What is Sales Tax?
Sales tax from each state in the United States is collected on the sale or lease of goods or services. In the US, no national sales tax exists. Sales tax charged on goods and services is collected at the state level. However, the state may grant power to the local government to impose additional general or selective sales tax. Retail sales tax is one of the most common and convenient ways to collect taxes. The graduated sales taxes are sometimes complex to the taxpayer. As of 2017, five states, namely Alaska, Delaware, New Hampshire, Oregon, Montana and California has a 7.25% sales tax, which is the highest and includes the city as well as country tax.
Calculating Sales Tax
The sales tax collected by the state in the US is calculated by multiplying the purchase price by the applicable tax rate. Moreover, the seller collects sales tax from the customer at the time of sale. Unlike the value-added tax, the sales tax is imposed only at the retail level. In case if the item is sold more than once in retail, like used cars, the sales tax will be charged on the same product. Let us discuss the states with the highest and lowest tax rates.
Highest tax rate states in the US
- Tennessee – 9.47%
- Louisiana – 9.45%
- Arkansas – 9.43%
- Washington – 9.17%
- Alabama – 9.14%
Lowest tax rate states in the US
- Alaska – 1.43%
- Hawaii – 4.41%
- Wyoming – 5.36%
- Wisconsin – 5.44%
- Maine – 5.50%
During the year 2019, average local sales tax rates rose the most in Florida. The state has jumped from 28th in the list to 22nd. The change was largely due to a 1% increase in sales tax. Colorado maintained its ranking in the same position it was previously. Central city’s sales tax increased from 4% to 6% during the year 2019.
Role of Competition in Setting Sales Tax Rates
Avoidance of sales tax usually occurs in two different areas where there is a significant difference between the two jurisdictions rates. State and central government should be well aware of high rates. They should compare the taxes as per their neighbors. Doing so will yield less revenue than expected or less revenue loss despite the higher taxes.
Basis of Sales Tax
Tax experts generally state that all goods and services should be inclusive of sales tax. However, it should not be applied to business-to-business transactions in retails sales. This would result in a tax rate system that is right-sized and not broadly based. It should also be applied once to every product that the market produces. Also, Hawaii has the broadest sales tax in the US. However, the drawback is that it taxes each product many times. It leads to 105% of the state’s income. This basis is far wider than the national median.
Sales tax is an individual part of the overall tax structure and should be considered in context. Many other factors influence business investment decisions and business location. Sales tax by the state in the US can have an immediate impact and therefore are controlled by several policymakers within the country or the state.