For most Americans, sales tax is a fact of life. Whether they buy something that costs only a few dollars, or make a major purchase (such as a new car), there’s a tax added.
Sales tax is a consumption tax levied at the state level and paid at the time of purchase. Controlled by the individual state, sales tax rates vary from 4% to 7%, although some states also allow local jurisdictions to charge an additional tax, bringing the total sales tax to 8% or more. This money is typically added to the state general fund, helping to support services and infrastructure such as schools and state roads.
Although many states exempt certain purchases from sales tax (usually necessities, such as clothing and groceries), a few states do not charge sales tax on any purchases. Instead, they may have higher tax rates in other areas, including excise or property taxes. Or, they levy additional taxes that other states don’t, such as local taxes or additional taxes in certain tourist areas. Still, in some cases, shopping in states that don’t have sales tax can save you money and help you preserve your budget.
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States That Don’t Have Sales Tax
Five U.S. states don’t have sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Again, while consumers in these states may not pay sales tax to the state on their everyday purchases, they may pay taxes to their local governments or on specific types of purchases.
In Alaska, shoppers do not pay any sales tax to the state at all. However, state laws allow municipalities to levy their own sales tax. These local sales taxes range from 2% to 7.5%, with some municipalities charging variable tax rates based on the season. Several of the state’s largest cities, including Anchorage and Fairbanks, do not charge any sales tax.
Because Alaska allows individual jurisdictions to set their own tax rates, the rules vary considerably all over the state. Cities can opt to levy taxes on alcohol, tobacco products, marijuana, raw fish, car rentals, and hotel stays. For instance, in Anchorage, visitors pay a 12% “bed tax” on their hotel stays, 8% on car rentals, and 5% on marijuana purchases. In Fairbanks, which also does not have sales tax, the bed tax rate is 8% and marijuana is 5%, but there’s no extra tax on car rentals.
Property and gas taxes also help support Alaska’s general fund. Alaska drivers pay an 8 cents per gallon tax, plus a .009 cent per gallon surcharge. Property tax rates vary by location. Cruise ship passengers are also charged a $34.50 excise tax for their visit to Alaska.
Unlike Alaska, Delaware does not allow individual jurisdictions to charge sales tax, so the sales tax rate is zero throughout the state. Delaware also does not levy a property tax.
Instead, the state is funded via the comparatively high corporate taxes, gross receipt taxes charged to retailers based on their sales, and excise taxes on items such as alcohol, fuel, and cigarettes. For example, smokers pay $2.10 in tax on every pack of cigarettes, while every gallon of fuel includes a 23 cent tax in the price.
Like Delaware, Montana does not allow local jurisdictions to levy sales taxes. However, in certain areas with low permanent populations (under 5,500 residents) that attract tourists, such as Yellowstone and Whitefish, the city can charge up to a 3% tax known as the “resort and local option tax.” This money is earmarked to support the infrastructure in those areas, such as maintaining roads.
Montana consumers also pay a tax on cigarettes. The state levies an 8.5 cent per cigarette tax, for a total of $1.70 per pack, which is included in the cost of a pack of cigarettes. All other tobacco products, with the exception of chewing tobacco, are taxed at 50% of the wholesale price. Visitors to Montana will also pay a 7% sales and use tax on lodging, and 4% on rental cars.
Montana does require residents to pay income and property taxes. All drivers also pay a 32 cent fuel tax on every gallon of gas purchased (.2945 cents for special fuel).
New Hampshire is another state that does not have a statewide sales tax and does not permit local sales taxes. However, the state charges excise taxes on certain purchases, including a 9% tax on prepared food, lodging, and rental cars. Residents also pay tax on their phone and electric service and real estate purchases, as well as tobacco, beer, and fuel.
New Hampshire residents do not pay income tax on their earned income, but are charged 5% on their earnings from interest and dividends. A significant portion of the state’s operating revenue comes from property taxes, which are some of the highest in the nation. The average homeowner pays $5,100 in property taxes, based on a rate of 2.15% on a home valued at $237,300.
Finally, Oregon does not levy a statewide sales tax, but local municipalities can charge taxes on certain goods, such as prepared food. As with other “tax-free” states, Oregon charges excise taxes on certain items as well. Cigarettes are taxed $1.33 per pack, for example, and every gallon of fuel has an additional 36 cent tax. Currently, the state also charges a lodging tax of 1.8%, which will be reduced to 1.5% on July 1, 2020.
Although Oregon residents don’t shoulder the same sales tax burden as neighboring states, they do have a relatively high personal income tax rate to fund state operations. Residents pay a progressive tax rate of 5% to 9% based on their earnings.
Is No Sales Tax Worth It?
The complexities regarding sales taxes and how they are applied begs the question of whether living in a sales-tax-free state, or traveling to a state without sales taxes to shop is really worth it.
The answer largely depends on what you are purchasing, and whether you will be required to pay sales tax to your state. For example, residents of Maine who purchase a vehicle in neighboring New Hampshire will not be charged sales tax by the NH seller. However, in order to register the vehicle in Maine, they must pay Maine’s 5.5% state sales tax, in addition to the local excise tax. Therefore, purchasing the vehicle in New Hampshire doesn’t result in any tax savings.
On the other hand, Maine only exempts groceries and certain medical supply purchases from sales tax, so traveling to tax-free New Hampshire to shop for clothing, household items, and other goods may save you a few dollars.
Likewise, it’s common for residents of states neighboring Delaware, in particular New Jersey, to head to Delaware for shopping, as the overall cost of goods is lower. In fact, Salem County, NJ, which is on the border of the two states, allows businesses to sell certain items at a reduced tax rate to encourage residents to shop in New Jersey instead of traveling to Delaware.
Ultimately, though, living in a sales-tax-free state may not save you a great deal of money overall. Not only do the states without this tax make up the tax shortfall in other areas, such as income and property taxes, but the overall cost of living in these states is at or higher than average. Therefore, if you’re considering a move to a tax-free state, consider all of the different factors that influence your total tax burden before you do.
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