How State Sales Taxes Work
Forty-five U.S. states and the District of Columbia rely on
levying sales taxes on most things residents and visitors buy to help keep the
state government functioning. In those states, sales taxes are an important
source of income. The revenue from sales taxes is an essential part of the
state's general budget. It goes into the pot with revenues from other sources
and helps keep the public schools, universities, courts, highway departments,
state police, medical programs and all sorts of other institutions and
activities running. Without sales taxes, those states would find it difficult
-- if not impossible -- to stay in business.
A sales tax is classified as a consumption tax. An income tax goes after the money you earn; a consumption tax targets only the money you spend. Some economists argue that state sales taxes aren't true consumption taxes. That's because most states have lots of exemptions -- sales of some goods and most services aren't taxed. Also, businesses often have to pay the sales tax on things they buy, although the businesses aren't the final consumers. Many foreign countries use a different sort of consumption tax -- known as a Value Added Tax (VAT) -- that gives a tax credit to businesses when the goods reach the consumer. Regardless of what you call it, sales tax is usually tacked onto the price of an item. The consumer pays the tax to the retailer, who's responsible for keeping records and sending the revenue to the state at regular intervals.
Consumers in most states don't care about the fine distinctions. A sales tax feels like a consumption tax to them. How much does it hurt?
A sales tax is classified as a consumption tax. An income tax goes after the money you earn; a consumption tax targets only the money you spend. Some economists argue that state sales taxes aren't true consumption taxes. That's because most states have lots of exemptions -- sales of some goods and most services aren't taxed. Also, businesses often have to pay the sales tax on things they buy, although the businesses aren't the final consumers. Many foreign countries use a different sort of consumption tax -- known as a Value Added Tax (VAT) -- that gives a tax credit to businesses when the goods reach the consumer. Regardless of what you call it, sales tax is usually tacked onto the price of an item. The consumer pays the tax to the retailer, who's responsible for keeping records and sending the revenue to the state at regular intervals.
Consumers in most states don't care about the fine distinctions. A sales tax feels like a consumption tax to them. How much does it hurt?
First, there are the sales-tax-free states:
* Alaska does allow local governments to levy sales taxes, and many do.
* Delaware does impose a tax on businesses' receipts, at a lower rate (a maximum of 2.07 percent) than sales taxes in other states.
*New Hampshire imposes excise taxes on hotel rooms, some restaurant meals and communications services. For practical purposes, these excise taxes work like sales taxes.
* Montana levies a 4 percent tax on rental vehicles.
* Oregon imposes small taxes on cigarettes and gasoline.
Then, there are the other 45 states. Some, such as New Mexico, don't call it a state sales tax on buyers, but rather a gross receipts tax of 5 percent on businesses, but since businesses routinely pass the tax on to consumers, it works the same way.
The state determines what you pay. California leads the nation with a state sales tax of 8.75 percent. On its heels are Indiana, Mississippi, New Jersey, Rhode Island and Tennessee at 7 percent. Next highest are Minnesota at 6.875 percent, Nevada at 6.85 percent, Washington at 6.5 percent, and Texas and Illinois at 6.25 percent. On the low end is Colorado, with a 2.9 percent state sales tax. Next are seven states with 4 percent sales taxes: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming.
Tax Holidays
* Alaska does allow local governments to levy sales taxes, and many do.
* Delaware does impose a tax on businesses' receipts, at a lower rate (a maximum of 2.07 percent) than sales taxes in other states.
*New Hampshire imposes excise taxes on hotel rooms, some restaurant meals and communications services. For practical purposes, these excise taxes work like sales taxes.
* Montana levies a 4 percent tax on rental vehicles.
* Oregon imposes small taxes on cigarettes and gasoline.
Then, there are the other 45 states. Some, such as New Mexico, don't call it a state sales tax on buyers, but rather a gross receipts tax of 5 percent on businesses, but since businesses routinely pass the tax on to consumers, it works the same way.
The state determines what you pay. California leads the nation with a state sales tax of 8.75 percent. On its heels are Indiana, Mississippi, New Jersey, Rhode Island and Tennessee at 7 percent. Next highest are Minnesota at 6.875 percent, Nevada at 6.85 percent, Washington at 6.5 percent, and Texas and Illinois at 6.25 percent. On the low end is Colorado, with a 2.9 percent state sales tax. Next are seven states with 4 percent sales taxes: Alabama, Georgia, Hawaii, Louisiana, New York, South Dakota and Wyoming.
Tax Holidays
In the 1990s, a few states came up with an idea that would
spread like wildfire. They would suspend the collection of state sales tax on
certain items for a weekend in August to give parents a break on back-to-school
purchases like backpacks, supplies and clothes for their children. It was a
win-win situation for many retailers and shoppers. The retailers came out ahead
because the tax break encouraged a lot of shopping, and the parents saved
money. In 2010, at least 15 states had
sales tax holidays scheduled. They ranged from one day to one week.
Sales tax holidays usually are targeted toward certain items. They often have upper limits on the price of items that can be bought tax-free. Back-to-school sales tax holidays are popular, but they aren't the only kind. Several states have started tax holiday weekends for appliances with the federal Energy Star efficiency rating.
Some sales tax holidays appear to be designed to influence behavior as well as to save shoppers' money. Louisiana and Virginia, for example, have tax holiday weekends for hurricane preparedness items. Louisiana also has a tax-free weekend for the sale of ammunition, hunting supplies and guns in honor of the Second Amendment.
