States with High Sales Tax: Why Do Rates Differ Across the U.S.?

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.

Unlike federal income tax, which has just seven brackets to cover the whole span of what somebody can make, states with sales taxation have a huge range. From the states with the highest combined state and local taxes (pushing 10%) of Louisiana, Tennessee, Arkansas and Washington to the lows of Alaska, Wyoming and Maine, there is a lot of ground to cover.

Why are there different sales tax rates in states across the U.S.?

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 and priorities. Below is a list of some of the areas that affect sales tax rates:

• Revenue Needs: Each state has varying revenue requirements depending on population, infrastructure, social programs, and other services. States with lower income or property taxes may rely more heavily on sales taxes to balance their budgets. This is why states like Tennessee and Louisiana have high sales tax rates, while others with high income taxes, such as New York, may have lower state-level sales tax rates.
• Local Autonomy: Some states allow cities and counties to impose their own sales taxes, leading to a patchwork of rates within the same state. Known as "home rule," this approach allows local governments to address specific financial needs or community projects, such as funding schools, law enforcement, or local infrastructure improvements.
• Economic Strategy: States use sales tax policies to attract residents, businesses, and tourists. For example, New Hampshire, with no statewide sales tax, promotes itself as a shopping destination for neighboring states with higher tax rates. Additionally, some states hold sales tax holidays on items like back-to-school supplies or emergency preparedness kits to encourage spending.
• Exemptions and Variability: Exemptions and exclusions further complicate tax rates. For instance, many states exempt essential items like groceries or prescription medications, impacting the overall effective tax rate. Meanwhile, other states tax levy taxes based on specific business activities, such as fuel or excise taxes on certain goods, influencing the total sales tax collected.
• Legislative Priorities and Trends: State legislatures respond to economic trends and shifts in public priorities. For example, in response to environmental concerns, some states have recently added retail delivery fees or adjusted tax policies to promote sustainability, which can indirectly affect sales tax rates and how they’re applied.

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 states with the highest sales tax rates are 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 worth mentioning 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.

Other trends (and complications) in state sales tax rates across the U.S.:

• Some items and buyers and even shipping charges are exempt from sales tax if the proper documentation is provided.
• 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.

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.