount to the government.
Sales tax is charged on the sale of a good to its final user every time that item is sold.
Curious about income tax as well? Read more here.
Sales tax may be levied, or collected, by the state, city or other local governments.
The percentage they charge is set by that governing body and varies wildly, from 0% sales tax in some states to 10% in others.
So, let’s say that watch I buy costs $100. If the state sales tax rate is 5%, I pay $105 when I buy it. The store keeps $100 and sends $5 to the state.
$100 cost of item
X 5% sales tax
$105 total cost
$5 goes to state
A city may charge sales tax in addition to the state.
So If I buy the same watch in Kansas City, Kanasas, I would pay $109.13.
The city charges a sales tax of 1.63%; the county it’s in, Wyandotte, charges a sales tax of 1%; and the state of Kansas charges a 6.5% sales tax. So all together in Kansas City, Kansas, you pay a 9.13% sales tax on most items purchased.
The same items have different amount of taxes paid on them depending on where you purchase them.
Another town in the same county may not charge sales tax; a neighboring county may charge a different sales tax; and some states don’t charge any sales tax.
Not every item is taxes
Some goods are considered too important to have sales tax charged on them. Most commonly, food at the grocery store does not have sales tax. But other items at the grocery store, like napkins or paper towels, may be taxed.
What is and is not taxed also depends on the government charging the tax. For example, some states charge tax on clothing, while others do not. And yet other states only charge tax on clothing over a certain price.
Some items are exempt from sales tax, like food at a grocery store. The government charging the tax can determine what is and is not taxed, like clothing.
Specialty sales taxes
Generally speaking, all items in the same municipality are taxed at the same rate. However, some goods and services may be taxed at a special rate.
This is particularly common for items used when traveling, like hotel rooms and rental cars. To know the specific tax rate on an item in your location, you’d have to look it up, as the rates change by location and over time.
But the general idea of how sales tax is charged always works the same way – you pay a set percentage of the cost of an item you buy to the government.
To see the sales tax rate in different cities and states, visit TaxJar.
To calculate the sales tax on any item, use this calculator.