Which States Have the Lowest Sales Tax?

Sales tax might not be the most exhilarating topic, but it’s a crucial aspect of running a successful business that can’t be ignored. 

The rate of sales tax varies from state to state, with some states having no sales tax at all while others have rates as high as 10% or more. 

This can also apply to local municipalities, resulting in varying rates even within one state. So, keeping your sanity intact while complying with varying rates across states is no small feat! 

Whether you’re a budding ecommerce entrepreneur or a seasoned business owner, doola Bookkeeping can help you manage sales tax obligations without drowning in the sea of paperwork. 

But fear not! In this comprehensive guide, we’ll demystify sales tax — strip away the jargon — and provide you with everything you need to know to run your business with confidence. 

From understanding what goods and services are taxable to tips on managing reporting requirements efficiently, let’s dive in and turn those pesky numbers into opportunities for growth!

Understanding How Sales Tax Works

Businesses need to understand how sales tax works because failure to comply with sales tax regulations can result in penalties and fines from the government. 

Sales tax is a consumption tax levied by the government on the sale of goods and services. It is usually a percentage added to the purchase price and collected by the seller at the point of sale.

This means that regardless of whether your business sells products or services, you may be required to collect and remit sales taxes.

Once collected, these taxes must then be remitted to state authorities. However, the specific rate of sales tax varies depending on the state and the type of product or service being sold.

This typically involves registering for a Sales Tax Permit with your state’s department of taxation or revenue agency and then charging customers based on their location’s applicable tax rate. 

However, things can get more complicated when dealing with online transactions and interstate transactions, where different states may have varying rules regarding ecommerce sales taxes.

How Does Sales Tax Affect Ecommerce Businesses?

Collecting sales tax is relatively straightforward for traditional brick-and-mortar stores. You charge the customer the applicable rate and remit that amount to the appropriate jurisdiction. 

However, for ecommerce businesses that may have customers scattered across multiple states or even countries, things get much more complicated.

Up until recent years, ecommerce businesses without a physical presence or nexus in a particular state were not obligated to collect sales tax. 

This meant that many online retailers could avoid charging sales tax, leading to more savings for consumers. However, this created an unlevel playing field for traditional businesses.

However, with the Supreme Court ruling in South Dakota v. Wayfair in 2018, states now require out-of-state sellers without a physical presence in their state to collect and remit sales taxes. 

So, even small-scale online businesses must now comply with collecting and remitting sales taxes when meeting these thresholds set by individual states.

This creates a significant burden for ecommerce businesses, which must navigate complex state-by-state regulations and track various rates and exemptions for each sale. 

Also, ecommerce businesses must take into account how and when they will be collecting sales tax from customers who may reside in other states.

States With the Lowest Sales Tax Rates

Knowing the states with the lowest sales tax rates can help you, as a business owner, make informed decisions about where to establish your business or expand into new markets.

Here are some states with the lowest sales tax rate, which can significantly impact a business’s operations and profitability.

🗺️ Alaska 

While Alaska may not necessarily be known for its low taxes, it is one of the few states that does not have a statewide sales tax. 

This means that businesses in Alaska do not have to collect or remit any sales tax to the state government. 

However, local municipalities in Alaska may impose their own local option sales taxes, which are 1.82%, significantly lower than other states’ rates.

🗺️ Delaware

Delaware is another state without a statewide sales tax. This business-friendly state has no retail sales tax or personal property taxes imposed at either the state or local levels. 

However, the state has relatively high corporate income taxes and imposes additional taxation to continue these benefits to businesses.

🗺️ Montana

Montana also has no statewide sales tax, making it attractive to businesses and individuals seeking lower costs of living. 

However, some resort towns may impose their local option taxes of up to 3% on specific goods and services to support infrastructure frequented by tourists.

🗺️ New Hampshire

Another state with no statewide sales tax is New Hampshire; however, there is a slight catch: They do have an 8.5% meals and rooms (rental cars) levy in effect instead. 

