When you're at the supermarket or the mall and you go to check out, there's usually an additional price added on - the sales tax.
And while the sales tax comes in a variety of forms - from excise tax to value-added tax - most states in the U.S. add it to the base price of the goods. But, in five lucky states, residents are exempt from sales tax (for the most part). But, what does it mean to be exempt from sales tax, and which states are sales-tax-free?
What is Sales Tax?
Sales tax is a tax applied to the sale of goods or services - traditionally charged to the final user (or consumer).
For example, companies rely on the government to define nexus - the physical presence of a company in a state - when determining taxes for online retailers. Some employees can constitute a nexus in a state if they work primarily out of that state - like Amazon (AMZN) - Get Amazon.com, Inc. Report for example. In New York state, recent laws called "Amazon laws" require companies to pay sales tax even if they aren't based in a specific state.
However, other kinds of sales tax, like excise and value-added tax, add on to the consumer's budget. Excise tax, sometimes colloquially coined "sin tax," are taxes on products like cigarettes or alcohol.
Value-added tax essentially charges incremental tax for each level of production of an end good. However, in the U.S., conventional taxes are primarily used.
According to USA Today, Americans generally pay a sales tax of between 2.9% and 7.25% of the price of the good in most states.
Which States Don't Have Sales Tax?
Even though there may be drawbacks, the five states that don't have sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon.
Still, while all of these states do not impose sales tax, some of them do permit localities to levy some sales tax. Additionally, many states with low sales tax have higher income taxes.
Alaska exempts its residents from sales tax, which sounds great.
But, there's a caveat - Alaska does permit localities to impose sales tax in some areas - up to 1.76%.
Still, because it is minimal, Alaska is typically very tax efficient for buying goods and services. The cost of living in Alaska is 5.6% higher than the national average and the eighth highest in the nation, according to USA Today. However, Alaska's personal income per capita is also one of the highest in the nation, hitting around $48,973 as of 2018.
So, while many areas in Alaska do not impose sales tax, many localities do - but the high income per capita may somewhat balance the cost of living in The Last Frontier.
No conditions - Delaware is sales tax free! However, for businesses, Delaware does impose gross receipts tax - which constitutes some percentage of the receipts of goods sold by the business in the given state. And while this tax is not shared by consumers, it may be reflected in the cost of the actual goods themselves.
However, Delaware's cost of living is 0.4% higher than the national average. Additionally, its average personal income per capita is on the lower side - at around $42,917, according to USA Today.
So, while Delaware residents get a break from sales tax, they may be paying for it in other ways.
Much like Alaska, Montana allows certain localities to impose sales tax. But in general, the state does not impose sales taxes. So, depending on where you roam in the Treasure State, you may be subject to some sales taxes.
Additionally, Montana has a lower cost of living (at around -5.2% below the national average), but has a lower personal income per capita as well (at around $40,985).
4. New Hampshire
The lucky residents of New Hampshire don't have to pay any sales tax.
But, before you up and move to New Hampshire, the state also has one of the highest costs of living - at around 5% above the national average, and the ninth highest. But, to help offset that, the Granite State has one of the higher personal income per capita in the nation - hitting around $47,530 on average.
Oregon is sales tax free - and, to boot, has a lower cost of living compared to the national average.
With an average cost of living at around 0.8% below the national average, Oregon definitely saves its residents some cash. But, it also has a lower personal income per capita, at a little over $40,000 - or, 15th lowest, according to USA Today. Additionally, income tax is on the high side - so, even if you can catch a break at the supermarket in Oregon, you may be charged elsewhere for residing in the state.
Is it Cheaper to Live in a State With No Sales Tax?
Unfortunately, you can't have it all.
While these states are exempt from sales tax for the most part (and will undoubtedly save you some cash when buying goods and services), several of them make up for the savings in other ways.
Oregon, for example, has one of the higher income taxes in the country, coming in at around 9.9% - even taxing most retirement income (so, maybe think elsewhere if you're looking to retire).
Additionally, other states like Tennessee are thought of as some of the most tax efficient states in the country - because, while it does have a hefty sales tax (the highest in the country, in fact), the Volunteer State has no income tax.
The bottom line is that, while states that do not impose sales tax may seem to save their residents extra cash, they likely make up for it in other ways - either in income or various other taxes for individuals, or higher prices of goods charged by businesses.
States With Low Sales Tax
There are several other states that, while continuing to impose sales tax, have a lighter sales tax than normal.
According to The Washington Post in 2014, other states that had lower sales tax include Hawaii (4.35% sales tax), Wisconsin (5.43% sales tax), Wyoming (5.49% sales tax), and Maine (5.50% sales tax). Others with low sales tax include Alabama (4%), New York (4%), Oklahoma (at around 4.5%), and South Dakota is around 4.5% as well.
For full details on sales tax rates nationwide, see the Tax Foundation's page.