Sales tax is a tax paid on certain goods and services purchased in stores, online, by telephone, or through catalogs. While most states levy sales taxes, there are few states with no sales tax whatsoever. Additionally, Alaska allows localities to collect sales tax but does not impose it at the state level. Understanding which states do not have sales tax can help consumers make major purchases wisely and assist businesses with sales tax compliance.
Overview of Sales Tax in the United States
Forty-five U.S. states plus Washington D.C. impose some form of statewide sales tax. Rates range from 2.9% in Colorado to 7.25% in California. State and local sales taxes combined create average total burdens between 6-9% nationwide.
Five states stand out for not having any state-level sales taxes:
- Alaska
- Delaware
- Montana
- New Hampshire
- Oregon
However, some local jurisdictions within these states may still impose sales taxes.
States With No Sales Tax
Let’s take a closer look at the states with no conventional statewide sales tax and their respective policies.
Alaska
While Alaska has no standard statewide sales tax, it allows cities and boroughs to enact local sales taxes if their residents approve it through election.
For example, Anchorage has a sales tax of 8.5%, the highest local rate in Alaska. Juneau also imposes sales tax around 5%, as do a few other Alaskan cities.
In areas of Alaska without a borough or city sales tax, retail purchases would not be subject to any sales tax. This includes popular tourist towns like Seward.
Remote sellers making deliveries into Alaska only need to charge sales tax for orders bound for areas with local sales tax in effect. Alaska does not have an economic nexus law requiring collection on all shipments into the state.
Delaware
Delaware is one of five states with no statewide or local sales taxes. Despite allowing local income taxes, Delaware has never imposed any form of general retail sales or use tax.
However, Delaware does levy selective sales taxes on specific goods like lodging, restaurant meals, and utility service. Some business inputs may incur use tax as well. But general consumer retail purchases are sales tax free.
The lack of sales tax makes Delaware an attractive destination for shoppers from nearby high-tax states like New Jersey, Pennsylvania, Maryland, and New York. Major shopping malls cluster near the state’s borders to cater to cross-state visitors.
Online retailers are not required to collect sales tax on orders shipped to Delaware addresses. The state has not adopted an economic nexus rule following the Wayfair decision.
Montana
Montana is another Western state that takes a limited approach to retail sales tax. It has no standard statewide tax, and also prohibits cities and towns from enacting local sales taxes.
However, Montana does selectively tax certain transactions:
- Lodging – 4-8% tax on hotels, motels, campgrounds, short-term rentals
- Rentals – 4% tax on passenger car rentals
- Restaurants – 0.5% basic tax plus local option for up to 3% more
- Alcohol – Variable tax per drink based on beverage type
Aside from those exceptions, Montana has no sales tax on general consumer retail. Shopping in Montana provides savings for residents of neighboring high sales tax states.
Online retailers are not required to collect Montana sales tax, even after Wayfair. The lack of local jurisdictions with taxing authority precludes economic nexus requirements.
New Hampshire
New Hampshire holds the distinction as the only New England state without a sales tax. It has stood firm with no state or local sales taxes for decades, despite surrounding states with up to 7% tax.
The tax free status makes New Hampshire a retail destination drawing shoppers from the Northeast and Canada. Large outlet malls line the southern border with Massachusetts catering to visitors.
However, New Hampshire does selectively tax the following:
- Restaurant meals
- Lodging
- Car rentals
- Motor vehicle purchases
- Alcohol
- Tobacco
- Amusements
Aside from those exceptions, retail goods are sales tax free. New Hampshire also has no economic nexus rules or requirements for remote sellers to collect tax on general goods purchased online.
Oregon
Oregon has no standard sales tax but does impose taxes on selective goods and services including:
- Lodging – 1-3% statewide tax depending on location
- Restaurants – 0.5% basic tax plus local options
- Motor fuels – State gas tax of $0.36 per gallon
- Alcohol – Variable tax per drink based on beverage type
- Marijuana – 17-20% retail tax on cannabis products
- Local tax options – Cities and counties may enact selective taxes on things like prepared foods, event admissions, and more if approved by voters.
For general consumer retail, Oregon has no sales tax. Purchases made within the state are tax free. Oregon also has no economic nexus laws stretching sales tax obligations to out-of-state online retailers.
Why Some States Shun Sales Tax
There are a few reasons why the states above eschew traditional sales taxes:
- Tax philosophies favoring income taxes over consumption taxes
- Desire to promote retail competitiveness with nearby high-tax states by attracting cross-border shoppers
- Wariness of the regressive effects sales taxes have on lower earners
- Preference for selective taxes on goods like alcohol and lodging over broad-based taxes
- Reliance on revenue from natural resources reducing the need for sales tax
- Decentralization allowing local jurisdictions to set own sales tax policies rather than the state
Regardless of reasoning, consumers in these five states pay less sales tax on everyday purchases than residents of states like California or Tennessee which impose high statewide rates with local add-ons.
The Drawbacks and Challenges of Forgoing Sales Taxes
Despite benefits for consumers, eschewing sales taxes brings tradeoffs for states including:
- Lost revenue that must be made up elsewhere like higher income or property taxes
- Budget shortfalls during times of weak economic growth when income tax receipts falter
- Reliance on taxes narrowly concentrated in certain sectors like tourism
- Pressures from neighboring states who criticize attracting cross-border shoppers to skirt sales taxes back home
- Complexities from not tracking sales tax bases that most other states monitor
- Disparities between localities that do and don’t impose sales taxes on residents
This makes instituting a sales tax challenging once a state has gone without one for so long. But periodic proposals to enact sales taxes usually arise during tough fiscal times.
Conclusion
Only five states – Alaska, Delaware, Montana, New Hampshire, and Oregon – forego conventional statewide sales taxes paid on general retail purchases. While they selectively tax certain goods, these states stand out for the lack of broad sales taxes applied in most of the country. This provides financial benefits for their residents. However, it also introduces budgetary and economic distortions that constantly draw debate over whether to expand sales taxation. With growing needs for revenue and the rise of e-commerce, long-time holdouts may eventually face renewed pressure to institute sales taxes. But for now, consumers and businesses in these five states continue to operate in a unique tax-free retail environment found few other places.
