Sales tax
A consumption tax collected at the point of sale.
A sales tax is a tax paid to a governing body for the sales of certain goods and services. Usually, laws allow the seller to collect funds for the tax from the consumer at the point of purchase. Sales taxes are one of the least harmful taxes for economic growth according to economists at the Organisation for Economic Co-operation and Development, but are generally considered regressive because the rate does not change based on income or wealth.
- type
- Consumption tax
- common_forms
- Conventional retail, manufacturers', wholesale, gross receipts, excise, use, value-added tax (VAT)
- US_implementation
- 45 states impose a statewide sales tax; 38 states allow local sales taxes
- notable_high_rate
- Hungary has the highest VAT at 27%
Lore & Background
Sales taxes are levied on the sale of goods to final end-users, with exemptions often provided for food, education, and medicines. Businesses that purchase goods for resale are typically issued a resale certificate and are not charged the tax. Other types include manufacturers' sales tax, wholesale sales tax, retail sales tax, gross receipts taxes (criticized for cascading effects), excise taxes on narrow products like gasoline or alcohol, use taxes imposed directly on consumers for out-of-jurisdiction purchases, securities turnover excise tax, value-added tax (VAT), FairTax, and turnover tax.
Reader's Guide
Sales taxes are a major revenue source for many governments worldwide, though their structure varies. In the United States, sales taxes are imposed at state and local levels, with combined rates reaching over 10% in some jurisdictions like Chicago. The tax is generally considered regressive, but exemptions for necessities such as food and medicine can mitigate this effect. Enforcement of tax on remote sales (e.g., e-commerce) is difficult unless the vendor has a physical presence in the state, leading to significant uncollected use tax revenues. Globally, value-added taxes have largely replaced conventional sales taxes, accounting for about 20% of worldwide tax revenue.
Did You Know?
- Sales taxes are generally considered regressive because the rate does not change based on income or wealth.
- In Chicago, the combined sales tax rate can reach 11.25% on dining out due to multiple layers of government taxes.
Frequently Asked Questions
What is a sales tax in simple terms?
A sales tax is a consumption tax charged when a buyer purchases specific goods or services. The seller typically adds the tax to the checkout price, collects it from the consumer, and remits the money to the government.
Why do economists call sales tax regressive?
Because the rate is fixed and does not scale with a person's income or wealth, lower-income households end up dedicating a larger slice of their earnings to the tax than wealthier buyers do.
What different forms can a sales tax take?
Beyond the familiar retail sales tax, the category includes manufacturer's taxes, wholesale taxes, gross receipts taxes, excise taxes, use taxes, and VAT. Hungary currently carries the highest VAT rate globally at 27 percent.
How does the OECD view sales taxes' impact on growth?
Economists at the OECD rank sales taxes among the least damaging tax types for overall economic growth. The main criticism is not efficiency but fairness, since the flat rate hits lower earners proportionally harder.
More in Economics And Business 1-17
Spotted an error? Know more?
This is a living reference — every entry is fact-audited, and reader corrections feed straight into our audit queue. Suggest an edit · See this site's audit record