When you buy many items at a retail store, the price on the tag is not the final amount you will pay. Sales tax is often added to the final price, affecting total spending. Understanding how sales tax works is vital for budgeting effectively.

What are Sales Taxes?

Consumers pay a sales tax when they purchase goods and services, and businesses also incur this tax on their transactions involving goods and services. As a consumption tax, businesses generally pass the sales tax onto the consumer at the time of sale.

How Sales Taxes Work

Sales taxes are not paid directly to the government by the consumer. Instead, they are an indirect tax, which means they are collected at the time of the sale by the merchant. That party is then responsible for paying the taxes to the government. State and local governments typically charge sales taxes, and they are one of the most important funding sources for revenue for those government organizations.

Retailers calculate sales tax as a percentage of the total purchase amount. They accurately collect this tax from customers and then pay it to the government. Some products and services, like groceries and medications, are exempt from sales tax.

Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a sales tax. That means purchases here do not have added costs applied to them.

Taxable Goods and Services

You may hear the term "taxable goods and services" used to define which products and services may have state and local taxes applied to them. Each state can set its own rules. For example, some states do not tax medical devices and supplies.

Some purchases that may be exempt from sales tax (as defined by state law) include:

• Groceries
• Out-of-state purchases and international purchases
• Non-profit organization purchases of goods and services
• Goods for resale
• Sales tax holidays (specific dates of the year that sales taxes do not apply)

Impact on Consumer Decisions

Consumers should factor in sales tax when planning to purchase items or services. For instance, if you're buying groceries, in many places, you won't have to pay an additional 5% to 8% (or your state's specific sales tax rate) on top of the grocery bill, as groceries are often exempt from sales tax.

However, if you are considering the purchase of a big-screen TV, the added tax could impact your ability and willingness to make the purchase.

Variations Between Federal, State, and Local Jurisdictions

The federal government does not impose a sales tax but primarily generates revenue through income taxes. In contrast, many states and local governments levy sales taxes. State laws determine whether to charge sales tax, which items are taxable or exempt and the applicable tax rate. Typically, state sales tax rates are higher than local rates. Still, these percentages vary significantly across different regions of the country.

Tips for Consumers

When you are headed to the store to make a purchase, there are several key factors you need to keep in mind. Consider these things before you make a purchase:

• You may have to pay sales tax if you purchase something from another state and have it shipped to you. Before 2018, companies did not have to collect sales tax if they did not have a physical location in the state. That has changed, and you may now be required to pay state taxes based on where you live.
• When traveling, you may be surprised to learn that the sales tax in one area is higher than the other. It is critical to know what to expect. You can look up this information on the city or state's website.
• Sometimes, they may have an excise tax applied, which is a higher level of taxation. That typically applies to taxes on things considered non-necessary, like alcohol or tobacco purchases.

Takeaways

Understanding sales tax and factoring it into your budget is critical in managing your financial health. If you are unsure you are paying fair sales tax, contact the local county or state auditor for more information and support.