Ranking Sales Taxes on the 2022 State Business Tax Climate Index

Accounting News

Today we continue our map series on the 2022 State Business Tax Climate Index with a map showing states’ rankings on the Index’s sales and excise tax component. The 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 23.7 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 appropriate 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.

As shown on the map, the highest-scoring states on the sales tax component of the 2022 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, Washington, Louisiana, California, and Tennessee.

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.

How Does Your State Rank on Sales Taxes?
Sales Tax Component of the State Business Tax Climate Index (2019–2022)
State 2019 Rank 2020 Rank 2021 Rank 2022 Rank Change from 2021 to 2022
Alabama 19 18 19 19 0
Alaska 22 23 23 24 -1
Arizona 11 11 10 11 -1
Arkansas 26 25 26 27 -1
California 13 15 14 14 0
Colorado 33 33 33 34 -1
Connecticut 50 50 50 50 0
Delaware 4 4 4 4 0
Florida 12 12 12 12 0
Georgia 29 30 25 25 0
Hawaii 21 26 29 30 -1
Idaho 3 3 3 3 0
Illinois 48 48 48 48 0
Indiana 2 2 2 1 1
Iowa 38 38 38 39 -1
Kansas 31 31 31 31 0
Kentucky 23 21 22 22 0
Louisiana 27 27 24 23 1
Maine 40 40 40 41 -1
Maryland 41 41 43 43 0
Massachusetts 45 44 45 45 0
Michigan 25 24 20 21 -1
Minnesota 32 32 32 32 0
Mississippi 37 37 37 38 -1
Missouri 9 9 8 8 0
Montana 30 28 28 29 -1
Nebraska 39 39 41 40 1
Nevada 5 6 5 5 0
New Hampshire 46 45 47 46 1
New Jersey 44 46 44 44 0
New Mexico 1 1 1 2 -1
New York 47 47 46 47 -1
North Carolina 14 13 13 13 0
North Dakota 6 7 11 10 1
Ohio 7 5 6 6 0
Oklahoma 28 29 30 28 2
Oregon 16 19 16 17 -1
Pennsylvania 17 16 15 15 0
Rhode Island 42 42 42 42 0
South Carolina 36 35 35 36 -1
South Dakota 15 14 21 18 3
Tennessee 35 34 34 33 1
Texas 34 36 36 37 -1
Utah 8 8 7 7 0
Vermont 49 49 49 49 0
Virginia 24 22 27 26 1
Washington 18 17 18 20 -2
West Virginia 10 10 9 9 0
Wisconsin 20 20 17 16 1
Wyoming 43 43 39 35 4
District of Columbia 49 49 50 50 0

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.

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