Sales Taxes

A sales tax is a tax on consumption, where a consumer pays a percentage of the final purchase price or a fixed unit cost (e.g., per pack of cigarettes) as tax on top of the cost of the product.

States and local governments levy both general sales taxes (applying the same rate to all taxable purchases) and selective sales taxes (different rates on specific types of goods or services, such as alcohol and gas).

This backgrounder answers six questions:

All revenue data are from the US Census Bureau’s Annual Survey of State Government Tax Collections. All dates in sections about revenue reference the fiscal year unless stated otherwise.

How much revenue do state and local governments raise from sales taxes?

States rely on sales tax revenue more than local governments (table 1). State governments collected $378 billion in revenue (23.2 percent of state general revenue) from sales taxes in 2012 (table 1). Nearly two-thirds of that amount ($245 billion) came from general sales taxes; one-third ($133 billion) came from selective sales taxes. Local governments collected $98 billion (6.7 percent of local government general revenue) from sales taxes in 2012, $69 billion from general sales taxes and $29 billion from selective sales taxes.

Table 1

State and Local Sales Tax Revenue, 2012

 

General Sales Tax

Selective Sales Tax

Total Sales Tax

 

Revenue
($billions)

Share of general revenue

Revenue
($billions)

Share of general revenue

Revenue ($billions)

Share of general revenue

State and local governments

$314.8

12.1%

$161.7

6.2%

$476.4

18.3%

State governments

$245.4

15.1%

$133.1

8.2%

$378.5

23.2%

Local governments

$69.4

4.8%

$28.6

2.0%

$97.9

6.7%

 

Sales tax revenue (general and specific) was 18.3 percent of combined state and local general revenue in 2012. That was a higher percentage than either property taxes (17.2 percent) or income taxes (11.8 percent).

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Figure 1

Figure 1: Taxes as a Percentage of State and Local General Revenue, 2012

Nevada relied on sales tax revenue more than any other state in 2012; sales taxes accounted for 34.2 percent of Nevada’s combined state and local general revenues (20.8 percent general sales and 13.4 percent selective sales). Hawaii and Washington also collected more than 30 percent of combined state and local general revenues from sales taxes in 2012. These three states and Tennessee all collected 20 percent or more of general revenue from general sales taxes. Among the states with a general sales tax, Massachusetts (11.9 percent) relied least on sales tax revenue in 2012. Nevada and Vermont both collected 10 percent or more of general revenue from selective sales taxes while Alaska and Wyoming collected less than 1 percent.
Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) did not have a general state sales tax, but all levied selective sales taxes, and Alaska allowed local governments to levy their own general sales taxes. Among these five states, sales taxes as a share of general revenue ranged from 3.2 percent in Alaska to 9.3 percent in New Hampshire.

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How has sales tax revenue changed over time?

Real (2012 dollars) per capita state and local sales tax revenues (both general and selective) increased from $1,045 in 1977 to $1,518 in 2012, but sales tax revenue as a percentage of personal income has remained more stable over that period (figure 2).

Figure 2

Figure 2: State and Local Sales Tax Revenue

Since 2007, sales tax revenue has declined in both real per capita and percentage of income terms. This drop in part reflects lower consumption during and immediately following the Great Recession, but it also reflects changing consumption patterns with increased purchases of services (often exempt from sales taxes) and goods from online vendors (taxable but difficult for states to collect).

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How much do general sales tax rates differ across states?

State general sales tax rates range from 2.9 percent in Colorado to 7.5 percent in California (figure 3). Among states with a general sales tax, Colorado is the only one with a rate below 4 percent. Six states have rates at or above 7 percent. Alaska, Delaware, Montana, New Hampshire, and Oregon have no state general sales tax.

Figure 3

Figure 3: State General Sales Tax Rates, 2015

Thirty-eight states (including Alaska, which has no statewide tax) allow local governments to impose their own general sales taxes on top of any state sales tax. The maximum sales tax rates levied by local governments range from 0.5 percent in Hawaii to 7.5 percent in Alaska.

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What purchases are subject to the general sales tax?

