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Sales tax by state varies in rates – Where state sales tax may be less

4 min read

4 min read

Each state in America is free to set its own tax policy, and, therefore, differences exist between state in regards to sales tax. With this autonomy, states and local municipalities can choose the types of taxes and the tax rate they impose.

While H&R Block is in the business of helping taxpayers with their income taxes, we can also give you an overview of state sales taxes. In this post, we’ll cover the basics of sales tax – including what it is, what it pays for, how it’s calculated, states without sales tax, lowest sales tax states, and general state sales tax rates. Read on as we share the details.

What is state sales tax?

First, we’ll answer, “what is state sales tax?” State sales tax is imposed by state and local governments a on certain retail transactions and services. The seller of the goods and services collects sales tax from a consumer when the purchase is made. This requires many businesses to collect sales tax and register for a specific sales tax permit from a state agency.

States create their own rules around sales tax, and each state can choose specific sales tax exemptions. In some states there is no sales tax on specific purchases like education, food/beverage, medical purchases, prescriptions, apparel, and more. For example, there is no sales tax on clothing in Minnesota. In some states and local municipalities, sales tax-free weekends or weeks are held. This is common during back-to-school times.

Additionally, some counties and cities/municipalities impose additional surtaxes for the sale of specific goods and services.

What does state sales tax pay for?

Sales tax pays for a number of state-related services and programs, including primary and secondary education, state-funded health insurance and social services, transportation, public assistance programs, recreation, police and fire services, public pensions and retirement funds, and more.

How is state sales tax calculated?

State sales tax is determined by multiplying the final purchase price of a good by the established sales tax rate.  That said, there will never be a fixed amount you’ll pay for sales tax. The amount in sales tax you owe is required to appear on a receipt or sales transaction report.

States without sales tax

Let’s get to the good news – the states without sales tax at a state level are:

  • Alaska – The state doesn’t impose sales tax, but local municipalities may.
  • Delaware – Delaware imposes a gross receipts tax on the seller of goods (tangible or otherwise) or provider of services in the state.
  • Montana
  • New Hampshire – Local governments are barred from sales tax, yet the state imposes other taxes like restaurant, hotel, rental car, and phone services tax.
  • Oregon

To generate state revenue, each of the states listed above collects money from other areas, like tourism tax, phone services, gasoline, tobacco, alcohol, or property taxes.

State sales tax rates 

Most states impose a sales tax. Here are the lowest and highest state sales tax rates at the state level as of 2021:

Highest sales tax states:

  • California: 7.25%
  • Indiana: 7%
  • Mississippi: 7%
  • Rhode Island: 7%
  • Tennessee: 7%

Lowest sales tax states:

  • Alaska: 0%
  • Delaware: 0%
  • Montana: 0%
  • New Hampshire: 0%
  • Oregon: 0%

 (Source: Tax Foundation)

Online sales taxation

Controversy exists around collecting sales tax from online purchases. According to tax law, a business collects sales tax in a state where the business has a physical presence (nexus); if the business doesn’t have a physical presence, states may require the business to collect sales tax if certain conditions are met. So, if a Florida business has a transaction with a Florida resident, they can collect sales tax. But a Florida business needs to check rules from other states to determine if it must collect sales tax from an out-of-state resident.

More help with taxes

While we don’t specifically focus on sales tax expertise, H&R Block tax pros are well versed in federal and state income tax preparation. With thousands of office locations and other online filing options, you can file taxes the way that works for you. Any way you crack it, we’ll always give you the max refund, guaranteed.

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