However, unlike traditional sales taxes, this levy does not apply to most goods sold at retail establishments.

🗺️ Oregon

Like Alaska and New Hampshire, Oregon has no statewide sales tax. However, it does impose an excise called “Transient Lodgings,” which applies only to hotels and temporary lodging accommodations.

However, some municipalities impose taxes on certain goods, such as Ashland’s 5% tax on prepared foods.

States with relatively low sales tax rates, ranging from 2% to 5%:

🗺️ Alabama (4%)

🗺️ Colorado (2.9%)

🗺️ Georgia (4%)

🗺️ Hawaii (4%)

🗺️ Louisiana (4.45%)

🗺️ Missouri (4.23%)

🗺️ New York (4%)

🗺️ North Carolina (4.75%)

🗺️ Oklahoma (4.5%)

🗺️ South Dakota (4.2%)

🗺️ Wyoming (4%)

Benefits of Operating in the Low-Sales-Tax States

Now, let’s understand the advantages of operating in low-sales-tax states:

Reduced Expenses & Improved Profitability

One of the main advantages of operating in a low-sales-tax state is that it can lead to significant cost savings for businesses. By choosing to operate in a state with a lower sales tax rate, businesses can immediately reduce their expenses and increase their profitability.

With lower sales tax rates, consumers may feel more inclined to make purchases because they know they won’t be taxed at such a high rate. 

This can also attract shoppers from surrounding states who want to take advantage of the lower taxes while making purchases in bulk.

Reduced Administrative Burdens

Furthermore, by choosing a state with lower sales tax rates, you may be able to access other types of tax incentives or exemptions offered by those states. 

For example, some low-sales-tax states offer favorable income or property tax policies for businesses, providing even more opportunities to save money.

Moreover, this reduces administrative burdens since businesses won’t have to manage, update, or revise their sales tax procedures, which saves time and resources. This can lead to smoother operations and less time spent on compliance, allowing businesses to focus on their core activities.

For these reasons, it is no surprise that many companies choose to set up shop in these states and reap the benefits they have to offer.

Low-Sales-Tax States vs No-Sales-Tax States

When it comes to sales tax, a few states in the U.S. stand out for having either low or no sales tax at all. 

One significant difference between low-sales-tax states and no-sales-tax states is the way their economies are structured. 

Low-sales-tax states often rely on sales tax as one of their primary sources of revenue, while no-sales-tax states have alternative sources to fund government programs and services. This means that businesses operating in no-sales-tax states may not necessarily face higher overall tax burdens compared to those in low-sales-tax states.

In terms of compliance costs for businesses, operations within low- or no-sales-tax-states bring different challenges as well. 

Businesses operating solely within a single low-sales-tax state need only worry about collecting and remitting one set of rates based on where they operate physically or virtually. In contrast, businesses located within no-sales-tax states do not have to deal with sales tax compliance at all. 

However, for businesses that operate in multiple states, the complexity of managing and complying with various tax rates and regulations can be a significant burden.

It is worth noting that the absence of state-level sales tax does not mean businesses are entirely free from taxes in these no-sales-tax states. 

Many municipalities within these states may impose their own sales tax on specific goods or services, which businesses operating in those areas must also consider.

Take Care of All Your Sales Tax Obligations With doola Bookkeeping

When running a business, many obligations and responsibilities need to be taken care of, one of which is sales tax. This is where doola Bookkeeping software and services come in handy. 

Our comprehensive bookkeeping solutions and dedicated services can handle all your sales tax obligations and keep you compliant.

Our software accurately tracks your business transactions, ensuring that you are charging the correct amount of taxes on each transaction. This eliminates the risk of miscalculating taxes and ensures compliance with state laws by automatically filling out the necessary forms. 

In addition, you also get expert support from our dedicated bookkeepers and accountants, who are readily available to answer your questions or guide you on how to manage your sales tax obligations.

Book a demo today to say goodbye to the hassle of sales taxes with doola!