Sales Tax

Definition

The term sales tax refers to an ad valorem transactional tax applied at the point of sale or lease of goods and services.  Sales tax in the United States is levied by forty-five states and the District of Columbia.  While the tax is paid on the sale or lease of goods and services, nearly all states provide exemptions for groceries and prescription medications.

Explanation

Sales tax in the United States is imposed by state governments and collected by retailers.  Sales tax is an ad valorem tax, which means the amount paid is based on the value of the goods or services purchased.  For example, the amount of tax owed is calculated by multiplying the purchase price of the goods or services times the applicable tax rate.

While some states do not impose this tax, the actual rates charged vary from a low of around 3% to a high of nearly 8%.  State sales tax is also classified as a regressive tax, since it's based on consumption and not income.  That is to say, lower-income individuals consume a larger portion of their disposable income; for that reason, they pay a higher proportion of their income as sales tax than higher-income individuals.

Related Terms

flat tax, progressive tax, excise tax, ad valorem tax, franchise tax, gas guzzler tax, pick-up tax, Pigovian tax, regressive tax, marginal tax rate, sin tax, special tax assessment, sumptuary tax