In Vermont, the Legislature approved two one-day sales tax holidays in 2009, during which people can buy anything costing $2,000 or less tax-free. When shoppers turned out in droves on one of those holidays, March 6, 2010, retailers said it gave them a needed boost in a down economy. One speculated that the sales tax holidays encourage shoppers to buy locally rather than online. Buying online can be an easy way to avoid state sales tax. (Consumers are technically required to pay any sales taxes directly to the state -- even when the online store doesn't collect it -- but this rule is rarely enforced.) When tax isn't an issue, buying locally becomes more attractive because it's quicker and there are no shipping costs.
There's a catch, though: Sales tax holidays can be a victory for retailers and shoppers. But they're not great deals for the states that are losing the tax revenue. Some states have repealed tax holidays when the economy worsened. Others require that legislators authorize the holiday every year or two, and in some states such as Florida and Massachusetts, they've decided not to. New York, which was one of the first states to have a tax holiday, did away with the holiday in favor of removing state sales tax on clothing and shoes costing $110 or less year-round.
The Down Side of Sales Taxes
Sales tax holidays usually are targeted toward certain items. They often have upper limits on the price of items that can be bought tax-free. Back-to-school sales tax holidays are popular, but they aren't the only kind. Several states have started tax holiday weekends for appliances with the federal Energy Star efficiency rating.
Some sales tax holidays appear to be designed to influence behavior as well as to save shoppers' money. Louisiana and Virginia, for example, have tax holiday weekends for hurricane preparedness items. Louisiana also has a tax-free weekend for the sale of ammunition, hunting supplies and guns in honor of the Second Amendment.
In Vermont, the Legislature approved two one-day sales tax holidays in 2009, during which people can buy anything costing $2,000 or less tax-free. When shoppers turned out in droves on one of those holidays, March 6, 2010, retailers said it gave them a needed boost in a down economy. One speculated that the sales tax holidays encourage shoppers to buy locally rather than online. Buying online can be an easy way to avoid state sales tax. (Consumers are technically required to pay any sales taxes directly to the state -- even when the online store doesn't collect it -- but this rule is rarely enforced.) When tax isn't an issue, buying locally becomes more attractive because it's quicker and there are no shipping costs.
There's a catch, though: Sales tax holidays can be a victory for retailers and shoppers. But they're not great deals for the states that are losing the tax revenue. Some states have repealed tax holidays when the economy worsened. Others require that legislators authorize the holiday every year or two, and in some states such as Florida and Massachusetts, they've decided not to. New York, which was one of the first states to have a tax holiday, did away with the holiday in favor of removing state sales tax on clothing and shoes costing $110 or less year-round.
The Down Side of Sales Taxes
Many observers say that Americans accept sales tax more
willingly than they do other taxes. We pay it in small amounts, we're used to
it and there's no paperwork for the consumer.
The main criticism of sales taxes has to do with fairness and social
justice. Sales taxes are regressive, meaning that they hit the poor harder than
the rich. Poor people have to spend a larger percentage of their income just to
get by. Richer people can save more of their income or use it in other ways
that don't involve paying sales tax.
But that's not the only rap on sales taxes:
* Too many exemptions: With the exception of Hawaii, most states with sales taxes exempt a number of items. Some of these exemptions lessen the tax burden on the poor. Food is often exempt, as are prescription medications. But other exemptions are more politically motivated and draw criticism.
* Too complicated: Exemptions are one reason sales taxes are complicated and sometimes confusing for retailers. Another is the fact that various states have different rates, rules and ways of collecting from retailers. This maze of tax laws can be a nightmare for retailers doing business in more than one state.
*Double taxation: Businesses usually are treated as consumers and charged sales tax on office supplies and other items they use that don't go directly into the products or services they sell. This expense raises the price they charge on their goods or services, on which consumers pay sales tax.
* Can't keep up with the times: The economy has changed faster than sales taxes have. Services are a much bigger part of the American economy today than they were in the 1930s. States are beginning to tax some services like telephone and cable and satellite TV, but they encounter a lot of resistance.
* Lack of online taxes: The Internet has affected sales taxes in at least two important ways. Online shopping makes it easier for consumers to buy goods in other states and avoid sales taxes on most purchases. And downloading music, movies, books, games and software allows people to buy things they want without paying state sales tax.
Sales taxes aren't the perfect way for states to raise revenue. And if states are going to continue to rely heavily on sales taxes, they'll have to figure out how to deal with changing times. But shoppers should know that state sales taxes won't disappear anytime soon.
But that's not the only rap on sales taxes:
* Too many exemptions: With the exception of Hawaii, most states with sales taxes exempt a number of items. Some of these exemptions lessen the tax burden on the poor. Food is often exempt, as are prescription medications. But other exemptions are more politically motivated and draw criticism.
* Too complicated: Exemptions are one reason sales taxes are complicated and sometimes confusing for retailers. Another is the fact that various states have different rates, rules and ways of collecting from retailers. This maze of tax laws can be a nightmare for retailers doing business in more than one state.
*Double taxation: Businesses usually are treated as consumers and charged sales tax on office supplies and other items they use that don't go directly into the products or services they sell. This expense raises the price they charge on their goods or services, on which consumers pay sales tax.
* Can't keep up with the times: The economy has changed faster than sales taxes have. Services are a much bigger part of the American economy today than they were in the 1930s. States are beginning to tax some services like telephone and cable and satellite TV, but they encounter a lot of resistance.
* Lack of online taxes: The Internet has affected sales taxes in at least two important ways. Online shopping makes it easier for consumers to buy goods in other states and avoid sales taxes on most purchases. And downloading music, movies, books, games and software allows people to buy things they want without paying state sales tax.
Sales taxes aren't the perfect way for states to raise revenue. And if states are going to continue to rely heavily on sales taxes, they'll have to figure out how to deal with changing times. But shoppers should know that state sales taxes won't disappear anytime soon.
