Here’s What Happens to Your Sales Tax
Though most Americans associate April with taxes, the truth is, every day is tax time. Unless you're lucky enough to live in a state with no sales tax, you pay a percentage on nearly all of the items you purchase. On a pack of gum you might just pay a few cents, but on a new car, it could be a few thousand dollars.
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Since this tax is built into the cost of most items, you might not have ever stopped to think about it. It begs the question, do you know what sales tax is? More importantly, do you know where your tax dollars actually go? Read on to find out how your sales tax pays for public schools, among other things.
Last updated: Aug. 10, 2021
What Is Sales Tax?
A sales tax is the direct tax on the consumption of retail goods and services. But unlike income taxes, which are levied by the federal government, sales taxes are strictly imposed by state and local governments. That means each state determines its sales tax rate and enacts it. Although the majority of states collect statewide sales taxes, there are several states that also impose a local sales tax.
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Is There a Cap on a Sales Tax?
The maximum percentage a state can levy for a sales tax varies by state and its municipalities. The rates for sales taxes are fixed and set by each state. However, that fixed tax rate serves as a base rate, which can be increased. For example, the New York sales tax is 4% at the state level, the local sales and use tax for New York City is 4.5%, and the Metropolitan Commuter Transportation District surcharge is 0.375%. So, the total sales tax you'll pay in New York City is 8.875%.
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State Sales Tax
Not all states are created equal when it comes to taxation. Some states have a uniquely high sales tax rate such as the California sales tax. Californians pay the highest state sales tax in the country at a minimum of 7.25%. However, only 6% of that money goes to the state. The remaining 1.25% is an additional local tax used to pay for county and city funds, according to Smart Asset.
California, Indiana, Mississippi, Rhode Island and Tennessee are all tied for the second-highest state sales tax rate, according to a study by the Tax Foundation.
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Local Sales Tax
There isn't necessarily a correlation between state and local sales tax rates. For example, Alabama has a fairly low 4% state sales tax rate, but it also has the highest average local sales tax rate at 5.10%. Depending on the city district, the local sales tax in Alabama ranges between 5% and 11%.
Combined State Taxes
When you want an accurate picture of a state’s sales tax, look at the combined sales tax rate. The combined sales tax rate includes both the state and local sales tax ranges. The Tax Foundation Study found that Louisiana has the highest combined sales tax rate at 10.02%, followed by Tennessee at 9.46% and Arkansas at 9.41%.
States Exempt From Sales Tax
Residents in Alaska, Delaware, Montana, New Hampshire and Oregon are the only states that don’t have to pay a statewide sales tax. However, Oregon, Alaska and Montana do collect local taxes.
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Reduced Sales Tax Rates in Urban Enterprise Zones
The majority of states now have Urban Enterprise Zones (UEZ), designated areas that offer reduced sales tax rates and other incentives to encourage growth and development, usually after economic hardship. For instance, the New Jersey sales tax rate is 6.625% statewide, but businesses in one of the state's 32 UEZs are allowed to charge half that -- just 3.3125%.
Items Exempt From Sales Tax
Although most items have a sales tax, there are things you can purchase that don’t carry the extra levy. For example, in California, food and prescription drugs are exempt from any sales tax.
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Online Sales Taxes
Previously, states couldn’t collect sales taxes on sales from e-commerce businesses that had no physical presence in the state. That meant that if an online retailer didn’t have a brick-and-mortar store, warehouse or employee in your state, you wouldn’t have to pay a sales tax for online purchases. However, in June 2018, the case of South Dakota vs. Wayfair, the Supreme Court ruled that states could collect sales taxes on purchases from out-of-state retailers.
Schools
Public schools are often financially supported by collecting sales taxes. A bill was reintroduced in Iowa, for instance, that would extend its one-penny sales tax in order to help fund school construction and other public expenses. According to the Quad-City Times, the extension of the sales tax was projected to bring in more than $16 billion in funding.
Roads and Streets
Sales tax can also be used to help pay for a city’s infrastructure. In Lincoln City, Nebraska, the city council recently held a public hearing to discuss the quarter-cent increase to the city’s sales tax, according to the Lincoln Journal Star. The proposed tax increase would secure $13 million a year to support street maintenance and other improvements.
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Roads and Streets Continued
Again, cities often use the revenue from local sales taxes to make improvements to the city’s roads or public streets. In 2018, the city of Ennis, Texas, voted overwhelmingly to pass Ennis Proposition A, which allowed the “reauthorization of the local sales and use tax in the City of Ennis at the rate of .0025 to continue providing revenue and maintenance and repair of municipal streets,” according to the NBC local affiliate, KXAS-TV.
The Texas sales tax is currently 6.25%, with the local sales tax rate ranging from 0.125% to 2%.
General City Purposes
Cities and states collect sales taxes to fund public projects, just as the federal government does. For example, in November 2018 residents in Culver City, California, voted to pass Measure C -- a bill that increased the city’s sales tax by 0.25%, with the money from the tax increase slated to fund miscellaneous resources in the city.
General City Purposes Continued
Similarly, residents in Newark, California, voted to pass Measure GG in 2016, which was proposed "to upgrade City of Newark facilities and services, including replacing the seismically unsafe police operations/emergency operations center to survive an earthquake; providing updated crimefighting technology; replacing aging library/city facilities with buildings meeting safety codes; providing disabled access and senior/teen/children’s facilities; and other facilities and services." Sixty-one percent of voters elected to pass the sales increase tax measure, which raised taxes to 10% for 25 years.
Sales Tax Pays For Important Things
Though sales tax can be burdensome at times, particularly with large purchases, it's important to remember that the money you're paying upfront is being used to build you and your family a better future. Your roads are smoother, your libraries have better resources, your police are better equipped, and your schools offer better programs -- all because of those few cents you pay on a stick of gum.
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Erica Corbin contributed to the reporting of this article.
This article originally appeared on GOBankingRates.com: Here’s What Happens to Your Sales Tax
