Vat And Sales Tax in United States

Does the United States have a federal sales tax or VAT?

No. The United States is the only major developed economy without a national consumption tax. There is no federal sales tax, no federal value-added tax (VAT), and no federal goods and services tax (GST). Multiple proposals to introduce a federal VAT have been advanced — by tax-reform commissions, individual policymakers, and academic studies — but none has been enacted [SC1]. The result is that all general consumption taxation in the US is administered at the state and local level.

The absence of a federal consumption tax is the principal reason the US tax system relies more heavily on income tax than peer economies. Per OECD data, total US tax revenue as a percentage of GDP is around 27 percent (2024), well below the OECD average of 34 percent, and the gap is largely the missing VAT (OECD VAT/GST yields typically run 5-9 percent of GDP). The US federal government is funded primarily by individual income tax (50 percent of receipts), payroll tax (33 percent), and corporate income tax (10 percent), with the remaining 7 percent from estate, gift, excise, and other taxes.

State and local sales tax is the principal substitute. State sales-tax revenue funds roughly 30 percent of state-level general revenue in states that have one, with the remainder coming from state income tax, property tax (mostly local), federal aid, and other sources. Local sales tax revenue is a major component of city and county budgets, particularly in jurisdictions with weak property-tax bases.

Which states have a general sales tax and at what rates?

Forty-five states plus the District of Columbia impose a general sales tax. Five states do not impose a state-level general sales tax — the NOMAD states: New Hampshire, Oregon, Montana, Alaska, Delaware [SC2]. However:

• Alaska: No state sales tax, but approximately 100 of its 165 municipalities impose local sales tax, with rates running 1 percent to 7 percent depending on the city.
• Montana: No state sales tax, but a small number of resort communities (Whitefish, West Yellowstone, Big Sky, Red Lodge) impose local-option sales tax up to 3 percent.
• New Hampshire, Oregon, Delaware: Truly no general sales tax at either state or local level. New Hampshire imposes a meals and rooms tax (8.5 percent on prepared food, lodging, and rental cars).

State-level sales tax rates for 2025 (excluding local addons) [SC2]:

• Highest state rates: California 7.25%, Indiana 7%, Mississippi 7%, Rhode Island 7%, Tennessee 7%
• Mid-range: Texas 6.25%, Florida 6%, New York 4%, Pennsylvania 6%, Illinois 6.25%
• Lowest: Colorado 2.9%, Alabama 4%, Georgia 4%, Hawaii 4% (technically a general excise tax that operates similarly), Louisiana 4.45%, Wyoming 4%

Combined state-plus-local average rates (which is what shoppers actually pay):

• Tennessee: 9.55% (highest)
• Louisiana: 9.55%
• Arkansas: 9.45%
• Washington: 9.40%
• Alabama: 9.30%
• Oklahoma: 8.99%

The combined rate matters because local addons are substantial: Chicago's combined rate is 10.25% (state 6.25% + Cook County 1.75% + Chicago 1.25% + special 1%), among the highest in the US. New York City's combined rate is 8.875% (state 4% + city 4.5% + MCTD 0.375%). Birmingham, AL hits 10% combined.

How does sales tax nexus work post-Wayfair?

The constitutional framework for state imposition of sales-tax collection on remote sellers was settled by South Dakota v. Wayfair, Inc. (138 S. Ct. 2080, 2018) [SC3]. The Supreme Court overruled prior decisions (Quill, National Bellas Hess) that had required physical presence in a state before collection could be required. Wayfair permits a state to require an out-of-state seller to collect sales tax on sales into the state when the seller's activity creates an "economic nexus" with the state.

Most states adopted post-Wayfair economic-nexus statutes within 18 months of the decision. The standard thresholds, modeled on the South Dakota statute that survived Wayfair review:

• USD 100,000 in sales into the state during the current or preceding calendar year, OR
• 200 separate transactions into the state during the current or preceding calendar year

Some states use only the dollar threshold (typically the larger states with substantial commerce: California adopts USD 500,000, New York USD 500,000, Tennessee USD 100,000). Some states use a different number (Alabama uses USD 250,000; Texas uses USD 500,000). Effective date for nexus creation also varies: same-day, first-day-of-next-month, first-day-of-next-quarter, or first-day-of-next-year.

Once a seller crosses the threshold, the seller is obligated to register with the state's department of revenue, obtain a sales-tax permit, collect sales tax on all taxable sales into the state, file periodic sales-tax returns, and remit collected tax. The administrative burden is substantial for multi-state sellers — a seller crossing thresholds in 30 states must maintain registration and filing obligations in all 30. The Streamlined Sales and Use Tax Agreement (SSUTA) provides a simplified registration and filing path for sellers in the 24 SSUTA member states, but the remaining 21 states require state-by-state compliance.