General sales taxes apply to the purchase of nearly all tangible goods. One notable exception is food purchased for use at home: only 13 states tax such purchases, and 6 of these states tax such food at a lower rate than their general sales tax rate. Five of the 13 states that tax food for use at home offer income tax credits to low-income residents to help offset the tax. (In contrast, food bought for immediate consumption—e.g., at a restaurant—is taxed, and often at a higher rate.)

Many states also exempt nonprescription drugs, textbooks, and/or clothing from general sales taxes. And some states have sales tax holidays, when specific purchases—for example, clothes and school supplies right before the start of a new school year—are sold tax-free.

The taxation of services (e.g., dry cleaning, carpentry work, barbershops) is more complicated. All states tax some services, but exemptions are common. Very few states tax professional services such as doctors and lawyers. Hawaii and New Mexico are exceptions to the rule and tax nearly all services.

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Do sales taxes apply to online purchases?

The treatment of online and other remote sales (e.g., catalog sales) is also complex. Under the Constitution, if a retailer has no physical presence in the online purchaser’s state of residence (technically called a "nexus” requirement), then the retailer is not required to collect a state or local sales tax from the consumer.

However, many consumers do not realize that, in addition to sales taxes, states levy use taxes. Consumers are subject to use taxes on goods purchased outside their state of residence for consumption in their home state. The use tax rate is the same as the sales tax rate, but few consumers actually pay the tax. Most states with both a sales tax and an individual income tax (such as California, Kentucky, Virginia, and Utah) give taxpayers a chance to pay use taxes on their income tax returns.

The Supreme Court (Quill Corp. v. North Dakota) ruled that states cannot require remote sellers to collect sales taxes but that Congress can enact new rules. The Marketplace Fairness Act, first proposed in Congress in 2011, would allow states to require remote sellers to collect sales taxes on online purchase made by their residents. The act would require that states simplify their sales taxes to make it easier for out-of-state sellers to collect the tax. It would also exempt businesses with less than $1 million of sales. However, Congress has thus far failed to pass the legislation.

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What taxes do states levy on alcohol, cigarettes, and gas?

Most states levy “selective” sales taxes, with different tax rates than the general sales tax, on particular goods and services. Three of the best known selective sales taxes are on alcohol, cigarettes, and motor fuels, and are in addition to any federal excise taxes (e.g., the federal gas tax). These taxes are also sometimes called excise taxes and, in the case of cigarettes and alcohol, “sin” taxes, because one purpose is to discourage consumption.

  • Alcohol taxes are generally paid at the wholesale level, so the cost of the tax is already incorporated into the retail price paid by the consumer. The excise taxes are per gallon, not percentage of price; beer, wine, and liquor all have different tax rates. In addition to the excise tax, many states levy a sales tax on the final purchase cost of alcohol, and some states and cities have special sales tax rates for alcohol.
  • Cigarette taxes are typically paid per pack. Missouri imposes the lowest state cigarette tax rate ($0.17), and New York has the highest ($4.35). In six states (Alabama, Illinois, Missouri, New York, Tennessee, and Virginia), local governments may impose an additional cigarette tax. Local cigarette tax rates range from $0.01 in Alabama and Tennessee to $4.18 in Chicago, Illinois (county tax plus city tax). Some states and cities levy their sales tax on top of cigarette price (excise tax included), while others build their sales tax into their excise tax rate.
  • Motor fuel taxes are mostly per gallon taxes: consumers pay tax based on how much gas they purchase, not as a percentage of the final retail cost of the gas. However, 15 states and DC tie at least a portion of their gas tax rate to the cost of gas, which means these rates go up or down with the price of gas. Florida and Maryland tie at least a portion of their tax rate to inflation. The lowest gas tax rate is in Alaska (8 cents per gallon), and the highest rate is in Pennsylvania (50.5 cents per gallon).

Some cities (e.g., Boston, San Francisco, and Washington, DC) also have special tax rates for certain purchases, such as restaurant meals, hotel accommodations, rental cars, and parking, that are higher than their general rates. The higher tax rates on these purchases are often intended to collect a significant share of their revenue from nonresidents who visit the city.

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