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Ahh, the sales tax. One of the most pervasive taxes in the country, for many, it’s also one of the most tedious. It’s an excellent way to send your grocery order to being just over budget and can put a dampen on your time spent shopping. Being as widespread as it is, you’d think it would be easier to deal with after a certain point. However, no matter what, it always is a bit of a thorn in our side. But yet, not all states deal with this thorn equivalently. Some have it better than others, while others have it worse. That’s why in this article, we’re going to be going over each state’s sales tax and comparing it to one another.

What Is a Sales Tax?

A sales tax is a tax on the retail selling of various goods and services. It’s categorized explicitly as a consumption tax, one that afflicts people who spend some money.

The exciting thing about the sales tax is that it’s indirect. It isn’t paid directly to the government – instead, it goes to the retailer, who then delivers it bulk to government entities. Due to its broad scope, it makes up the bulk of many states’ tax dollars.

Related: The Online Sales Tax Landscape: What You Need To Know

How Do They Work?

When a consumer purchases some form of a retail environment, a certain percentage of their purchase gets dictated to be a sales tax. This tax is then collected by the retailers, who divvy it to the applicable government entities.

The sales tax is given out to states – and the District of Columbia – responsible for collecting and managing the income from the sales tax. Some states allow local governments to manage sales tax as well, meaning that the tax would become additive between the state and local taxes, leading to the consumer paying more. It is not managed by the IRS.

However, sales taxes don’t necessarily apply to every item in every state. For example, many states exempt groceries and prescription drugs from the sales tax, while others exempt clothing and medical devices. Essentially, it’s a commonplace to exempt anything essential for living from the sales tax. Not every state does this, so be sure to keep that in mind.

There are also sales tax holidays when customers can purchase things free from sales tax on those specific dates. Not all states have these, but those that often have it correspond with the start of the school year to help families pay for school supplies for their children.

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What Exactly Is Nexus?

Nexus is an outdated concept in that it used to be what determined which companies had to input a sales tax on their goods and services. Specifically, the requirements were that they had to have a physical presence in that state to have a sales tax on their products.

However, in 2018, it was overruled by the Supreme Court, requiring companies to collect a sales tax on all goods and services they purchase, regardless of whether they have any physical presence in the state.

However, it isn’t outdated everywhere, as states have to pass an applicable law – like South Dakota, the originator of the decision – to collect sales tax on out-of-state businesses.

Related: The Most Common Tax Issues For Digital Marketers

Why Does Sales Tax Matter?

Sales tax plays a crucial role in how businesses decide what states to set up shop in, as some states apply it to business inputs, which can make the production of goods more expensive. A high sales tax can also encourage people to move their purchases out of state when applicable, such as for those living near the border of multiple states. Beyond that, it also matters how much money state governments get – a higher sales tax means they get more money to their name, whereas a lower sales tax means they get less.

It affects consumers, businesses, and governments alike, making it one of the essential constructs out there for taxation.

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State Business Tax Climate Index

The State Business Tax Climate Index is the index we will use to rank the different states on their sales taxes. It’s based on the assumption that the best sales tax for a state keeps business inside the state, doesn’t drive consumers outside the state, and doesn’t charge business inputs like machinery. Instead, it’s a cheap sales tax on consumers at the final point of sale, and that’s it. It also takes into account how states and their sales taxes treat remote sellers. Note that this list is updated as of 2022, and does not account for the years beforehand.

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Related: The Best Business Structure for Online Retail

State Rankings

At the very best in regards to low sales tax are those states that don’t have a sales tax. Numbering one through five is New Hampshire, Delaware, Montana, Oregon, and Alaska. Each of these varies slightly because they do have an excise tax, and Alaska allows for local sales taxes.

Going down the list from number six onwards, we have Wyoming, Wisconsin, Maine, Idaho, Michigan, Virginia, Massachusetts, Kentucky, Nebraska, Iowa, Vermont, Pennsylvania, West Virginia, Indiana, North Carolina, Florida, Utah, Connecticut, Rhode Island, Missouri, Maryland, Kansas, Hawaii, Minnesota, North Dakota, South Carolina, Mississippi, Georgia, South Dakota, Ohio, Texas, Oklahoma (Washington DC is tied at #37th with Oklahoma), Colorado, Illinois, Arizona, New Mexico, New York, New Jersey, Nevada, Arkansas, Tennessee, California, Louisiana, Washington, and lastly Alabama.

As seen from the list, Tennessee, California, Louisiana, Washington, and Alabama rank last in regard to who has the worst sales tax in the country.

Final Thoughts

Now that you understand what a sales tax is, how it operates, and which states have the best – and worst – sales tax, you’ll be able to use with a better understanding of how taxes work in America. So go on and spread this knowledge around to your friends and family!

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