Sales Tax by State: Overview

In their lifetime, the average US citizen pays a fortune in taxes. And while there are several different types of taxes, everyone is familiar with sales tax. After all, it’s printed on every receipt. Something you might not be familiar with, however, is that the rates of sales tax by state vary drastically. Moreover, in addition to state-level sales taxes, the average consumer is also obligated to pay local sales taxes, which, when combined, can add up to a quite high amount.

The report below will give you an idea of the complexity of sales taxes, to what extent state and local sales rates differ, and which consumers pay the highest (and the lowest) rates with their everyday purchases.

Sales Tax by State - The Highlights

• 45 states, including the District of Columbia, levy sales taxes.

• 38 states collect local sales taxes, which, together with the statewide rates, can reach a massive 11.45%.

• California is the state with the highest sales tax rate at 7.25%.

• Louisiana and Tennessee have the highest average combined sales tax rate of 9.55%.

• On July 1st, 2022, New Mexico reduced its sales tax rate to 5%.

• Alaska is the state with the lowest sales tax rate, amounting to 1.76%.

Sales Tax in the US by State

Sales taxes are a means to collect tax revenue. They are also vital to keeping schools, roads, and fire departments up and running. But in the land of the free and home of the brave, some states choose not to impose any sales taxes, others impose only local taxes, and the majority levy both state and local sales taxes.

As of July 1st, 2022, together with the District of Columbia, a total of 45 states have statewide sales taxes, 38 of which have combined taxes on sales. What this means is that the residents of these states pay one statewide and another local sales tax rate.

On the other end of the spectrum are the five states – Alaska, Delaware, Montana, New Hampshire, and Oregon – which do not levy sales tax rates. The exception is Alaska, where some municipal governments impose local tax rates on sales. Despite this, Alaskans pay one of the lowest tax rates for their purchases, which is not something the people of Tennessee or California can say. But again, depending on whether residents pay just the statewide sales tax rate or a combined one, the averages of the highest and lowest average vary.

Highest Sales Tax by State

The state of California currently holds the record with the highest sales tax rate at 7.25% while Indiana, Mississippi, Rhode Island, and Tennessee share the second position with the rate standing at 7%. Minnesota ranks third with 6.875%, while Nevada and New Jersey come fourth and fifth with 6.85% and 6.625%, respectively.

Arkansas, Kansas, and Washington, all of which share the same sales tax percentage by state at 6.5%, currently occupy the sixth position. And this ranking has not changed in the past couple of years.

Moreover, changes rarely happen when it comes to state-level sales tax rates. In April 2019, Utah made a decision to increase its rate from 5.95% to 6.1%, but the local rate remained unaltered. And so, the top 15 US states with the highest sales tax rates are the following:

• California (7.25%)

• Indiana, Mississippi, Rhode Island, Tennessee (7%)

• Minnesota (6.875%)

• Nevada (6.85%)

• New Jersey (6.625%)

• Arkansas, Kansas, Washington (6.5%)

• Connecticut (6.35%)

• Illinois, Massachusetts, Texas (6.25%)

Lowest Sales Tax in the US

With 2.9%, Colorado imposes the lowest rate of state-level sales tax on its residents. It is followed by Alabama, Georgia, Hawaii, New York, and Wyoming, all of which have a significantly higher rate compared to that of Colorado, standing at 4%. This pack of six is followed by Missouri with 4.225% which ranks seventh and Louisiana coming in the eight position with 4.45%. The list of top 10 with the lowest US sales tax rates by state ends with South Dakota in the ninth position with 4.50% and North Carolina with 4.75%.

What should be noted here is that although it rarely happens, some states occasionally make cuts on sales tax. The most recent one happened in July 2022 when New Mexico decided to move its rate from 5.125% to 5%. In fact, lawmakers of New Mexico say that sales tax rates will further reduce to 4.875% by July 1st, 2023. The previous cut on sales tax happened nearly five years ago when the state of Louisiana reduced the rates on sales tax from 5% to 4.45%.

