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Ranking Sales Taxes on the 2021 State Business Tax Climate Index

Today we continue our map series on the 2021 State Business Tax Climate Index with a map showing states’ rankings on the Index’s sales and excise tax component. A state’s sales tax rate and structure can make a state more or less attractive to businesses for two key reasons: (1) some states apply the sales tax to business inputs, which drives up the costs of production, and (2) as sales tax rates increase, consumers may cut back on purchases or move their shopping to lower-tax jurisdictions. The sales tax component accounts for 24.4 percent of each state’s overall Index score.

An ideal sales tax applies to a broad base of final consumer goods and services, with few exemptions, and is levied at a low rate. Broad-based, low-rate tax structures minimize tax-induced economic distortions that can occur when people change their purchasing behavior because of tax differences. In addition, sales tax exemptions narrow the tax base, driving up the sales tax rate on those goods and services that remain subject to the tax or forcing greater reliance on less economically efficient taxes.

It is important to note that a well-structured sales tax applies only to the final consumer at the point of sale. It does not apply to the sale of machinery, raw materials, and other business inputs, as those taxes increase the costs of production and ultimately get passed along to consumers in the form of higher prices. States that avoid taxing business inputs perform better on the Index.

This section of the Index also looks at how states apply their sales taxes to remote sellers. While most states have adopted safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few are penalized because they diverge from these practices, imposing substantial compliance costs on out-of-state retailers.

Ranking state sales tax codes on the 2021 State Business Tax Climate Index. Best and worst sales tax codes in the United States, best and worst state sales tax codes in the U.S.

As shown on the map, the highest-scoring states on the sales tax component of the 2021 Index are those without a state sales tax: New Hampshire, Delaware, Montana, Oregon, and Alaska. (They do not receive perfect scores because each state does impose excise taxes with varying degrees of competitiveness, and Alaska permits local sales taxes.) The states with the next best scores—Wyoming, Wisconsin, Maine, Idaho, Michigan, Virginia, and Massachusetts—have well-structured sales taxes and modest excise tax rates.

States that rank poorly on this component have high sales tax rates, high excise tax rates, complicated sales tax administration, and apply the sales tax to a variety of business inputs while exempting many final consumer purchases. The lowest-scoring states are Alabama, Louisiana, Washington, Tennessee, and Arkansas.

To learn more about your state’s score on the sales tax component, click here.

To see whether your state’s sales tax structure has become more or less competitive in recent years, check out the following table.

Sales Tax Component of the State Business Tax Climate Index (2017–2020)
State 2021 Rank Change from 2020 to 2021 2020 Rank 2019 Rank 2018 Rank
Alabama 50 0 50 50 49
Alaska 5 0 5 5 5
Arizona 40 0 40 40 44
Arkansas 46 0 46 45 46
California 45 0 45 46 40
Colorado 36 1 37 37 37
Connecticut 26 0 26 30 31
Delaware 2 0 2 2 1
Florida 21 0 21 22 28
Georgia 27 2 29 29 30
Hawaii 30 0 30 33 26
Idaho 9 2 11 12 15
Illinois 38 -4 34 35 27
Indiana 20 0 20 13 9
Iowa 14 0 14 18 19
Kansas 37 1 38 27 29
Kentucky 13 0 13 19 14
Louisiana 49 -1 48 48 50
Maine 8 0 8 8 8
Maryland 18 1 19 17 18
Massachusetts 12 0 12 10 11
Michigan 10 0 10 14 12
Minnesota 28 0 28 26 25
Mississippi 32 1 33 36 39
Missouri 24 0 24 25 24
Montana 3 0 3 3 3
Nebraska 15 0 15 11 21
Nevada 44 0 44 44 43
New Hampshire 1 0 1 1 2
New Jersey 42 0 42 42 42
New Mexico 41 0 41 41 41
New York 43 0 43 43 45
North Carolina 22 0 22 24 20
North Dakota 29 -2 27 31 35
Ohio 34 -2 32 28 32
Oklahoma 39 0 39 39 36
Oregon 4 0 4 4 4
Pennsylvania 17 0 17 21 22
Rhode Island 25 0 25 23 23
South Carolina 31 0 31 34 33
South Dakota 33 2 35 32 34
Tennessee 47 0 47 47 47
Texas 35 1 36 38 38
Utah 23 0 23 15 17
Vermont 16 0 16 20 16
Virginia 11 -2 9 9 10
Washington 48 1 49 49 48
West Virginia 19 -1 18 16 13
Wisconsin 7 0 7 7 7
Wyoming 6 0 6 6 6
District of Columbia 34 2 36 32 35

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.

Source: Tax Foundation.

To learn more about how we determined these rankings, read our full methodology here.

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