We recently did a state-wise analysis of the sales taxes in the US and discussed the role of sales tax in the US economy. There are five states with zero sales tax rates in the US and in this article, we will discuss the top state with zero sales tax, according to our methodology. Check out our free report on the 15 States With No or Lowest Sales Tax Rates in the US.
The Role of Sales Tax in the US Economy
The majority of revenue for the US federal government comes from income taxes including both personal and corporate. According to the Treasury Government Fiscal Data, the US government has collected a total revenue of $2.96 trillion in fiscal year 2024 year-to-date. The combined individual and corporate income tax revenue accounts for almost 62% of the total revenue so far. Sales tax plays a significant role in states where income tax and corporate income tax are low. Most of the states with no income tax or low income tax have sales tax higher than the average state sales tax rate of 5.10%. For instance, Tennessee, Florida, Washington, and Nevada are some of the states with the lowest income taxes and highest state sales tax rates. Tennessee, Washington, and Nevada each have a state sales tax rate of 7%, while Florida has a state sales tax of 6%, which is higher than the average state sales tax rate.
South Dakota was the last state that made a sales tax cut in 2023, a reduction that is expected to expire after 2026. New Mexico lowered its state sales tax from 5.12% to 5% in July 2022. Currently, New Mexico’s state sales tax is almost 4.88%. According to data from the Tax Foundation, the seven-county Twin Cities metro in Minnesota experienced a 1 percentage point sales tax increase in October 2023. In Milwaukee, Wisconsin, the state imposed a new 2% sales tax on January 1, 2024, while Milwaukee County raised its sales tax from 0.5% to 0.9%.
The first sales tax in the US was imposed in Mississippi in the 1930s and was established as a last resort during the Great Depression. There are five states with no sales tax and then Colorado has a minimum sales tax rate of 2.90%. California has the highest state sales tax rate of 7.25%, as of 2024. There are local sales taxes imposed by the state government upon various retail products and services. Alabama has the highest local tax rate of 5.29%.
According to the financial report for the financial year of 2023 by the US Treasury, the US government has $97.7 billion and $90.9 billion in compliance assessments and pre-assessment work in process for the financial years 2023 and 2022, respectively. The unpaid assessments are taxes receivable by the government if taxpayers agree or a court has determined the assessments are owed. In this case, neither of these circumstances are fulfilled and the unpaid assessments are categorized as compliance assessments. The amount of assessments that were written off and excluded from accounts receivable for financial years 2023 and 2024 are $76.6 billion and $77.3 billion, respectively. These written-off accounts are the assessment amounts that were to be collected by the statutory authority at the end of the financial period. The OECD’s Annual Revenue Statistics for 2023 revealed that the US tax-to-GDP ratio increased by 1.2 percentage points from 26.5% in 2021 to 27.7% in 2022. However, the US tax-to-GDP ratio was lower than the OECD average of 34% in 2022.
Companies Offering Tax Services in the US
Intuit Inc. (NASDAQ:INTU), H&R Block, Inc. (NYSE:HRB), and Deloitte are some of the top tax consultants and services providers in the US. Intuit Inc. (NYSE:HRB) is a leading technology company, specializing in financial solutions. The company owns the leading software applications and packages including TurboTax, CreditKarma, and QuickBooks. On May 23, Intuit Inc. (NYSE:HRB) reported its earnings for the third quarter of fiscal 2024. The company posted earnings per share of $9.88, beating consensus estimates by $0.50. The revenue was reported around $6.74 billion, surpassing estimates by $92.48 million. Here are some of the comments from the company’s Q3 2024 earnings call:
“Our third quarter revenue grew 12%. Small business and self-employed group revenue grew 18% despite an uncertain macro environment, demonstrating the importance of our platform in fueling success for small businesses and our momentum serving the mid-market.
Consumer group revenue grew 9% and Credit Karma revenue grew 8%, driven by the impact of innovation from members and the benefits of TurboTax and Credit Karma product integration. I’m proud of our performance and the momentum we’re seeing across the company. Turning to tax. We continue to revolutionize how taxes get done for consumers and small businesses.”
Deloitte is a British multinational, one of the big four corporations, specializing in audit, consulting, tax, and advisory services. On May 7, Deloitte announced that it has expanded its collaboration with Red Hat, Inc., a leading open-source solutions provider. Red Hat and Deloitte will help manage the complexity of multi-vendor software ecosystems across industries. Both corporations will help companies accelerate the transition from conventional hardware development to software-defined development methodologies in software-defined vehicle (SDV) product lines.
H&R Block, Inc. (NYSE:HRB) is a leading tax service provider in North America. On May 2, H&R Block, Inc. (NYSE:HRB) released its earnings for the third quarter of 2024. The company posted earnings per share of $4.94, beating estimates by $0.33. H&R Block, Inc. (NYSE:HRB) reported revenue of $2.18 billion, surpassing consensus by $47.37 million. Here are some of the comments from H&R Block, Inc.’s (NYSE:HRB) Q3 2024 earnings call:
“Beginning with Q3 results ending March 31, revenue grew 4%, EBITDA grew 6% and EPS grew 18%. In the quarter, performance was driven by improvements in net average charge or NAC in both assisted and DIY. DIY volume growth and ongoing disciplined expense management, based on how we ended tax season and our third quarter performance, we now expect to finish the year near the high end of our outlook.
Turning to the tax season. After a bit of a slow start, the overall industry grew about 2% this year, with DIY growing 3% and assisted growing about 1%. Our data indicates that last year’s California extension had a positive impact on category growth this year.”
Now that we have discussed statistics related to the sales tax in the US, let’s talk about the best state with no sales tax rate in the US.
Pixabay/Public Domain
Our Methodology
To compile our list of the 15 states with No or Lowest sales tax rates in the US, we gathered tax rates data from the Tax Foundation. We have considered the state sales tax rate and the average local sales tax rate, scored as the combined state sales and local tax rates, as of 2024. We have ranked states in ascending order of the combined state sales and local tax rates. For the states with similar combined state sales and local tax rates, we have used the state tax burden as a tie-breaker.
The ranking of states is based on the combined state sales and local tax rates and does not count the differences in tax bases such as the structure of sales taxes, and defining what is taxable and nontaxable.
The State with No Sales Tax Rate In the US
New Hampshire
State Sales Tax Rate (2024): 0%
Average Local Sales Tax Rate (2024): 0%
Combined State Sales and Local Tax Rates (2024): 0%
State Tax Burden: 4.93%
New Hampshire is one of the states with the lowest tax burdens in the US. New Hampshire has a tax burden of 4.93%, comprising 3% personal income tax and 1.93% property tax. New Hampshire does not charge state sales tax or any form of local sales tax. The New England state is the best state with no sales tax rate in the US.
To learn about the other US states that have zero sales tax other than New Hampshire, read our free report on the 15 States With the No or Lowest Sales Tax Rates in the US.
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Disclosure: None. This article is originally published on Insider Monkey.