How to Calculate US Sales Tax in 2025: A Step-by-Step Manual Guide [Different Examples]

Sales tax is a consumption tax levied on the final sale of goods and services. In the United States, sales tax laws and rates are determined at the state level. States may authorise local jurisdictions to levy an additional tax over the base sales tax rates. This leads to variation in sales tax across states and local jurisdictions. In this blog, we focus on how to calculate sales tax manually through a wide range of examples covering different sectors and states.

The Formula For Calculating US Sales Tax

In this section, we look at how to calculate sales tax manually, and how the purchase price for the end customer is determined when there is sales tax. 

Basic Sales Tax Formula

In the US, sales tax rates are determined at the state level. This serves as a base rate. Local jurisdictions within the state may be authorized to levy additional sales tax over the base rate. Therefore, all sales tax calculations should use a combined or effective rate. 

The formula for the effective sales tax rate is:

Effective Sales Tax Rate = State Sales Tax Rate + Respective Local Sales Tax Rate

Sales tax is calculated as a percentage of the product price. The formula for sales tax on purchase of a product is:

Sales Tax = Effective Sales Tax Rate (in decimals) x Product Price

Total Cost Formula

The purchase price for the buyer increases by the amount of sales tax over the product price, under the US sales tax system. The formula for total cost or purchase price for the buyer is:

Total Cost = Product Price + Sales Tax

Total Cost = Product Price + Effective Sales Tax Rate (in decimals) x Product Price

Example:

Consider the product price to be $100. The state-wide sales tax rate is 4%, while the local sales tax rate is 3%. 

Effective Sales Tax Rate = 4% + 3% = 7%

The effective sales tax rate is 7%

Sales Tax = 0.07 x $100 = $7

The sales tax on the product is $7

Total Cost = $100 + $7 = $107

The total cost to be charged from the buyer is $107.

Calculating US Sales Tax by Sector

In this section, we look at how sales tax calculation varies with each sector. We focus on four sectors - clothing, automotives, electronics, and dropshipping.

1. Clothing

The sale of clothing is taxed differently in different US states. 

1. Taxable above a certain price point: Among the states that tax clothing, clothing is often taxable only when it is sold above a price point. For example, in Massachusetts, clothing is exempt from sales tax when the price of the individual garment is below $175, but taxable when it is above $175. 

The formula for sales tax on clothing in this case would be:

Sales Tax = Sales Tax Rate (in decimal points) x (Product Price - Tax Exempt Price Limit)

2. Taxable based on use: Clothing items may be tax exempt or taxable based on their use. For example, in Massachusetts, clothing for everyday use is tax exempt while those for athletic use are taxable.

Here is an example. 

Olivia owns a clothing outlet in Massachusetts, where she primarily sells everyday clothing items. An individual clothing item is priced at $250. The sales tax rate in Massachusetts is 6.25%. As we saw earlier, clothing is taxable only when priced above $175 in this state. (Local sales tax rate has been ignored for the purpose of this calculation)

Sales Tax = 0.0625 x ($250 - $175) = 0.0625 x $75 = $ 4.69 (approx)

The sales tax to be collected will be $ 4.69.

Total Cost = $250 + $4.69 = $254.69

The total cost to be charged from the customer when this clothing item is sold is $254.69.

Businesses operating in this industry often need to manage exemptions carefully. If you’re unsure about how to manage these exemptions, consider reading about sales tax exemption certificates to ensure compliance with varying state laws.

2. Automotive (Cars)

The sale of cars are taxed differently in different states. 

1. Taxable at different rates based on price points: Some states adopt a lower tax rate when the price of the car is below a certain threshold, and a higher tax rate when the total cost of the car exceeds the threshold. For example, Connecticut levies a 6.35% for cars that cost below $50,000 and 7.75% for cars that cost $50,000 or more.

2. Taxable based on use: Vehicles received as gifts, farm vehicles, ambulances, and driver training vehicles may be tax-exempt in some states, like Connecticut. 

3. Local sales tax rates: Local jurisdictions in states, like Washington, may levy a local sales tax rate on sale of cars over the state tax rate. Other states, like Connecticut, do not levy a local sales tax.

Here is an example.

Michael owns a car dealership in Connecticut. He sells two car models – one priced at $45,000, and the other at $55,0000. The sales tax rates discussed above apply.

Sales Tax ($45,000 car) = 0.0635 x $45,000 = $2,857.5.

Sales Tax ($55,000 car) = 0.0775 x $55,000 = $4,262.5.

For the $45,000 car, the sales tax Michael must collect is $2,857.50. 

For the $55,000 car, the sales tax Michael must collect is $4,262.50.

3. Electronics

The sale of electronics and hardware goods are taxed differently in different states.