Physical-presence nexus also still applies: A seller with an employee, office, warehouse, inventory in a fulfillment center, or other physical presence in a state has nexus regardless of dollar volume. Amazon's FBA program creates inventory nexus for participating sellers wherever Amazon stores their inventory — historically a source of substantial unregistered-seller exposure. The 2018-2024 period saw extensive state enforcement against FBA-participating sellers retroactively.

Marketplace facilitator laws

Marketplace facilitator laws shift sales-tax collection responsibility from individual third-party sellers to the marketplace platform that processes the transaction. The laws emerged in 2018-2019 alongside the economic-nexus frameworks and now cover all 45 sales-tax states plus DC [SC3].

A marketplace facilitator is typically defined as an entity that contracts with sellers to facilitate sales of goods or services and processes the payment for those sales. Amazon, eBay, Etsy, Walmart Marketplace, Wayfair, Etsy, AbeBooks, Reverb, and similar platforms qualify. The seller using the platform does NOT need to collect or remit sales tax on facilitated sales; the platform does so on the seller's behalf.

For a seller, the practical implication is:

• Marketplace-facilitated sales: Platform collects and remits. Seller's reporting obligation is typically reduced to including these sales as gross receipts on the seller's own business income tax return.
• Direct sales (the seller's own website, in-person sales): Seller is responsible for collection if economic-nexus or physical-presence thresholds are met.
• Mixed channels: Seller maintains a single sales-tax registration but reports facilitated and direct sales separately on the periodic return.

The marketplace-facilitator framework substantially reduced compliance burden for small sellers using major platforms but did not eliminate state-by-state registration obligations for sellers with direct-channel sales above nexus thresholds. Drop-shipping arrangements add complexity: who is the seller — the retailer or the drop shipper — and which party is responsible for collection is a fact-specific question that varies by state.

What is taxable: tangible personal property vs services

US sales-tax bases historically were limited to tangible personal property — physical goods. The growth of services in the US economy has put pressure on this base, and many states have extended sales tax to specific service categories [SC4]:

• Telecommunications services: Taxable in all 45 sales-tax states.
• Hotel and lodging: Taxable in nearly all states, often at higher "transient accommodations" rates.
• Repair services: Mixed — some states tax labor on repairs (Texas, Arkansas, Hawaii), most don't.
• Personal services (haircuts, dry cleaning, lawn care): Taxable in Hawaii, New Mexico, South Dakota, West Virginia, and a few others; not taxed in the majority.
• Professional services (legal, accounting, engineering, medical): Taxable in Hawaii, New Mexico, South Dakota, and Washington only (rare).
• Digital goods and SaaS: Highly variable. Approximately 30 states tax SaaS; the rest don't. Specific positions:
  • Texas: SaaS NOT taxable (general rule); data processing services taxable.
  • California: SaaS NOT taxable; canned software for download IS taxable.
  • New York: SaaS taxable.
  • Washington: SaaS taxable as digital automated services.
  • Tennessee: SaaS taxable starting October 2024.

The digital-goods picture has been a moving target for the past decade, with states routinely updating their positions. The Streamlined Sales and Use Tax Agreement provides a standardized definition of "specified digital products" that SSUTA member states have largely adopted, but the underlying taxability decision (yes/no for each digital category) remains a state-by-state question.

Food and clothing exemptions are common state-level departures from the standard taxable base. Most states exempt unprepared food (groceries) — Alabama, Hawaii, Idaho, Kansas, Mississippi, Oklahoma, South Dakota, and Tennessee fully tax groceries, while the rest exempt or partially exempt. Some states tax restaurant meals at higher rates (Connecticut, Vermont). Clothing exemptions apply in Massachusetts (first USD 175 per item), New Jersey (most clothing exempt), New York (clothing under USD 110 per item exempt from state, sometimes local), Pennsylvania (most clothing exempt), Rhode Island (first USD 250 per item), and Vermont (most clothing exempt).

Use tax: the consumer-side complement to sales tax

Use tax is the consumer-side complement to sales tax under most state tax codes [SC5]. When a consumer purchases a taxable item from an out-of-state seller that does not collect sales tax (because the seller lacks nexus or the consumer purchased before the seller crossed economic-nexus thresholds), the consumer owes use tax to their state of residence at the state's sales-tax rate.

Use tax compliance among individual filers is notoriously low. Most states include a use-tax line on the state personal income tax return for self-reporting, but voluntary compliance is estimated at under 5 percent. State enforcement against individual filers is sporadic but does happen — particularly for high-value items like cars, boats, art, and jewelry where ownership is registered or documented.

