What is a sales tax deduction?

Paying taxes can be complicated for many business owners, from figuring out how to properly file your taxes to identifying which and what items would help you legally reduce your tax obligations with the Internal Revenue Service (IRS). One way is to arm yourself with knowledge of eligible tax deductions, such as state and local tax deductions, which include sales tax deductions.

In this article, we will discuss essential points on the deductibility of sales tax deductions, how it works, and when you can legally use such deductions to lower your income tax payable.

Understanding tax deductions

In the Form 1040, US taxpayers use to file an income tax return, the Schedule A attachment lists the itemized deductions you can claim to lower your income tax liability, which includes:

1. Medical and dental expenses
2. Taxes paid
3. Interests paid
4. Charitable gifts
5. Casualty and theft losses from federally declared disasters

Compared to the flat rate amount of standard tax deductions, itemized deductions allows taxpayers to claim a certain amount as tax deductions (for example, you can only deduct medical and dental expenses that exceed 7.5% of your adjusted gross income or mortgage interest on the first $750,000 debt of your primary or secondary home).

In the case of line item 5 of Form 1040 Schedule A, taxes paid as deductible items include:

1. State and local income taxes or general sales tax
2. State and local real estate taxes
3. State and local personal property taxes

It is important to remember that in the case of the first item: state and local income taxes or general sales tax, you can only elect to claim either state or local income tax or state and local sales tax, but not both at the same time per taxable year.

What is a sales tax deduction?

Before we discuss sales tax deduction, it is first important to know what sales tax is. A sales tax is a tax imposed on the sale of goods or services as a percentage of the total purchase amount. Sales tax can be considered a form of indirect tax, where retailers collect the tax from consumers at the time of purchase and then remit the collected amount to the state and local governments.

When sales tax is collected by the retailers or sellers and remitted to the local government, the sales taxes paid qualify as allowable itemized deductions as state and local sales tax on your Form 1040.

It is important to remember, however, that all SALT deductions or state and local tax deductions are capped at $10,000, including sales tax.

How does a sales tax deduction work?

A sales tax deduction is a qualified itemized deduction that reduces a taxpayer’s tax liability in the State and Local Taxes paid section, instead of a state and local income tax. When your sales taxes paid are higher than your state income taxes, taking advantage of the sales tax deductions is beneficial when seeking tax relief and larger take-home pay, especially those looking for debt relief programs.

Your sales tax deduction is computed based on the sales tax paid on purchases made from a state that imposes a sales tax, and rates can also vary from state to state. If you have a hard time identifying how much state and local sales tax deduction you can claim, the IRS helps taxpayers determine the estimated amount of this deduction through the IRS Sales Tax Deduction Calculator. This sales tax deduction calculator asks specific questions, like:

1. The tax year you want to determine your sales tax deduction
2. Your filing status for that year
3. The number of your dependents
4. Your big purchases and taxes paid for that year
5. Your residence zip code

The amount appearing at the end of the calculator will total the sales tax paid for your indicated purchases for the year, together with the state and local taxes due based on your indicated residence.

Software systems play a crucial role in managing large datasets. Just as ERP software for steel industry is invaluable, there are also ERP systems that help business owners track sales taxes paid, which they can use as a reference and support for sales tax filing and deduction.

Example of sales tax deduction

As an additional cost to your purchase, sales tax is calculated as a percentage of the purchase price of the item or service, and is collected by the seller. Here is an example:

Let’s say you purchased a bulk of $1,500 worth of taxable custom t-shirts for your small business in California, which has the highest sales tax in all US states, at 7.25%. This means that you’ll be paying an additional $108.75 on top of the $1,500 purchase price for the custom t-shirt because of the sales tax California imposes.

Depending on the district or county, you may also have to pay additional taxes on other district or local sales charges on top of the statewide sales tax, which can range from 0.10% to 1.50% in California.

