You pay the FET to the Feds. You pay sales tax to the local/state taxing authority. The sales tax is figured AFTER the FET is rolled into the price.
On a side note, let's say you build 100 lures and donate them to a fishing club as a prize or auction item. You still have to pay the FET on those lures, but in most states you wouldn't have to pay the sales tax since no "sale" has taken place.
Make sure you keep detailed records on EVERY lure you make. If the Feds decide to audit and you've purchased 10k hooks, have 1k on hand but have only paid FET on 5k lures you're going to have a problem.