1. Tax-exempt based on use: The sale of electronics can be tax-exempt based on their intended use. For example, New York makes purchase of computer hardware tax-exempt when it is predominantly used to develop computer software for sale, and/or develop websites.

2. Local sales tax rates: Local jurisdictions may levy a local sales tax rate on sale of electronics

Here is an example.

Mary owns a computer store in New York. The price of the computer she sells is $500. She has 2 customers on this particular day. Alex is a student who wants to purchase a computer for personal and academic purposes. Robert works for a company that makes and sells software and wants a computer for work purposes. The combined sales tax rate is around 8.5%. 

Sales Tax (Alex) = 0.085 x $500 = $42.5

Sales Tax (Robert) = 0 (because the computer would be predominantly used to develop software)

Mary will collect $42.5 as sales tax from Alex. She will not collect any sales tax from Robert, but will instead ask him to provide the exemption certificate for computer hardware so that she can remain compliant to sales tax laws.

4. Dropshipping

In dropshipping, there are three parties (seller, supplier, and customer) and two transactions. The customer places an order with the seller for the product. The seller, in turn, places an order for the same product with the supplier and requests them to drop ship (directly deliver) to the customer. 

The two transactions are orders placed by customers and orders placed by seller. Often, the supplier need not collect sales tax when they are provided with an exemption certificate or resale certificate by the seller. 

Read: Which States Do Not Accept Out-of-State Resale Certificates

The collection of sales tax on drop shipping varies by state. Even within a state like Washington, there can be different scenarios like:

1. Seller does not have valid exemption certificate: When the seller does not have a valid exemption certificate or reseller permit, then the supplier must collect and remit sales tax from the customer.

2. Supplier has a nexus in the state: When the supplier has nexus in Washington, the supplier owes a wholesaling business and occupation (B&O) tax. 

3. Seller has a nexus in the state: When the seller has nexus with Washington, the seller owes retailing business and occupation (B&O) tax and must collect sales tax from the customer.

Here is an example.

Sara runs an online store in Washington. She receives an order for a product worth $100 from a customer. Sara places an order for the product with a supplier Mark and directs him to ship the product to the customer. Sara has a valid exemption certificate and sales tax nexus in Washington, where the sales tax rate is 6.5%.

Sales Tax = 0.065 x $100 = $6.5

Total Cost = $100 + $6.5 = $106.5

Sara must collect $106.5 from her customer and provide Mark with a valid exemption certificate.

Calculating US Sales Tax for Multi-State Nexus

In this section, we learn how to calculate sales tax for destination-based and origin based states. We also look at how to handle multi-state transactions. 

1. Destination-Based Tax States

In destination-based states, the relevant sales tax rate for sales tax calculation is determined by the buyer’s location. Most US states are destination-based.

For example, John runs a business in Alabama, a destination-based state. He sells his product to a customer in Connecticut for $100. The sales tax rate in Alabama and Connecticut are 4% and 6.35% respectively.

Since Alabama is a destination state, John must use the sales tax rate at the buyer’s location to calculate sales tax. The relevant sales tax rate is 6.35%.

John will thus collect $106.35 from the customer and remit sales tax of $6.35.

To understand how different states handle this process, check out this guide on physical nexus for sales tax, which explains how state tax laws vary and how nexus impacts the tax collection process.

2. Origin-Based Tax States

In origin-based states, the relevant sales tax rate for sales tax calculation is determined by the seller’s location.

For example, Liam runs a business in Arizona, an origin-based state with a state tax rate of 5.6%. When he makes a sale for $100, the sales tax to be collected is the product of the state sales tax rate and the sale price. That is: 0.056 x $100 = $5.6. 

Liam will collect $105.6 from the customer and remit $5.6 as sales tax.

3. Handling Complex Multi-State Transactions

Determining the relevant sales tax rate for sales tax calculation can become complex while dealing with multi-state transactions. The relevant sales tax rates are dependent on whether the state in which you operate business in is origin-based or destination-based. 

Another issue in dealing with multi-state transactions is determining if you have a sales tax nexus in the buyer’s state. If you do not have a sales tax nexus in the buyer’s state, then you are not required to collect and remit sales tax. The buyer would be required to pay use tax to their state under this scenario. 

Let us consider an example.

Oliver runs a business in Alabama, a destination-based state. His customers are majorly from three states - Alabama, Connecticut, and Colorado. He has a sales tax nexus in Alabama and Connecticut, but not in Colorado. 

He makes a sale of a product with $100 to three customers, one from each state. The state sales tax rates in Alabama, Connecticut, and Colorado are 4%, 6.35%, and 2.9% respectively.

Sales Tax (Alabama Customer) = 0.04 x $100 = $4

Sales Tax (Connecticut Customer) = 0.0635 x $100 = $6.35

Oliver has to collect $4 as sales tax from the Alabama customer and $6.35 as sales tax from the Connecticut customer. 