Use tax enforcement against businesses is more aggressive. State sales-tax audits commonly identify out-of-state purchases on which the business should have paid use tax (office supplies from out-of-state vendors, services from out-of-state consultants, equipment from out-of-state sellers). The audit typically uses a sample-and-extrapolate methodology to estimate annual use-tax exposure.

The MTC's voluntary disclosure program allows out-of-state sellers and consumers to come into compliance with multiple states' sales-and-use-tax obligations through a single application, with limited look-back period and waiver of penalties. The program is administered by the Multistate Tax Commission for sellers; individual states run their own VDA programs as well.

State sales-tax holidays

Seventeen states offer one or more annual sales-tax holidays during which specified categories of goods are exempt from sales tax. Common categories and dates:

• Back-to-school holidays (typically late July or early August): Clothing, school supplies, computers below price caps. Texas, Florida, Massachusetts (sometimes), Ohio (now permanent), Maryland, Virginia, South Carolina, Iowa, Tennessee.
• Emergency preparedness holidays: Hurricane supplies, generators, ladders. Florida, Texas, Virginia, Alabama.
• Energy Star appliances: Florida (May).
• Firearms / hunting supplies: Mississippi, Tennessee.
• Memorial Day weekend: Texas (Energy Star + WaterSense).

The holidays are popular politically but have limited economic-policy support — Tax Foundation and similar academic studies have found that they shift the timing of purchases rather than create new economic activity, and that they introduce compliance complexity for retailers.

Drop shipping, third-party fulfillment, and inventory nexus

Drop-shipping arrangements — where the retailer takes the order, the supplier ships directly to the customer, and inventory never passes through the retailer's hands — create complex nexus questions [SC4]. The principal positions:

• The retailer has nexus in the state where the customer is located (delivery), based on economic-nexus thresholds. The retailer collects sales tax from the customer if registered.
• The drop-ship supplier may or may not have nexus in the customer's state depending on whether it has physical presence or economic-nexus thresholds met.
• If the retailer is NOT registered in the customer's state but the supplier IS, some states require the supplier to collect tax on the wholesale invoice to the retailer (treating the retailer as a final consumer). The retailer then has to claim a refund of the tax paid to the supplier when the retailer's customer pays sales tax on the same item.

The interaction is complex and varies by state. Resale certificates (the certificate the retailer provides to the supplier to claim wholesale-purchase exemption) are state-specific; an Illinois resale certificate may not be valid in California. The MTC's Uniform Sales and Use Tax Resale Certificate is accepted by 38 states for resale exemptions on multi-state purchases, but the holdouts (including California, New York, Texas) require state-specific certificates.

Fulfillment center nexus: Amazon FBA, ShipBob, Deliverr, and similar third-party logistics providers store inventory in fulfillment centers across multiple states. A seller using these services has inventory presence — and therefore physical-presence nexus — in every state where the provider stores inventory. The seller may not even know which states are involved (FBA inventory placement is determined by Amazon's algorithm). The 2018-2024 enforcement wave against unregistered FBA sellers focused on this exposure.

Compliance technology and sales-tax automation

Sales-tax compliance for multi-state sellers is intractable without automation. The compliance burden — determining the correct rate for each delivery address (often street-address-specific in some states due to special-district overlays), tracking economic-nexus crossings, filing returns in multiple states on different schedules, and maintaining exemption certificates — is the principal reason a software-automation category exists [SC6]:

• Avalara: Largest player. Real-time rate determination, returns filing automation, exemption certificate management. Enterprise-focused but with SMB tiers.
• TaxJar (now owned by Stripe): SMB-focused. Strong e-commerce platform integrations.
• Vertex: Enterprise. Strong integration with ERP systems (SAP, Oracle, Microsoft Dynamics).
• Sovos: Enterprise. International reach including VAT compliance.

These platforms typically charge per-transaction or per-state-registration. For a small business with USD 1 million in revenue across 15 states, sales-tax automation costs USD 5,000-USD 15,000 per year — substantial but materially lower than the alternative manual compliance burden.

For the broader US tax stack: the Small business tax crossover covers entity-choice and federal income tax mechanics for multi-state sellers. The Self-employed tax crossover covers Schedule C / 1099 mechanics for sole-prop sellers. The Property tax overview covers property tax interaction for sellers with warehouse or office presence. The US federal tax overview covers the federal stack.

For cross-border sellers managing USD-foreign-currency revenue and expense flows from international wholesale arrangements, WorldFirst handles the multi-currency banking layer. For 1099-NEC issuance to fulfillment partners or contractors, Tax1099 handles the e-filing workflow. The Sales tax and VAT topic hub compares US treatment with VAT/GST regimes in other jurisdictions. To find a credentialed sales-tax practitioner — multi-state compliance, nexus reviews, voluntary-disclosure-agreement work — browse the US tax-pros directory.