In a Nutshell
You may grumble when you see how much money Uncle Sam takes out of your paycheck every month for federal income tax. But there’s another type of tax that many Americans pay virtually every day: Sales tax. Tax on goods and services can add up, but you may also be able to deduct some (or all) of that tax when you file your federal return.This article was fact-checked by our editors and Rachel Weatherly, tax product specialist with Credit Karma.
You may think $50 is a great deal for that sweater you fell in love with, but when you go to check out, that’s not necessarily the price you’ll pay.
Thanks to sales tax, that sweater may cost more depending on where you buy it, what items are considered taxable in that state, and the current tax rate set by the state or local governments.
To make things more complex, if you go to a different state, the sales tax can change. It can even vary from city to city. Every state has its own rules. Some may not have sales tax at all.
Learning the basics of sales tax could help you feel more comfortable about what you’re paying, manage your spending and possibly use the sales tax you pay to your advantage come tax time.
What is sales tax?
Most people buy a lot of goods, products and services every day. A latte from the coffee shop. A tank of gas. Your phone and internet bill. And so much more. Sales tax is money that, in most cases, must be paid to the government on top of the price for you pay for these things.
Forty-five states and the District of Columbia have general sales taxes. Delaware, Montana, New Hampshire, Oregon and Alaska have no state-level sales tax, although Alaska does have local sales taxes.
Sales taxes are unique to each state and apply to certain goods and services depending on state guidelines. Typically, states provide information about their sales tax rate and the goods and services it applies to on their department of revenue website.
Sales tax usually is collected at the time of purchase by the business providing the service or making the sale, such as retailers. Those organizations are then responsible for paying the sales taxes to the state or local government on a monthly or quarterly basis.
And some states may levy additional taxes, which you pay at the time of purchase, on certain goods such as alcohol, gasoline or tobacco products.
State and District of Columbia taxing authorities
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* State has no personal income tax for individuals |
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How much is sales tax?
How much sales tax you pay depends on where you purchase an item or service.
California’s state-level sales tax is the highest at 7.25%. Four states have a 7% sales tax — Indiana, Mississippi, Rhode Island and Tennessee, according to the Tax Policy Center. And Colorado’s sales tax is the lowest at 2.9%.
When you add in local sales taxes, the amount of tax due on a purchase can increase substantially.
For example, Colorado has the lowest state-level state sales tax rate, but 315 municipalities in the state have their own sales taxes, with some as high as 8.3%. That means if you buy a $100 item in a city in Colorado that doesn’t have a local sales tax, you’ll pay $2.90 in state sales tax. But if you buy the same item at the same price in a municipality with its own sales tax, you could pay as much as $11.20 in state and local sales taxes.
State and local governments determine sales tax rates, which is one reason they can vary so drastically.
Revenue from state and local sales tax is used to fund a variety of things that help communities function, such as infrastructure and education. In 2016, state-level sales taxes poured $441 billion into state coffers, according to the Tax Policy Center. In the same year, local governments brought in $118 billion from sales taxes.
What is use tax and how does it differ from sales tax?
Sales tax is different from use tax. Use tax can apply when someone purchases taxable items or services but hasn’t paid sales tax. Use tax is a way to compensate when sales tax is not applicable, so it usually doesn’t apply when you already have to pay sales tax.
Sales tax on online purchases
In 1992, when the World Wide Web was a year old or so, the U.S. Supreme Court ruled that states and municipalities couldn’t require online retailers to collect sales tax on sales made to customers from states where the seller didn’t have a physical presence. In 2018, the court overturned that earlier ruling, giving states the ability to collect sales tax from online retailers.
Some online retailers were already voluntarily collecting and paying sales taxes to states, regardless of their actual business location, according to the Tax Policy Center. According to the National Conference of State Legislatures, 29 states and the District of Columbia now require remote sales tax collection.
That means in addition to the sales tax you pay on that latte, if you live in a state that requires online sellers to collect sales tax, you could also pay sales tax for the K-Cups you buy online.
Can you deduct sales tax on your federal tax return?
When filing a federal income tax return, most people can choose to take the standard deduction or itemize. If your total itemized deductions exceed the current standard deduction for your filing status, then itemizing may result in a greater reduction in your overall tax obligation.
State and local sales taxes may be deductible if you choose to itemize.
What are the standard deduction amounts for federal taxes?The deduction for state and local taxes, commonly known as the SALT deduction, provides filers who itemize deductions with two options for deducting taxes they’ve paid to state and local governments.
- You can deduct state and local property taxes plus state and local income taxes, or
- You can deduct state and local sales taxes plus state and local property taxes
The Tax Cuts and Jobs Act of 2017 temporarily capped the SALT deduction. Beginning with the 2018 tax year, the SALT deduction is limited to $10,000 ($5,000 for taxpayers who are married filing separate returns).
If you decide you want to claim sales tax as part of your deductions, you’ll need receipts to document these expenses throughout the year. Sales tax is typically visible as a line item on the receipt before the total amount. You can add up the sales taxes you paid and put the totals toward the applicable deduction limits when itemizing.
The IRS offers a sales tax calculator to help streamline the process.
Bottom line
Sales tax might make you grumble when you see the grand total at checkout, but it serves the purpose of funding local and state governments. While you may not be able to avoid sales tax, you can be proactive in considering its potential to help you maximize your tax return if you can use it to itemize on your federal filing.
Rachel Weatherly is a tax product specialist with Credit Karma. She studied accounting and finance at Western Carolina University and has also worked as a tax analyst. You can find her on LinkedIn.