States with no sales tax: What you need to know

The sales tax affects different aspects of the United States economy. The amount of sales tax affects price formation, dictating both buyer and seller behavior. Thus, the sales tax partly determines purchasing power and, at the same time, business strategies. The sales tax is also a part of the state budget. This forms a correlation between the sales tax and other state taxes. The absence of sales tax in a state can either improve or worsen the financial situation. While in some states the absence of a sales tax can make doing business easier and more profitable and life easier and cheaper for citizens, in other states it will lead to compensation from other taxes or a loss in the budget. The purpose of this article is to explore states with no sales tax and analyze how it affects the way business is conducted.

Sales tax is an indirect tax that is levied on customers when they purchase goods or services. In other words, it is an additional amount of money that must be paid when purchasing a good or service, which then goes to the state. The sales tax is usually calculated as a percentage of the purchase price – this is called the sales tax rate. If the sales tax rate is 10%, for example, and someone buys a product for $10, additional $1 of tax will be required. Although sales tax is paid by the buyer, it is the seller’s responsibility to collect and pay the tax to the state. Thus, the business is an intermediary between the buyer and the state in the matter of paying sales tax. Sales tax applies to most goods and services, but there are exceptions. For example, in some states, food, drugs, and clothing may be exempt from the tax or a reduced sales tax rate may apply.

Sales tax rates vary from state to state and even from city to city in the state. Sales tax rates vary from state to state and even from city to city in the state. This is because each state sets the sales tax rate independently of each other. An additional county or city rate may then be added to the state sales tax rate. Thus the final sales tax rate that applies to a product or service may consist of the state sales tax rate, the county sales tax rate, and the city sales tax rate together. Using California as an example, where the sales tax rate on a good or service may be 10.75%, we can see that it is made up of the state rate (7.25%), the county rate (3%), and the city rate (0.5%).

Who needs that kind of complexity when you have the option of not using sales tax in your state? States with no sales tax are Alaska, Delaware, Montana, New Hampshire, Oregon. By the way, some local governments in Alaska apply the sales tax rate. It turns out there are still some nuances and differences between states without sales tax. Below I will summarize the tax policy of each state and the main reasons why the state does not apply sales tax.

• Alaska is a unique state when it comes to taxation. More than 100 municipalities in the state of Alaska apply a sales tax rate ranging from 1% to 7%. Interestingly, however, the state itself did opt out of the sales tax. The reason for this may have been due to several factors at once. In addition to the obvious factor of the need to stimulate business development in Alaska, I can emphasize two more – historical and geographical. First, Alaska was the last state to join the United States, which influenced the independent development of the economy in this state. The sales tax waiver may have been part of this independent state policy. Second, Alaska derives its revenue from oil, which reduces tax collection. In Alaska, a sales tax cannot be authorized unless a majority of the voters approves it.
• Delaware also does not apply sales tax. As of 2018, Delaware businesses that sell goods or services to other states are required to collect and remit sales tax to those states where it applies. Delaware residents purchasing goods or services online are generally not obligated to pay sales tax to other states, except for specific cases like airline tickets, which are subject to federal tax. Additionally, renting a car or home in a state with a sales tax will incur that tax, even if the transaction is completed online from Delaware.
• New Hampshire compensates for not having a sales tax with a higher property tax. New Hampshire retailers must now comply with demands for customer information and tax payments. Since 2018, other states may require New Hampshire companies to register, collect and remit out-of-state sales tax if they meet those states’ threshold. New Hampshire residents generally do not pay sales tax on online purchases, exceptions exist, such as federal tax on airline tickets. Local taxes may also apply when renting a hotel or car in another state, even if booked online from New Hampshire.
• Montana offset the lack of sales tax by other taxes such as property tax, income tax and excise taxes. Montana resale businesses can use the Montana Business Registry Resale Certificate service to send resale certificates to vendors, allowing sellers to exempt transactions from state sales or use tax. However, sellers are not obligated to accept certificates generated through this service, and some states may require a state-specific form or additional information. As of 2018, Montana businesses also need to collect and remit sales tax on sales to out-of-state consumers. The rules for Montana are the same as for Delaware and New Hampshire.
• Oregon is a state that has opted out of the sales tax. Oregon has one of the highest income tax rates in the country. As of 2018, Oregon is subject to the same sales tax rules listed above as Delaware, New Hampshire and Montana.

Historical and political context aside, states that have not implemented a sales tax all states have in common is a desire to encourage business and commerce in the state. The lack of a sales tax makes the state more attractive for starting and operating a business. The money the companies saves can be reinvested into their growth. This in turn creates additional jobs in the state. It also removes the bureaucratic burden in the state. However, is doing business in these states worth its pros, or could the cons outweigh the benefits? Consider this in detail.

The obvious benefit of no state sales tax is the attraction to buyers and tourists from other states. Therefore, the very absence of sales tax is a potential increase in customers. Price regulation for businesses becomes easier because there is no additional fact affecting pricing. For example, the price of the same product can be priced differently in different states, because the customer will end up paying the same amount of money due to sales tax. Conversely, the price can be the same for all states, but the demand for the product will differ depending on the sales tax. Not having a sales tax is a significant advantage for online sellers. In the modern world of e-commerce, it helps to increase sales due to the ability to offer goods without additional tax charges. In addition, a definite benefit of no sales tax is the lack of bureaucracy involved. The absence of sales tax makes accounting easier. Businesses do not need to collect, monitor and remit sales tax, reducing the risk of reporting errors and simplifying financial management. It also makes it easier for e-commerce sellers to do business as it makes it easier to sell goods across the US country. The business environment in states without sales tax attracts investors, which then boosts business development.

Of the disadvantages of doing business in a state without a sales tax, the most obvious has been previously noted – offset by other taxes. Since the state’s budget is formed mainly by taxes, the lack of revenue from one of them has to be covered somehow. Therefore, the state is faced with the choice of raising other taxes, cutting the state budget or, if possible, compensating with other revenues. However, using the example of Alaska, which has oil income, we can conclude that this kind of income forms an unhealthy dependence. Businesses may experience higher rates of income tax, property tax and excise tax, which increases the total cost to the company. At the same time, the state budget deficit affects the development of infrastructures, public services and education, finally affecting the quality of life of both the entrepreneurs themselves and the purchasing power of their customers. The budget deficit also affects the ability to subsidize enterprises and to issue grants, which can slow down the development of small and medium-sized businesses. There is a lack of assistance from the government, which could be directed to the introduction of innovations and business expansion. There is also a paradox: the undeniable disadvantage of not having a sales tax is the risk of imposing one. This can create a need for rapid adaptation to new tax politics.

In conclusion, while states without a sales tax have obvious advantages, such as attracting business investment, simplifying pricing strategies and reducing regulatory complexity, they also face significant challenges. The absence of a sales tax often results in higher taxes in other areas, potential budget deficits, and dependence on alternative revenue sources. This trade-off can impact infrastructure, public services and overall economic stability. Businesses need to carefully weigh the benefits of operating in these states against the potential drawbacks, including the risk of future tax changes and the need to make up for state revenue short.