State and Local Sales Tax Rates: Highest to Lowest

In addition to the base sales tax, many states also levy a local sales tax rate which, according to the latest reports, ranges from a maximum of 7.50% to as low as 0.7%. The interesting thing about it is that once the local sales tax rates are added to the equation, the landscape of the states we’ve revised above becomes very different.

Moreover, Louisiana, which is one of the states with the lowest sales tax, becomes the state with the highest combined sales tax. Indiana, on the other hand, where no local tax rates are imposed on sales, drops from the second to the 24th position. The case is similar to New Jersey and Massachusetts, which drop to the 30th and 38th position, respectively.

Highest Combined Sales Tax by State

Louisiana and Tennessee are the record holders with the highest amount of both state and local sales taxes, amounting to 9.55%. Louisiana is ahead, however, also having one of the highest maximum local rates and average local sales rates at 7% and 5.1%, respectively. The same rates in the state of Tennessee are significantly lower at 2.75% and 2.55%. The five states with the highest combined sales taxes are:

• Louisiana (9.55%)

• Tennessee (9.55%)

• Arkansas (9.47%)

• Washington (9.29%)

• Alabama (9.24%)

Lowest Combined Sales Tax Rates by State

Looking at the percentages of the combined rates, Alaska is the state that charges its residents the lowest sales tax or an average of 1.76%. However, it should also be noted that Alaska and Alabama are the states where the maximum local sales tax rates are the highest at 7.5%. But since Alaska only imposes local sales tax rates and has no state-level sales tax, with 4.44%, Hawaii would be the more logical ‘winner’ or the one with the lowest combined sales tax rate by state. The five states with the lowest combined sales taxes are:

• Hawaii (4.44%)

• Wyoming (5.36%)

• Wisconsin (5.43%)

• Maine (5.50%)

• Virginia (5.75%)

Why Sales Tax Requirements by State Differ?

The reason why every state has different requirements on sales tax is that every state has different vested interests, laws, and rules. In fact, many states choose to balance revenue between, say, income and property taxes and sales taxes. Others, like Oregon, for instance, have different requirements. In fact, Oregon does not have state or local sales tax rates but collects a significant amount from income tax (a total of 41%, to be exact), and as such, it is the state with the highest share of revenue collected from income tax.

In reality, however, many states struggle with whether to impose sales or income tax. States that opt to levy income tax are, in fact, collecting most of their revenue from wealthier citizens. Those that require the consumer to pay sales taxes but do not charge any income tax, like the state of Washington, for example, equally affect all residents, which in essence, creates a disproportionate burden on people with lower income.

Sales Taxes by State – The Bottom Line

Competition is a deviant little thing, and consumers love to take advantage of it, especially when it comes to taxation. And so, sales tax avoidance becomes a thing for consumers and businesses who live in high-tax states closely located to areas with low sales taxes.

For instance, research shows many retail businesses from Vermont purposefully move to New Hampshire just to avoid the high sales tax. Similarly, Delaware had placed a welcome sign to inform visitors it’s a tax-free shopping zone.

The moral of the story here is that governments should proceed with caution when imposing or even raising tax rates, especially on sales, because it could all backfire and leave neighboring, sales tax-free states with all the credit on revenue.

FAQs on Sales Tax Rates by State

Which state in the US has no sales tax?

Of the 50 states in the USA, only five do not levy state-level sales tax; Alaska, Delaware, Montana, New Hampshire, and Oregon. Technically, however, it’s four states because, in some areas of Alaska, consumers are charged local sales tax rates, the highest of which is 7.50%.

Which state has the highest sales tax?

At 7.25%, the residents of California currently pay the highest US sales tax by state. But given that the average and maximum local sales tax rates are significantly lower in California compared to those of other states, the states with the highest combined sales tax are Tennessee and Louisiana.

How do states without sales tax make money?

States that don’t have sales tax rely on other taxes to grow their revenue. New Hampshire, for instance, has a sizable business profits tax and business enterprise tax but also property taxes which are paid at a local level. In fact, the residents of New Hampshire pay the third-highest property tax which is around 2.2%.

Sources:

• State of Alaska

• Tax Foundation

• Tax Foundation