The statewide sales tax is applicable in 45 states, including the District of Columbia, and 38 of these states impose additional city, county, and municipality taxes onto the state tax. There are only five states that do not impose sales tax at the state level: Alaska, Delaware, Montana, New Hampshire, and Oregon. These states can be considered business-friendly since the no sales tax rule brings in more customers to make purchases that generate revenue.
However, the state governments have to make revenue in another way through other forms of taxes. Each of these states imposes different forms of taxes, including income taxes, excise taxes, and local sales taxes. For example, while Montana has no state sales taxes, it imposes a low sales tax rate (resort and local option tax) of up to 3% on tourists visiting its resorts.
Here's everything a seller needs to know about the relevant tax laws in the five states without sales tax.
5 Tax-Friendly States for Sellers Without Sales Tax
Alaska does not impose a state-level sales tax. However, its local governments have the authority to levy sales taxes on some goods and services. The local sales tax rates of up to 7.5% can approximate or exceed most state-level taxes.
It also imposes taxes on income earned by businesses reaching up to 9.4%. Other taxes include accumulated earnings tax, alternative tax on capital gains, and personal holding company tax. In addition, dealers of alcoholic beverages are charged a flat rate.
Delaware has no state or local sales taxes but has other taxes to compensate for the lack of sales tax revenue. Businesses are liable to pay a high state corporate income tax rate of 8.7%, which is almost close to the highest rate in the country of 11.55% in New Jersey. In addition, sellers of goods and services are assessed for their gross receipts taxes, which range from 0.945% to 0.7468%. There are also excise taxes imposed on a variety of goods such as alcohol, tobacco, and fuel.
Montana is a fairly tax-friendly state with a 0% state sales tax and low property taxes. However, it charges a resort and local option tax, a type of low sales tax for those visiting Whitefish, Red Lodge, Big Sky, and West Yellowstone. Selling certain goods or services also attracts excise taxes such as alcohol (beer-$9.74 per gallon and wine $1.06 per gallon) and cigarettes ($1.74 per pack).
Sellers who handle prepared meals in hotels, restaurants, car rentals, and short-term rentals have to collect a meal and room sales tax of 8.5%. This was reduced from the previous rate of 9% as of October 1, 2021.
The state largely generates its revenues from its excise taxes on goods such as gas (22.2 cents per gallon) and cigarettes ($1.78 per pack). New Hampshire is one of the states with the lowest liquor taxes below 1$ per gallon. Businesses also have to pay a business profit tax (BFT) of 7.6% and business enterprise tax (BET) of 0.55%.
According to the MoneyGeek report, Oregon scores a C grade on tax friendliness and ranks 36 out of 51 states in overall tax burden. The state may not impose a state sales tax, but its municipalities such as Ashland impose a food and beverage tax of 5%. Further, it charges a state corporate income tax rate of 7.6% plus excise taxes on a variety of goods. A pack of cigarettes costs $1.33 per pack, and a gallon of gasoline is 36.82 cents.
Knowing the important basics about the tax systems in these states will help a business run its operations without hiccups. It's also beneficial to know which states impose hefty sales tax rates that leave a huge dent in a business's income.
5 States With the Highest State and Local Sales Taxes
- Louisiana - 9.55%
- Tennessee - 9.547%
- Arkansas - 9.48%
- Washington - 9.29%
- Alabama - 9.22%
5 States With the Highest State Tax Rates
- California - 7.25 %
- Indiana - 7%
- Mississippi -7%
- Tennessee - 7%
- Rhode Island - 7%
Learn More About These Tax-Friendly States
In general, no state is completely without taxes as the state government needs funds to manage projects. The five states without sales taxes have other taxes such as corporate income tax to offset revenue gaps. Depending on a business's location, a seller could end up with a low or high tax bill.
At Sales Tax Helper, we offer business consulting, audit defense, and litigation services for sales tax matters in multiple states. If you're planning to set up base in any of the states, you can schedule a free 30-minute call with us to get answers to any questions you have.