He need not collect sales tax from the Colorado customer as his business does not have a sales tax nexus in Colorado.

Applying Tax Exemptions in the US Sales Tax

Not all transactions are subject to sales tax. In this section, we will look at the common exemptions, and how businesses must handle these tax-exempt transactions.

Common Exemptions

Some transactions are exempt from sales tax due to the nature of the product or the buyer. 

• Product-wise Exemptions: Products such as prescription drugs and groceries are exempted from sales tax in most states.
• Buyer-wise Exemptions: When products are purchased by federal / state government, political subdivisions, or non-profit organizations, they may be exempt from sales tax in some US states.

Businesses collect valid exemption certificates from their buyers as proof for these tax-exempt transactions. These exemption certificates must be filed along with sales tax returns. 

Example - Exemption Certificate Use

Mary owns a computer store in New York. The price of the computer she sells is $500. The combined sales tax rate is around 8.5%. Robert visits her store to purchase a computer. He works for a company that makes and sells software and wants a computer for work purposes. 

She will not collect any sales tax from Robert, but ask him to provide a valid exemption certificate for computer hardware. In New York, sale of computer hardware for developing software predominantly is tax exempt.

Mixed Sales (Taxable and Non-Taxable Items)

In some cases, a transaction may involve multiple items, some taxable and some not taxable. In such cases, it is important to determine which item is taxable and apply sales tax only on those items. 

For example, James owns a clothing store in Massachusetts, where only clothes priced over $175 are taxable. A customer arrives at his shop and purchases 2 pieces of clothing - a dress worth $ 200 and a shirt worth $50. The sales tax rate is 6.25%.

Sales Tax (Dress) = 0.0625 x ($200 - $175) = 0.0625 x $25 = $1.5625

Total Cost (Dress) = $200 + $1.5625 = $201.5625

Sales Tax (Shirt) = 0 (since less than $175)

Total Cost (Shirt) = $50

Total Cost (Entire Purchase) = $201.5625 + $50 = $251.5625

James should collect $251.5625 from the customer and remit $1.5625 to the state of Massachusetts. 

Challenges of Manual US Sales Tax Calculations

Calculating accurate sales tax manually can be complex and challenging. Some of the common challenges businesses face are:

1. Determining Effective Sales Tax Rate

To calculate the effective sales tax rate, it is necessary to know both the state and local sales tax rates. There are around 13,000 jurisdictions in the US. Looking up state and local tax rates and determining the effective sales tax rate becomes cumbersome and error-prone.

2. Tracking Nexus Thresholds

Businesses become liable to collect and remit sales tax only when there is a sales tax nexus. It is established upon reaching certain sales tax thresholds (number of transactions or gross revenue). Therefore, a business must constantly monitor its transaction if the threshold limit is reached and a sales tax liability is introduced. The nexus rules vary across states. Hence, manually monitoring nexus thresholds can be very complex.

3. Handling Complex Transactions

As we saw earlier, transactions that involve many states and a mix of taxable and tax-exempt goods are increasingly common these days. However, manually calculation of sales tax for these transactions requires one to be constantly up-to-date with the changes in sales tax laws. Hence, calculating sales tax for these transactions is complex.

FAQs on Manual US Sales Tax Calculations

• How do I calculate multi-state US sales tax manually?

You can calculate multi-state US sales tax manually by following these steps:

1. Determine if the state where your business is located is origin or destination based.
2. Determine if you have a sales tax nexus
3. Find the relevant effective (combined) sales tax rate
4. Apply the sales tax rate on taxables products

• What happens if I calculate sales tax incorrectly?

Inaccurate sales tax calculation can invite monetary penalties from sales tax authorities. It can also erode customer trust in your business. 

Read: Sales Tax Audits and Statute of Limitations by States

Conclusion

Accurate sales tax calculations are vital for businesses to remain compliant to sales tax laws. However, manually handling these calculations is becoming complex with varying state laws, tax rates, and nexus rules. Businesses must adopt the use of sales tax automation tools and software, like Commenda, to simplify the sales tax compliance.

Book a free consultation with one of our experts to know more. 

Citations

1. Massachusetts Department of Revenue. (n.d.). Sales and use tax. Massachusetts Government. https://www.mass.gov/guides/sales-and-use-tax#:~:text=Clothing%20is%20generally%20exempt%20from,of%20the%20taxable%20%2425%20difference
2. Learn about sales tax on first time vehicle registrations | CT.gov. (n.d.). CT.gov. https://portal.ct.gov/dmv/vehicle-services/sales-tax-registrations?language=en_US
3. Exemptions for computer system hardware (Form ST-121.3). (2024, October 16). https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/exemptions_computer_hardware.htm
4. Drop shipments | Washington Department of Revenue. (n.d.-b). https://dor.wa.gov/forms-publications/publications-subject/tax-topics/drop-shipments

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