Sales tax can add a noticeable cost to your overall tax burden. In the United States, sales tax is imposed at the state level. While most states have sales taxes, some handful of states have no sales tax. Residing in one of the states free of sales tax can be a strategic advantage.

But before you pack your bags, read below to see the list of states that impose a sales tax and those that do not, and understand what all this means to businesses and consumers alike. We also highlight the trade-offs you can expect in these “sales-tax-free” states.

What Is Sales Tax?

A sales tax is a consumption tax imposed by the government on businesses’ sales of goods and services. Sales tax is collected at the point of sale by the seller and reported and paid to the designated government authority—usually calculated as a percentage of the purchase price. This tax is termed “indirect” as the seller is responsible for collecting and remitting it, but the financial burden ultimately falls on the consumer.

In the United States, sales tax policies are primarily determined at the state and local levels. It leads to variations in tax rates and the range of taxable goods and services across different jurisdictions. The revenue generated from sales taxes is commonly allocated to fund public services such as transportation infrastructure, education, and initiatives undertaken for public safety.

It’s important to note that not all transactions are subject to sales tax. For instance, many states exempt essential items like groceries and prescription medications to reduce the tax burden on necessities. Additionally, depending on the state’s regulations, certain services may be exempt or taxed differently.

Which US States Have No Sales Tax?

In the United States, five states do not impose a statewide sales tax:

• Alaska:

While Alaska does not have a state sales tax, many local governments levy their taxes, leading to varied rates across different areas. For example, Anchorage does not impose any taxes, but Juneau, the state capital, now charges a 5% local sales tax.

• Delaware:

Delaware does not impose a state or local sales tax but implements a gross receipts tax on specific businesses. Additionally, the state employs excise taxes, applying a fixed rate per gallon on products like motor fuel and alcohol. With comparatively high corporate income taxes and targeted taxes on particular distributors of goods and services, Delaware maintains almost nonexistent property and sales tax rates.

• Montana:

Montana has no statewide sales tax, but some localities may impose specific local taxes. These include tourist-heavy areas, which often impose a modest resort and local option tax of up to 3% on sales to help maintain infrastructure that visitors frequently use. Cities eligible for this tax must have a permanent population below 5,500, such as Red Lodge, a small town where tourism is a major contributor to the local economy.

• New Hampshire:

New Hampshire does not impose a state or local sales tax. However, an 8.5% meals and rentals tax is levied on short-term accommodations, restaurant meals, and car rentals. A timber tax, amounting to 10% of the wood’s value, is also charged at harvest, except for personal use cuts.

Local governments are also prohibited from instituting their own sales taxes, so excise taxes are applied to the sales of tobacco and electricity.

• Oregon:

Oregon does not impose a state or local sales tax. Local governments levy taxes on specific items, including tobacco and prepackaged alcoholic drinks. Certain municipalities, like Ashland, also apply sales taxes, with a 5% tax on prepared foods being one example.

While Oregon’s personal income tax rate is higher than that of other states, it does not impose taxes on intangible properties such as stock accounts and bonds.

Which US States Have the Lowest Sales Tax?

While five US states do not impose a statewide sales tax, several others maintain relatively low sales tax rates. As of 2024, the following states have notably low state sales tax rates:

• Colorado: 2.9%
• Alabama: 4%
• Georgia: 4%
• Hawaii: 4%
• New York: 4%
• Wyoming: 4%
• South Dakota: 4.2%
• Oklahoma: 4.5%
• North Carolina: 4.75%
• Missouri: 4.225%
• Louisiana: 4.45%

It’s important to note that while these states have low state-level sales tax rates, local jurisdictions within these states may impose additional sales taxes, leading to higher combined state and regional rates. For instance, Colorado has a state sales tax rate of 2.9%, but local taxes can increase the total rate paid by consumers.

Likewise, some states with higher state sales tax rates may have local jurisdictions that do not impose additional sales taxes, resulting in a lower overall tax burden in certain areas. This means that when it comes to sales tax only, it’s essential to account for both state and local tax rates to understand the total tax impact in a specific location.

What Are the Trade-Offs to Consider?

While residing or operating a business in a state without a sales tax may appear financially advantageous, it’s essential to consider several factors:

• Alternative Tax Structures: States that forgo sales tax often compensate with other forms of taxation. For instance, they may impose higher property or income taxes to generate necessary revenue for public services.
• Use Tax Obligations: Purchasing items without sales tax and bringing them into a state that imposes such taxes can trigger a use tax liability. Use tax is typically equivalent to the home state’s sales tax and ensures residents pay appropriate taxes on out-of-state purchases. Businesses must be particularly vigilant about using tax when acquiring assets or goods from states without sales tax, as non-compliance can lead to penalties.
• Comprehensive Tax Assessment: For businesses, it’s crucial to evaluate all tax implications of a particular location, not just the absence of sales tax. This includes considering property taxes, income taxes, and other local levies that may impact overall financial planning.

Additionally, businesses operating in “sales-tax-free” states should be aware of potential tax obligations in other states with a physical presence or significant sales, as they may be required to collect and remit sales taxes in those jurisdictions. These obligations are primarily determined by two types of “nexus”: economic nexus and physical presence nexus.

Economic Nexus occurs when a business’s sales activities exceed certain thresholds, obligating the company to collect and remit sales tax in that state. These thresholds vary by state and are typically based on the dollar amount of sales or the number of transactions. For example, some states, like Alaska, have set a threshold of $100,000 in sales or 200 transactions within the state.

(*Note: Effective January 1, 2025, Alaska is eliminating its 200-transaction threshold, focusing solely on a $100,000 gross sales threshold in the current or previous calendar year).

However, some states have different criteria; for instance, California’s threshold is $500,000 in sales. These thresholds can change, and businesses should stay updated on each state’s specific requirements.

On the other hand, a business establishes a physical presence nexus when it has a tangible connection to a state. This can include:

• Locations: Operating an office, warehouse, store, or any other physical place of business within the state.
• Inventory: Storing goods for sale in the state, including merchandise stored in third-party warehouses or fulfillment centers.
• Employees or Representatives: Having employees, contractors, salespeople, or installers working in the state.
• Events: Participating in trade shows, conventions, or other events where sales or orders are made.

Connection to these activities can create a physical presence nexus, obligating the business to comply with the state’s sales tax laws.

Conclusion

Overall, states without a sales tax can offer a clear financial benefit for both residents and businesses. However, the absence of a state sales tax often means that other taxes, such as use, property, or income taxes, take on a more significant role. Consumers and businesses should carefully review the complete tax picture, including local variations and additional obligations like nexus rules, before making decisions based solely on the lack of sales tax.

Frequently Asked Questions