When it comes to business finances, knowing how taxes affect your operations can make a significant difference. While most states in the U.S. impose sales tax on goods and services, a few states have opted not to. This can influence business decisions, particularly for those operating in multiple states or considering relocation. However, it’s important to be mindful of tax laws, especially when dealing with purchases across state lines.
What is Sales Tax?
Sales tax is a consumption tax imposed by state and local governments on the sale of goods and certain services. When you purchase an item at a retail store, the store collects sales tax on behalf of the government. The sales tax rate varies widely from state to state and can even differ between cities and counties within the same state.
At the time of purchase, sales tax is added to the listed price of goods and services. For example, if a state has a 7% sales tax and you buy an item for $100, you’ll pay an additional $7 in tax, bringing your total to $107. Businesses then remit the collected tax to the appropriate tax authorities.
Sales tax primarily serves as a revenue stream for state and local governments, funding services like public education, infrastructure, law enforcement, and health services. Certain items, such as groceries, medications, and other necessities, are often exempt or taxed at a lower rate in some states.
Considerations for Businesses and Shoppers
While living or operating in a state without sales tax might seem like a financial advantage, there are a few factors to keep in mind. Many states that don’t impose sales tax may compensate through other taxes, such as higher property or income taxes. For businesses, it’s important to weigh all the tax implications of a particular location, not just the lack of sales tax.
Additionally, it’s important to avoid the misconception that purchases made in a no-sales-tax state can be taken back to a home state (where sales tax is collected) without consequence. If an item is purchased in a state without sales tax and brought back to a home state, use tax may apply. This tax is typically equal to the home state’s sales tax and ensures residents are paying the correct taxes on out-of-state purchases. Businesses need to be especially diligent about use tax when acquiring assets or goods from a state with no sales tax, as failure to comply can lead to penalties.
Which States Have No Sales Tax?
While most states have a sales tax, a few states stand out for not imposing this tax. As of 2024, five states in the U.S. do not impose a statewide sales tax. These states, also known as the “NOMAD” states – New Hampshire, Oregon, Montana, Alaska, and Delaware – offer residents and businesses the benefit of not having to pay sales tax on most goods and services, though there may be local or specialized taxes to consider.
New Hampshire has no general sales tax, though it does impose taxes on specific items like alcohol and tobacco. The state is known for its strong anti-tax sentiment, and voters have consistently opposed the introduction of both sales and income taxes. New Hampshire funds its government through property taxes and selective taxation of other goods.
Oregon has long been a state without sales tax, making it attractive for both residents and businesses. There are no additional local taxes on goods, keeping transactions straightforward and tax-free. Oregon’s revenue comes from higher income and property taxes, and the state has repeatedly rejected sales tax proposals put to voters over the years, prioritizing other forms of revenue collection.
Montana does not have a statewide sales tax, but some tourist-related businesses, such as hotels and rental car agencies, may charge local taxes. Montana has historically resisted sales tax due to its rural nature and small population. The state primarily generates revenue through natural resource extraction and higher property taxes.
Alaska does not have a state sales tax, but many local governments in Alaska can levy their own taxes, leading to varied tax rates in different areas of the state. Alaska’s reliance on oil revenues has historically allowed the state to avoid broad-based taxes like sales tax, although budget fluctuations have occasionally sparked discussions about introducing one.
Delaware is often seen as a tax-friendly state due to its lack of state and local sales taxes. This makes Delaware a popular shopping destination for nearby residents looking to avoid sales tax on large purchases. The state funds itself through other methods, such as business incorporation fees, as Delaware is a popular legal home for many large corporations, generating substantial revenue without needing to rely on sales tax.
While none of these states collect traditional sales tax, each of these states has developed alternative ways to fund public services, offering unique tax landscapes that appeal to different residents and businesses.
Key Takeaways
While the NOMAD states do not impose statewide sales taxes, each has alternative tax structures to fund public services. These states often rely on property taxes, income taxes, and taxes on natural resources or business activities. Although the absence of sales tax may seem like an advantage, it’s essential to understand the complete tax landscape before making decisions about living or doing business in these states.
If you’re looking for expert guidance on navigating tax strategies and financial planning, DHJJ’s team of experienced CPAs and business advisors is here to help. Whether you’re managing multi-state operations or seeking personal tax advice, we offer customized solutions to ensure your financial success. Contact us today to learn how we can support your business or personal financial goals.