Jesse Hanson, Content Manager at Online Solitaire & World of Card Games, says, “Not all products and services within a state that imposes sales tax have sales tax. Some categories, such as food and medicines, aren’t imposed with sales tax, and the categories and types vary by each state.”

Who qualifies for a sales tax deduction?

A US taxpayer can qualify to claim a sales tax deduction, provided that:

1. A taxpayer chooses itemized deductions versus the flat-rate standard deduction.
2. This choice is explicitly indicated in Schedule A of Itemized Deductions of Form 1040 by ticking the box beside Item 5a to identify that you’re claiming a state and local sales tax, and not a state income tax deduction.
3. If a taxpayer resides in a state that doesn’t impose state income taxes, such as Nevada or Florida.

Kathryn MacDonell, CEO at Trilby Misso Lawyers, says, “While most states have sales tax, a few states don’t impose it, including Alaska, Delaware, Montana, New Hampshire, and Oregon. For taxpayers with transactions in these states who prefer to keep their actual receipts (for itemized deduction purposes or legal and sales tax audits), you can do away with receipts from these states for sales tax deduction computation.”

How to claim sales tax deductions

Here’s a step-by-step procedure on how to decide and claim your sales tax deduction:

1. Decide whether to itemize: Before claiming your sales tax deduction, you need first to decide which income tax deduction method is going to give you the most tax breaks.

   For perspective, in 2025, the IRS has increased the standard deduction to $15,000 from $14,600 in 2024 for taxpayers filing individually or for those married filing separately. However, this method does not allow you to claim any SALT deduction, including sales tax. If you want to claim your sales tax as a qualified deduction, you need to assess whether your total itemized deductions would be more than what you would receive as standard deductions (or $15,000 for 2025) to minimize your income tax liability.

2. Fill out your Form 1040 and Schedule A: You would not need the Schedule A when you opt for standard deductions, but with itemized deductions, you would need to fill out all items of Schedule A as itemized deductions, and keep receipts and documents of the amounts as support.

3. Use the IRS calculator: Keeping receipts isn’t everyone’s cup of tea, but that doesn’t mean the lack thereof disqualifies you from a sales tax deduction. As an alternative, taxpayers can use the IRS sales tax deduction calculator as an estimate of their sales tax deductions, including their other state and local taxes that they can claim as deductions. You can also add the actual sales tax of big-ticket items you bought for a taxable year (of which you have kept receipts of) as additional sales tax deductions.

Perspective on sales tax deductions

If you’re still on edge about whether or not to claim sales tax deductions, here’s some perspective on claiming this deduction:

1. Sales tax deductions, SALT deductions, or itemized deductions, in general, aren’t always the most popular choice for most taxpayers because itemizing deductions generally takes longer and requires a lot of effort and time when it comes to keeping track of your year’s purchases and expenses.

2. As with any itemized deductions, SALT deductions, which include sales tax deductions, are capped at $10,000 (and $5,000 for married individuals filing separately), thanks to the Tax Cuts and Jobs Act enacted in December 2017 for the years 2018 to 2025.

   There was no limit to the SALT deductions before this act, the change of which prompted most taxpayers to prefer standard deductions over itemized deductions.

3. Ian Gardner, Director of Sales and Business Development at CPA software Sigma Tax Pro, says, “Check where you live. If your state imposes high state income taxes or if you’ve earned higher gross income for the year, it would make more sense to opt for state and local income taxes as SALT deductions instead of sales tax. On the other hand, if you live in a state where there is no state income tax, then sales tax deduction would be the better choice.”

Conclusion

It makes sense for taxpayers to exhaust all legal and available remedies to reduce tax obligations and have more take home pay. Sales tax deductions offer one of the best ways of reducing your income tax liabilities, especially if you have big ticket purchases in states that impose sales taxes in a taxable year. Learn more about how to maximize small business tax deductions and other tax tips for small businesses.

If you find you need help keeping track of sales and expenses – and complying with all of the sales tax collection and record keeping requirements – then you should consider a tax compliance software. You can sign up for a Quaderno free trial today.