A Helpful Overview of the 2019 State Sales Tax Ranking

Over the past few years we’ve seen how companies have determined where to base operations based on considerations like sales tax, credits and incentives, and overall business climate. When it comes to running a business, which states are friendliest and which are most unfavorable?

The Tax Foundation’s 2019 State Business Tax Climate Index compiles various state details to offer a fascinating comparison for corporate leaders. Keep reading for an overview of how the various states stack up next to each other, especially in regards to sales tax.

2019 State Sales Tax Ranking

The Tax Foundation’s review of this year’s sales tax ranking includes a map with a helpful visual of each state’s placement on the list.

On it you can see the top 10 states are:

1. New Hampshire
2. Delaware
3. Montana
4. Oregon
5. Arkansas
6. Wyoming
7. Maine
8. Wisconsin
9. Nebraska
10. Virginia

And the worst 10 states are:

1. New Mexico
2. New York
3. California
4. Arkansas
5. New Jersey
6. Tennessee
7. Arizona
8. Alabama
9. Washington
10. Louisiana

While the highest scoring states don’t have sales tax, the next best scores are from states with sales taxes that are well structured and excise tax rates that are moderate. Comparatively, the lowest-ranked states have high sales tax and excise tax rates, or they apply the sales tax to various different business inputs, such as manufacturing equipment and raw materials, in addition to taxes paid by the end user.

Sales Tax Example: How Taxing Business Inputs Affects the Market

The Tax Foundation shares a nice example of how these business inputs can negatively affect the market:

Suppose a sales tax were levied on the sale of flour to a bakery. The bakery is not the end-user because the flour will be baked into bread and sold to consumers. Where the tax burden falls depends on how sensitive the demand for bread is to price changes. If customers tend not to change their bread-buying habits when the price rises, then the tax can be fully passed forward onto consumers. However, if the consumer reacts to higher prices by buying less, then the tax will have to be absorbed by the bakery as an added cost of doing business.

The hypothetical sales tax on all flour sales would distort the market, because different businesses that use flour have customers with varying price sensitivity. Suppose the bakery is able to pass the entire tax on flour forward to the consumer but the pizzeria down the street cannot. The owners of the pizzeria would face a higher cost structure and profits would drop. Since profits are the market signal for opportunity, the tax would tilt the market away from pizza making. Fewer entrepreneurs would enter the pizza business, and existing businesses would hire fewer people. In both cases, the sales tax charged to purchasers of bread and pizza would be partly a tax on a tax because the tax on flour would be built into the price. Economists call this tax pyramiding, and public finance scholars overwhelmingly oppose applying the sales tax to business inputs due to the resulting pyramiding and lack of transparency.

Clearly, this type of sales tax structure falls into what the worst states on the list have in common: Those ranked at the bottom tend to have, “Complex, non-neutral taxes with comparatively high rates.”

An Overview of the State Business Tax Climate Index

When it comes to ranking on the overall tax climate index, sales tax accounts for 25.3 percent of each state’s score. The report also considers corporate, individual income, property and unemployment insurance taxes. In fact, some states in the top or bottom ten for sales tax have a vastly different ranking overall, such as Washington (ranked 20 overall and 49 for sales tax) and South Dakota (ranked 3 overall and 33 for sales tax). If you’re interested, you can read the full report here.

What does this have to do with your company? It’s helpful to keep an eye on the business climate around the country, especially if you’re considering a relocation or expansion. Before moving to or opening a new branch in a new state, you’ll want a clear understanding of how sales tax, credits and incentives, and other factors will affect your enterprise. Contact me today if you’d like to know more about how multi-state issues may affect your company!

Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.