States assess sales tax on most tangible purchases, such as clothes you buy at the local mall. Sales tax rates vary by state, and they can differ significantly from state to state. But state sales tax rates aren’t the end of the story. Many counties and cities add on their own local sales taxes, raising your final tax bill. Here’s a look at how tax rates vary by state, how state sales taxes work and how much tax you should expect to pay.
State Sales Tax Rates
State sales tax rates are all over the map. Whereas you’ll find rates of 7 percent in Indiana, Rhode Island, Mississippi and Tennessee, California claims top billing with a sales tax percentage of 7.25 percent. On the other end of the scale, five states — Alaska, Montana, Oregon, New Hampshire and Delaware — don’t have any state sales taxes at all. Here’s a look at how sales tax rates vary by state:
How Much Is Sales Tax?
Of the states that levy sales tax, the lowest burden is in Colorado, with a sales tax rate of 2.90 percent. But Colorado has local tax rates as high as 8.30 percent — the highest in the country — meaning you could pay as much as 11.20 percent total tax in some regions of Colorado.
Of the five states with no state sales tax, only Alaska has local sales tax, which can reach 7.50 percent. Overall, local sales taxes are charged in addition to state sales taxes in 38 U.S. states.
Some taxpayers can reduce the cost of sales taxes by using itemized deductions when they file personal income tax returns. Itemizing on Form 1040 allows you to deduct either your state and local income taxes or your state and local sales taxes, thereby reducing your total cost.
How to Calculate Sales Tax
To calculate sales tax, simply multiply the sales tax rate by the price of your purchase to get the total price. Don’t forget to include both state and local sales taxes to get the proper amount that you’d owe.
Sales Tax Uses
State sales tax revenues are used for general expenditures. More than half of state spending goes toward health care and education. About 10 percent of total state spending goes to corrections and transportation, and the remaining one-third or so goes to different programs ranging from public assistance to environmental projects.
Local rates are often increased to pay for specific projects. For example, several cities and counties in California have raised rates in response to voter choices to increase transportation and law enforcement funding.
Sales Tax Impacts
States with lower tax rates than surrounding states highlight these differences to attract shoppers. Delaware’s highway welcome sign, for example, uses the slogan “Home of Tax-Free Shopping” to entice motorists. In New England, merchants lure shoppers from Vermont, which imposes a 6 percent state sales tax rate. Whereas sales in border counties of tax-free New Hampshire have tripled since the 1950s, sales in Vermont’s border counties have remained stagnant, according to the Tax Foundation.
Some states and counties try to combat these differences on a regional basis. For example, the border county of Salem County, New Jersey is exempt from one-half of the state’s sales tax to make the county more competitive with neighboring tax-free Delaware.
Why Some States Have No Sales Tax and Others Have High Sales Tax
If state sales taxes help finance state expenditures, how can five states have no sales tax at all? The answer usually lies in the state income tax rates. Oregon, for example, has no state sales tax but does have high state income taxes, with the highest bracket of 9.9 percent as of 2016, according to the Tax Foundation. Delaware also has high income tax, although it’s offset by low property taxes, which are based on a tax assessor’s valuation. Washington, on the other hand, has high sales tax rates, with a combined state and local tax rate of up to 9.9 percent, but it has no state income tax.
Some states, such as California, bear the burden of high total tax rates, with state and local combined sales tax rates as high as 9.75 percent and a top income tax bracket of 13.3 percent.
Sales Tax 2017
Tax rates of all kinds are subject to change, based on state and local needs, voter preferences and the timelines established by existing legislation. In 2017, for example, the California statewide sales and use tax dropped from 7.5 percent to 7.25 percent. In Tennessee, gas tax rose by 6 cents per gallon, but the sales tax rate on groceries dropped to 4 percent. Take these changes into account when considering how sales tax affects your bottom line.