State and Local Sales Tax Rates in 2015

by Scott Drenkard, Jared Walczak, The Tax Foundation, April 8, 2015 (excerpts)

Key Findings

45 states collect statewide sales taxes.

38 states collect local sales taxes.

The five states with the highest average combined state-local sales tax rates are Tennessee (9.45 percent), Arkansas (9.26 percent), Alabama (8.91 percent), Louisiana (8.91 percent), and Washington (8.89 percent).

Sales tax rates differ by state, but sales tax bases also impact how much revenue is collected from a tax and how the tax affects the economy.

Differences in sales tax rates cause consumers to shop across borders or buy products online.

Introduction

Retail sales taxes are one of the more transparent ways to collect tax revenue. While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can reach into their pockets and see the rate printed on receipts.

In addition to state-level sales taxes, consumers face local-level sales taxes in 38 states as well. These rates can be substantial, so a state with a moderate statewide sales tax rate could actually have a very high combined state-local rate compared to other states. This report provides a population-weighted average of local sales taxes in an attempt to give a sense of the statutory local rate for each state. See Table 1 at the end of this Fiscal Fact for the full state-by-state listing of state and local sales tax rates.

Combined Rates

Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, Alaska and Montana allow localities to charge sales taxes.[1]

The five states with the highest average combined state-local sales tax rates are Tennessee (9.45 percent), Arkansas (9.26 percent), Alabama (8.91 percent), Louisiana (8.91 percent), and Washington (8.89 percent).

The five states with the lowest average combined rates are Alaska (1.76 percent), Hawaii (4.35 percent), Wisconsin (5.43 percent), Wyoming (5.47 percent), and Maine (5.50 percent).

State Rates

California has the highest state-level sales tax rate at 7.5 percent.[2] Five states tie for the second-highest statewide rate at 7 percent: Indiana, Mississippi, New Jersey, Rhode Island, and Tennessee.

The lowest non-zero, state-level sales tax is in Colorado, which has a rate of 2.9 percent. Seven states follow with 4 percent rates: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota, and Wyoming.[3]

No changes to state-level sales taxes took effect in the first half of 2014. However, Rhode Island considered eliminating its 7 percent sales tax in 2013 and revisited the idea in January of 2014.[4]Had the proposal passed, Rhode Island would have become the first state ever to repeal its statewide sales tax.

On October 1, 2013, the District of Columbia lowered its sales tax from 6 percent to 5.75 percent.[5]In May of 2014, the D.C. Tax Revision Commission suggested raising this rate back up to 6 percent as a part of its comprehensive set of recommendations to the D.C. Council, which also included rate cuts in other parts of the tax code.[6] The Council decided against the sales tax rate increase, however, keeping Washington, D.C.’s sales tax rate below the rates in neighboring Northern Virginia and Maryland and instead broadening the sales tax base slightly. This base expansion partially offset decreases in individual and corporate income tax rates.[7]

On August 5, 2014, Missouri voters rejected an increase of 0.75 percent to their state sales tax. The increase would have lasted for ten years and would have frozen the state’s gas tax at its current rate over the same period.[8] ...

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Sales Tax Bases: The Other Half of the Equation

This report ranks states based on tax rates and does not account for differences in tax bases (e.g., the structure of sales taxes, defining what is taxable and non-taxable). States can vary greatly in this regard. For instance, most states exempt groceries from the sales tax, others tax groceries at a limited rate, and still others tax groceries at the same rate as all other products.[16] Some states exempt clothing or tax it at a reduced rate.[17]

Tax experts generally recommend that sales taxes apply to all final retail sales of goods and services but not intermediate business-to-business transactions in the production chain. These recommendations would result in a tax system that is not only broad based but also “right-sized,” applying once and only once to each product the market produces.[18] Despite agreement in theory, the application of most state sales taxes is far from this ideal.[19]

Hawaii has the broadest sales tax in the United States, but it taxes many products multiple times and, by one estimate, ultimately taxes 99.21 percent of the state's personal income.[20] This base is far wider than the national median, where the sales tax applies to 34.46 percent of personal income.[21]

In July of 2014, councilmembers in the District of Columbia voted to expand D.C.’s sales tax base to include previously untaxed services such as car washes, carpet cleaning, and bowling alleys. The expansion also brought fitness services under the sales tax umbrella, prompting health clubs and training studios to misleadingly label the measure a ‘fitness tax’ or ‘yoga tax,’ rather than simply the elimination of a pre-existing carve-out for the fitness industry.[22] As of this year, 22 states include fitness services in their sales tax bases.[23]

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