What is Sales Tax?

If you are a business owner, manager or decision-maker, it is in your interest to understand the nuances of your state’s sales tax laws (or lack thereof). Sales tax is often referenced in mainstream media yet rarely explained. Nearly every state collects sales tax, typically between 4% and 10%.

The purpose of collecting sales tax is to generate revenue for government services. However, the fact that five states do not collect sales tax presents an opportunity for those living in and near those jurisdictions to buy items and services without paying a penny in sales tax. However, those who buy products and services in states that collect sales tax pay at the point of sale. The retailer then passes on the collected sales tax dollars to the state government.

Which States Don’t Have Sales Tax?

If you detest the idea of paying sales tax to the government for simply purchasing goods and services, you are not alone. Those who live in the vicinity of the five states that sell items/services tax free and plan on spending a significant amount of money, should recognize that it is in their interest to consider making a shopping trip to a sales tax-free state.

The states with no sales tax are as follows:

-Alaska

-Delaware

-Montana

-New Hampshire

-Oregon

Below, we provide an in-depth look at each of these states with no sales tax.

Alaska

Alaska is unique in that it does not have a sales tax or personal income tax. The state’s minimization of taxes is largely the result of revenue stemming from petroleum. In fact, Alaskans receive a universal basic income each year thanks to the jurisdiction’s petroleum wealth. However, we would be remiss to gloss over the fact that Alaska empowers local municipalities and boroughs to collect sales tax up to 7%. As an example, Alaska’s capital of Juneau rakes in 5% sales tax, yet the city of Anchorage does not have sales tax.

Delaware

Delaware, the most popular state to incorporate businesses, is revered for its economically-friendly tax laws and minimal bureaucratic regulation. Delaware lawmakers intentionally wrote the state’s laws to attract businesses as well as consumers from nearby New England states. As an example, Pennsylvania and New Jersey have sales tax that often drives residents of those states to Delaware for tax-free shopping.

More than one-third of Delaware tax revenue is generated from corporate taxes from out of state corporations that register their enterprises in the business-friendly state of Delaware. It must be noted that Delaware has a nearly 2% gross receipts tax on business income along with a nearly 4% car purchase registration fee.

Montana

Montana is one of the freest states in the country partially because it does not have state sales tax. The “Treasure State” offsets the lost revenue through state income taxes along with taxes collected on the sale of its plentiful natural resources. However, the state does collect local sales tax on specific transactions, such as automobile rentals and hotel accommodations.

New Hampshire

New Hampshire does not have an overarching state sales tax or any personal income tax. The state rakes in revenue through taxes on property owners. Landlords pass on their tax burden to renters through increases in monthly rent. New Hampshire has a nearly 10% sales tax rate on auto rentals, hotel stays and prepared meals. Moreover, the New Hampshire government makes money through taxes on electricity, alcohol, tobacco in the form of cigarettes and gas.

Oregon

Oregon’s zero sales tax stance is possible thanks to its elevated state income tax. Though Oregon lawmakers often debate whether it is prudent to add a sales tax to goods and services purchased within state boundaries, the proposed changes have not been enacted into law. Some local governments have taxes on certain purchases such as prepared meals and hotel lodgings. Moreover, the state has taxes on telecommunications, alcohol sales and lodging that are ultimately paid by everyday people in the form of increased costs.

Physical Presence Nexus

Those who work in the legal industry sometimes reference the physical presence nexus yet most laymen understandably have no idea what this legalese means. In plain terms, physical presence in the context of taxation law indicates there is an obligation to collect sales tax in the state. A physical presence within a state’s boundaries creates the nexus. Even delivering goods to another state with the use of one’s personal automobile has the potential to create a physical presence nexus.

Economic Presence Nexus

As a business owner or manager, it is in your interest to understand the nuances of economic nexus presence laws, especially if your enterprise is headquartered in one of the states with no sales tax. Economic presence nexus refers to a business’s presence in a state within the United States that requires a seller that is located in a different state to collect sales tax in the jurisdiction where sales occur.

Economic nexus laws are on the books in the 45 states that have a sales tax in addition to Alaska’s local municipalities that enforce sales tax collection, the District of Columbia and even Puerto Rico. However, this nexus is not triggered until a specific number of transactions are logged or when other sales criteria are met.

Thankfully, efforts have been made to reduce the financial burden of the economic nexus on business owners that sell remotely. Each state provides specific exceptions for enterprises that sell below a specific sales figure. Each state’s economic nexus threshold is unique.

As an example, the economic nexus threshold in Illinois is $100,000 in aggregate gross receipts, or, alternatively, 200 distinct transactions within the current or prior year. The threshold in California is half a million dollars of the aggregate sale of personal property delivered to California within the current or preceding 365 days.

Have a question on sales tax? Contact Aaron Giles, Agile Consulting Group, Norcross, Georgia