Why are some states’ sale taxes higher than others?

When you sell across multiple states – or even within various localities in a single state – one striking observation emerges: the consistent inconsistency of sales tax rates.

Why? The federal income tax has just seven brackets to cover the whole span of what somebody can make. Why do the states with sales taxes have such a range, from the high combined state and local taxation (pushing 10%) of Louisiana, Tennessee, Arkansas and Washington to the lows of Alaska, Wyoming and Maine.

Why do sales tax rates have to be so complex?

Patchwork

Forty-five states and the District of Columbia collect statewide sales tax. The NOMAD states of New Hampshire, Oregon, Montana, Alaska and Delaware have no statewide sales tax – but online sellers aren’t off the hook in Alaska, where localities continue to band together to create a web of sales taxes that average out to slightly less than 2%.

Online sellers might be tempted to look only at statewide rates to determine their obligations. The highest state-level rates are in California, Indiana, Mississippi, Rhode Island and Tennessee. The lowest state-level sales tax (aside from the NOMADs) is in Colorado, Alabama, Georgia, Hawaii, New York and Wyoming.

But local sales taxes crop up in 38 states, according to the Tax Foundation, which adds that the five states with the highest average local sales tax rates are Alabama, Louisiana, Colorado and Oklahoma. Also significantly low is high is New York – which even though ranking among states with the lowest statewide sales tax still comes in at a high average rate when local taxes are figured in.

Trends

Retail sales taxes are an essential part of most states’ revenue, responsible for almost a third of state tax collections and 13% of local tax collections. Often, they’re earmarked for local initiatives, such as schools or law enforcement, among other areas.

Among trends (and complications) in sales tax:

• Some items and buyers and even shipping charges are exempt from sales tax if the proper documentation is provided.
• Some states eschew sales taxes in favor of higher income taxes, property taxes, excise taxes or other levies that are higher than in states with a sales tax.
• Retail delivery fees, or RDFs, billed by the few states that have so far adopted them as a fee rather than a tax, are usually dedicated to improving infrastructure or cutting carbon pollution.
• Home rule, a widespread kind of local sales taxation can also confuse online sellers: States like Illinois, Alabama, Colorado and Louisiana grant local governments authority to pass their own, additional tax laws.
• The attraction of lower or non-existent sales tax is often trumpeted by states like New Hampshire to attract consumers from neighboring states. Mushrooming sales tax holidays are also often touted on everything from clothing and back-to-school supplies to camping equipment and trigger guards.

Obviously, the reasons sales tax rates differ are as complex as the concept of sales tax itself.

If you think your business may be impacted by sales tax developments, contact TaxConnex. TaxConnex provides services to become your outsourced sales tax department. Get in touch to learn more.