If you run a small business, you know that sales tax laws can be complicated, especially when multiple states or jurisdictions are involved. For example, what if you live in a state with sales tax but sell your products in states without sales tax, or vice versa? And what are the states that don’t charge sales tax, anyway?
It’s an area of business that can quickly become convoluted. Luckily, you’re not alone in navigating it. Let’s go on a cross-country road trip to visit the five U.S. states without a sales tax, and what you need to know if you’re conducting business there.
What do businesses need to know about sales tax?
Sales tax is a levy paid by consumers at the point of purchase. When a consumer buys a taxed good or service, the seller is responsible for calculating the tax, adding it to the item’s price and collecting the tax. Sellers are also responsible for depositing and reporting sales tax.
Here are some details on how sales tax works:
- Sales tax is usually related to retail purchases, but sales tax laws in some states also cover services.
- While buyers are legally responsible for paying sales tax, sellers are responsible for collecting the tax and transferring it to the state.
- Sales tax is required on all cash transitions, credit sales, installment sales, layaway sales and trade-ins or exchanges of property in states with sales tax laws.
- There is no federal standard for sales tax. Instead, states (or, in some cases, county bodies) determine sales tax laws. This means sales tax laws vary from state to state.
- Each state has rules and exceptions for sales tax. Companies interested in exemptions must research their local tax rules and provide eligibility for the exemption to the relevant tax authorities.
Note that tax exemptions only apply to goods a business buys and resells. Companies in states with sales tax must still pay the tax on goods used for the business. Here’s an example:
Jaime runs a honey business where she buys botanicals to infuse her honey from local farmers. She doesn’t pay sales tax on those goods since they’re going into the honey she’ll ultimately sell to her customers. She’s getting an exemption because she’s submitted documentation that proves she uses the vendors’ products in her honey.
However, when Jaime buys straining materials to make her honey, she pays sales tax on that purchase. The sales tax applies since she’s using those strainers to make her honey (rather than reselling them).
The five states without sales tax
While America has no federal sales tax, 45 states, the District of Columbia and Puerto Rico all charge a tax. Additionally, 38 states allow local sales taxes that are often higher than state rates. Alaska and Montana, for example, don’t have a state-wide sales tax but do allow local sales taxes.
Here’s a breakdown of the five states that don’t have sales tax laws:
There is no state-wide sales tax in Alaska. Still, local governments retain the right to impose taxes on some retail purchases and services. Juneau, for example, has a sales tax of 5%, while Fairbanks and Anchorage don’t have any sales tax. Consumers also pay the gas tax, and alcohol distributors and wholesalers pay sales taxes calculated at a flat rate.
Instead of imposing a state-wide sales tax, Delaware uses a gross receipts system to assess tax on certain businesses.1 The state also levies excise taxes as flat rates per gallon on liquid goods like alcohol and motor fuel. Delaware has no sales tax.
Montana, like Alaska and Delaware, has no state-wide sales tax. However, resort communities that attract tourists have local “resort tax” rates of up to 3%. These taxes support the infrastructure needed to maintain tourism in high-interest areas like Whitefish, Red Lodge, Big Sky and West Yellowstone.
4. New Hampshire
New Hampshire imposes a sales tax of 9% on meals prepared in restaurants, car rentals and short-term room rentals. The state also charges a 7% tax on phone services and $.075 in tax per $100 in real estate sales. However, local governments cannot impose new sales taxes due to the state’s 0% sales tax. Additionally, the above taxes are not due on business-to-business transactions when buyers intend to resell a product.
Cities in Oregon have the right to impose sales taxes on certain retail goods. Ashland, for example, charges a sales tax of 5% on prepared foods. The state also imposes taxes on tobacco and prepackaged alcoholic beverages.
What about e-commerce and sales tax?
Online sales work like any type of sale: transactions require sales tax in some states, but not all. Whether you need to collect sales tax on an online sale depends on factors such as the location of the sale and the type of product you’re selling. It also depends on a term called nexus.2
When selling across state lines, nexus refers to the connection between a taxpayer or business and a tax authority, like a state. In most cases, your business has nexus with the state where it’s based. This is a crucial detail since states can’t require sales tax collection obligations on companies that don’t have nexus.
That said, nexus doesn’t always come down to physical presence. Sometimes, nexus can be economical and based solely on your company’s economic activity in a given state. Usually, economic nexus is triggered by hitting a certain number of gross sales or transactions ($100,000 in total sales, for example, or 200 transactions).3 Most states enforce economic nexus, except for Montana, New Hampshire, Oregon and Delaware.
Here’s the bottom line: If you’re selling products across state lines, you’ll need to understand where you have nexus (economic or physical) and which states expect you to collect sales tax.
Business protection that’s there for you in any state
For more in-depth answers about how sales tax works in your state, the Small Business Administration and your local tax authority can be excellent resources.
Meanwhile, ensure your business is protected no matter where in the U.S. your company is located with small business insurance from Thimble. Just as sales taxes vary by state, your small business is exposed to many liabilities. That’s why Thimble’s small business insurance offers a variety of policies to fit your needs.
Explore your options — everything from general liability to commercial property insurance — to select your desired coverage. Then, click “get a quote” or download the Thimble mobile app, answer a quick set of questions and get covered today.