Learn About States With No Sales Tax

Understanding Sales Tax Across the United States

Sales tax is a tax added to the purchase price of goods and services. When you buy something at a store or online, the retailer collects this tax and sends it to the state government. Most states use sales tax as a major source of revenue to fund schools, infrastructure, roads, and public services. The current national average sales tax rate is approximately 7.25 percent, though rates vary significantly from state to state.

Not all states collect sales tax the same way. Some states tax most purchases, while others have specific exemptions for certain items like groceries or clothing. A few states have chosen not to impose a sales tax at all on retail purchases. These states have different ways of funding their government operations, relying instead on other revenue sources such as income taxes, property taxes, or other fees.

Understanding which states have no sales tax can be valuable information for consumers, business owners, and people considering relocating. This guide provides information about states without sales tax, how they function financially without this revenue source, and what this means for residents and visitors. The information presented here is educational and designed to help you learn about tax policy differences across the country.

Sales tax laws can change, and it's important to note that while a state may not have a statewide sales tax, some cities or counties within that state might impose local taxes on purchases. Additionally, certain categories of items may be taxed differently than others, depending on state law.

Practical Takeaway: Sales tax varies dramatically across states, and five states currently have no statewide sales tax. Understanding these differences can inform purchasing decisions and relocation planning.

The Five States With No Sales Tax

Five states in the United States have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. These five states represent a unique approach to state taxation and government funding. Each of these states has made a deliberate policy choice to fund government operations without relying on sales tax revenue.

Alaska is one of the largest states geographically but has no sales tax at the state level. However, some cities and boroughs in Alaska do impose local sales taxes. Alaska generates substantial revenue from oil and natural gas production, which funds a significant portion of the state budget. The state also distributes profits from its oil revenues to residents through the Alaska Permanent Fund Dividend, a unique program that pays residents an annual dividend.

Delaware has no sales tax and is known as a tax-haven state for corporations. Many companies incorporate in Delaware because of its favorable business tax laws. The state also relies on income taxes, corporate taxes, and other revenue sources. Delaware's lack of sales tax makes it popular with shoppers from neighboring states like Pennsylvania and Maryland, who sometimes travel to Delaware specifically to make purchases.

Montana has no sales tax but does impose other taxes on consumers and businesses. The state relies on property taxes, income taxes, and resource extraction taxes. Montana's approach to taxation is designed to encourage business development and attract residents seeking lower-tax states.

New Hampshire has no sales tax and is one of only two states that do not tax earned income from wages. New Hampshire relies on property taxes, which are generally higher than in many other states, as well as taxes on businesses, restaurants, and rooms. The state uses the motto "Live Free or Die," which reflects its philosophy of limited taxation.

Oregon has no sales tax, making it attractive to consumers and businesses. Oregon instead relies on income taxes, which are relatively high compared to other states. Oregon's income tax rate is progressive, meaning higher earners pay a larger percentage in taxes. The state also uses business taxes and other revenue sources to fund state operations.

Practical Takeaway: Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax, but each state funds government through different revenue sources such as income taxes, property taxes, or resource extraction taxes.

How No-Sales-Tax States Fund Government Operations

States without sales tax must find alternative revenue sources to fund schools, highways, emergency services, and other government programs. The method each state uses reflects its unique economic situation, geography, and policy priorities. Understanding these different approaches provides insight into how state governments operate.

Income taxes are a primary revenue source for several no-sales-tax states. Oregon and New Hampshire both use income taxes to replace the revenue they would otherwise collect through sales tax. Oregon's income tax is progressive, with rates ranging from approximately 4.75 percent to 9.9 percent depending on income level. New Hampshire, interestingly, has no income tax on wages but does tax interest and dividends at 5 percent, creating an unusual tax structure.

Property taxes play a significant role in funding local and state services in no-sales-tax states. New Hampshire residents pay relatively high property taxes to support schools and local services. Montana also relies substantially on property taxes. Property taxes are based on the assessed value of real estate and are often the largest tax bill for homeowners in these states.

Resource extraction taxes are particularly important in Alaska and Montana. Alaska collects substantial royalties and taxes from oil and gas companies operating in the state. These revenues fund a large portion of Alaska's state budget. Montana similarly taxes the extraction of natural resources like coal, natural gas, and metals. These taxes are tied to commodity prices, which means state revenue can fluctuate based on market conditions.

Business taxes and corporate income taxes provide revenue in Delaware, Alaska, and other no-sales-tax states. Delaware has developed a business-friendly tax environment that encourages many corporations to incorporate there. These business taxes contribute significantly to state revenue. Additionally, states may impose taxes on specific businesses like restaurants, hotels, or recreational activities.

License fees, permits, and other specific revenue sources also contribute to state budgets. States may charge fees for professional licenses, hunting and fishing licenses, vehicle registration, and other permits. Lottery revenues in some states also contribute to education and other programs.

Practical Takeaway: No-sales-tax states fund government through income taxes, property taxes, resource extraction taxes, business taxes, and fees. The specific mix depends on each state's economy and policy decisions.

Practical Implications for Residents and Shoppers

Living in or shopping in a no-sales-tax state has real financial consequences that affect household budgets and business decisions. For consumers, the absence of sales tax means lower prices at the point of purchase compared to high-sales-tax states. A $100 purchase in Oregon costs $100, while the same purchase in California would cost approximately $107.25 due to California's average sales tax rate.

However, the savings from no sales tax may be offset by higher income taxes or property taxes in these states. New Hampshire residents pay no income tax on wages but pay some of the highest property taxes in the nation, averaging around 2.18 percent of home value annually. Oregon residents enjoy no sales tax but pay state income tax rates up to 9.9 percent on higher incomes. Residents should consider their overall tax burden rather than focusing on sales tax alone.

For business owners, operating in a no-sales-tax state means different accounting and regulatory requirements. Businesses do not need to collect sales tax from local customers, which simplifies operations. However, many businesses that sell to customers in other states must still collect and remit sales tax to those states. Online retailers, in particular, have complex sales tax obligations that vary by state.

Shoppers from high-sales-tax states sometimes travel to nearby no-sales-tax states specifically to make large purchases. Delaware, for example, attracts shoppers from Pennsylvania, New Jersey, and Maryland. This cross-state shopping provides some revenue to no-sales-tax states through income and business taxes from retailers, even though they don't collect sales tax directly.

Residents of no-sales-tax states who purchase items online from out-of-state retailers may still owe sales tax, depending on their state's laws and the retailer's policies. Many states require residents to pay sales tax on online purchases even if the retailer doesn't collect it. This creates an obligation that consumers should understand.

The cost of living varies significantly when considering all taxes. A comprehensive comparison should include income tax rates, property tax rates, sales tax, and other state and local taxes. Someone relocating should research the total tax burden in their destination state rather than focusing on a single tax type.

Practical Takeaway: No sales tax means lower purchase prices, but residents typically pay higher income or property taxes. Consider total tax burden when making purchasing or relocation decisions.

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