Sales tax is one of the top sources of revenue for most of US states. It is a direct tax imposed by the state government on purchased goods and services. The rate of sales tax paid is calculated as a percentage of the sales price. As of 2015, 45 US states charge sales tax. States may exempt certain goods such as prescriptions drugs and some food items from sales tax. In fact, out of all the states, only Illinois charges sales tax on prescription drugs. The rate of sales tax differ from state to state. Also, the rate of sales tax may differ from county to county within a state since the local government allows for local taxes.
Sales Tax Rate by State
45 US states charge sales tax. According to the 2016 report on sales tax, Oregon, Montana, Alaska, Delaware, and New Hampshire do not have a sales tax. Of the five states, Alaska and Montana allow for the collection of a local tax. However, Alaska's local authorities have capped local taxes below 2%, meaning the highest tax that can be charged in the state is 2%. The average local tax in Alaska as of 2015 is 1.76%.
The five states with the highest local taxes are Tennessee, Arkansas, Alabama, Louisiana, and Washington. These five states charge sales taxes of 9.45, 9.26, 8.91, 8.91, and 8.89%, respectively. The prices of goods and services in these five states are generally higher compared to the prices of the five states that do not charge sales tax. The high sales tax is attributed to additional local taxes charged by various counties and municipalities within these states.
The five states that charge the lowest average sales tax are Alaska, Hawaii, Wisconsin, Wyoming, and Maine. These states charge sales taxes of 1.76, 4.35, 5.43, 5.47, and 5.5%, respectively. These five states have low average tax rates since the majority of their localities do not charge a local tax, and if so, the rates of local tax are relatively low compared to the highest five states in terms of sales tax. Kentucky, Michigan, and Maryland charge similar sales tax rate of 6%, slightly lower than Idaho and West Virginia that charge 6.01 and 6.03%, respectively. 12 of 45 states charge an average tax of more than 8%, with Arkansas and Tennessee charging more than 9%.
Exemptions and Collecting Sales Tax
Only seven states charge sales tax on food purchases. However, all seven states offer reductions in the amount of tax charged rather than exemptions. Sales tax is often charged at the point of purchase or sale. Service providers or merchants have the responsibility of collecting sales tax from buyers and submitting it to the state. The businesses are therefore required to be registered with the state agency for permits. The service providers within a state have an obligation to maintain a record of all sales tax collected and to make periodic payments to the government. A penalty including fines and the withdrawal of business permits is often imposed on service providers who fail to file tax returns or those who do so after the stipulated time.