Sales Tax
$$\text{Tax Amount} = \text{Pre-tax Price} \times \frac{\text{Tax Rate}}{100}$$
What is Sales Tax?
Sales tax is a consumption tax imposed at the point of sale on retail goods and services. The seller adds the tax to the purchase price, collects it from the buyer, and remits it to the state or local government. Rates are set by state legislatures, and most states allow counties and cities to layer additional local rates on top of the state base rate. The Tax Foundation reports that 45 US states plus Washington D.C. levy a statewide sales tax, with rates ranging from 2.9% (Colorado) to 7.25% (California).
Unlike income tax (which taxes earnings) or property tax (which taxes assets), sales tax taxes spending at the moment of purchase. It is often described as regressive because lower-income households spend a larger proportion of their income on taxable goods, so the effective burden falls more heavily on them as a share of income.
When to use Sales Tax
Use the sales tax formula when pricing products for sale, checking a receipt, estimating the total cost of a large purchase, or reverse-calculating the original price from a tax-inclusive total. Always use the combined state plus local rate for your specific location, not just the state-level rate.
Worked examples for Sales Tax
This table quickly gives you the overview you need to understand Sales Tax and its most important comparisons.
| Pre-tax price | Tax rate | Tax amount | Total price |
|---|---|---|---|
| $50.00 | 8.00% | $4.00 | $54.00 |
| $200.00 | 7.25% | $14.50 | $214.50 |
| $1,000.00 | 9.55% | $95.50 | $1,095.50 |
| $25.99 | 6.25% | $1.62 | $27.61 |
Common pitfalls
The most common error is the reverse calculation: subtracting the tax percentage directly from the total gives the wrong pre-tax price. For a $108 total at 8%, subtracting $8.64 (108 x 0.08) gives $99.36 - incorrect. The correct method is $108 / 1.08 = $100.00. Always divide by (1 + rate) to reverse out sales tax.
Frequently asked questions about Sales Tax
How do I calculate sales tax on a purchase?
Multiply the pre-tax price by the tax rate divided by 100. For a $50 item at 8%: $50 x 0.08 = $4.00 tax. Add the tax to the price to get the total: $54.00. Use the combined state and local rate for your location, not just the state rate alone.
How do I remove sales tax from a total price?
Divide the tax-inclusive total by (1 + Tax Rate / 100). For a $108.00 total at 8%: $108 / 1.08 = $100.00 pre-tax. The tax was $8.00. Never subtract the percentage directly from the total - that method overstates the tax amount and gives the wrong original price.
Which US states have no sales tax?
Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Delaware, Montana, New Hampshire, and Oregon also have no local sales taxes. Alaska allows local municipalities to levy their own sales taxes, so many Alaskan cities do charge rates above 0%.
Quiz: how well do you know sales tax?
1. How does the sales tax collection mechanism work in the US?
2. How does sales tax differ from income tax and property tax?
3. From the examples table, what is the total price of a $200.00 item at 7.25% sales tax?
4. A receipt shows a total of $108 at 8% sales tax. What is the correct method to find the pre-tax price?
5. Which five US states have no statewide sales tax?