How Sales Tax Gets Calculated, and Why Rates Differ by State

The same $50 purchase can carry four different tax bills depending on which state, county, and city you're standing in.

There's no such thing as a single US sales tax rate — the number you pay is layered from as many as three or four separate taxing authorities at once: a state rate, and on top of that, county, city, and sometimes special-district rates, each set independently. That's why the same purchase can cost a meaningfully different amount in tax depending on exactly where it happens, sometimes even within the same metro area.

Illinois, for example, has a 6.25% statewide rate, but Chicago layers roughly another 4 percentage points of county and city tax on top, landing at a combined 10.25% — high enough that Tax Foundation research notes it pushes some shoppers to buy in surrounding suburbs or online instead. Statewide, Louisiana currently has the highest average combined state-and-local sales tax rate in the country at 10.13%, with Tennessee, Washington, Arkansas, and Alabama rounding out the top five, all according to Tax Foundation's 2026 rankings.

Where the tax is calculated from also varies by state. Most states use destination-based sourcing: the tax rate is whatever applies at the buyer's location, which is why online retailers have to track thousands of different local rates. A smaller number of states use origin-based sourcing, charging the rate where the seller is located instead, regardless of where the item ships. Neither approach is universal, and which one a state uses isn't obvious from its statewide rate alone.

Whether an out-of-state seller has to collect tax at all used to hinge entirely on having a physical presence — a store, warehouse, or office — in that state. That changed with the Supreme Court's 2018 decision in South Dakota v. Wayfair, which held that a large enough economic presence, essentially enough sales volume into a state, is sufficient on its own, even with zero physical footprint there. Every state with a sales tax has since adopted some version of an economic nexus threshold, which is why a purely online retailer with no stores or warehouses anywhere can still be required to collect tax in most states it ships to.

What's exempt varies by state as well as by locality. Most states with a sales tax exempt groceries entirely; a minority of 13 states still tax groceries to some degree, either at the full rate or a reduced one, according to Tax Foundation research. Clothing gets similar treatment in a handful of states. The upshot: the effective rate on a shopping cart can depend on what's actually in it, not just where you're standing.

What actually gets taxed varies too — every state with a sales tax taxes most physical goods, but far fewer tax services, and which specific services are covered differs state by state. The most common mistake when estimating sales tax by hand is using only the statewide rate and forgetting the local layer on top of it, which understates the real total almost everywhere a local tax applies; the Sales Tax Calculator is built to take a single combined rate for exactly this reason, rather than trying to guess a local add-on for you.

If you're working backward from a total that already includes tax, rather than forward from a pre-tax price, that's a related but different calculation — see reverse sales tax for how to separate the two once you only have the final number.