Sales tax is a significant expense for any eCommerce business, so finding ways to leverage the tax breaks of selling in US states with no sales tax seems like a no-brainer. But this is sales tax. Nothing is ever that simple. So, let’s take a closer look at this tax break area by examining the pros and cons.
The advantages of no sales tax states (and disadvantages)
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Operating in States Without Sales Tax: The Pros |
Operating in States Without Sales Tax: The Cons |
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Competitive edge Retail prices can be reduced because customers no longer have to pay sales tax, making competitive pricing more appealing to attract a larger customer base. |
Higher reliance on other taxes States without sales tax often rely on alternative taxes like income or property tax, leading to tax burdens in other areas – something to consider if operating in these states.) |
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No sales tax collection obligation Online businesses only collect sales tax in states where they have economic nexus. In no sales tax states, there’s no need to collect or remit such taxes. |
Local Taxes Even in sales-tax-free states, local jurisdictions might impose taxes, complicating compliance. |
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No use tax obligation Ecommerce businesses operating in states without sales tax do not have to worry about paying use tax on their untaxed purchases when filing sales and use tax returns. |
Potential tax policy changes States without sales tax might introduce it in the future, affecting e-commerce strategies. |
Which states have no sales tax?
Fun fact: No sales tax states are often called NOMAD, a mnemonic acronym created from the first letter of each state. These five states have no online sales tax or levy a statewide sales tax on goods and services. But they’re not 100% tax-free haven as some sales in NOMAD states may still be charged sales tax at a local level. Let’s zoom into these exceptions.
New Hampshire
The Switzerland of America has no general sales tax, but it does have a few exceptions. For example, the gross receipts tax (GRT) is imposed on prepared food, hotel rooms, and car rentals. Also, some local jurisdictions may impose their own sales taxes, adding complexity if you operate here.
What is GRT? Unlike traditional sales tax, which is typically applied to individual sales, how much GRT you pay is based on the total amount of money your business generates from its operations. This includes sales revenue, services rendered, and other business activities. The tax rate for GRT can vary depending on the specific regulations of the taxing authority, and it may be applied to businesses of various sizes and industries.
Oregon
The Beaver State’s tax structure can make it attractive for consumers who want to avoid traditional sales tax when shopping. Oregon doesn’t have a general sales tax, but it does have a statewide use tax. The use tax is imposed on the sale of tangible personal property purchased in another state and brought into Oregon for use. Visit the Oregon Department of Revenue online for the latest sales tax requirements. It’s one of the few black-and-white rules you can follow (without exception) when operating in any NOMAD state.
Montana
Montana has no general sales tax, but it does have a few exceptions. For example, sales tax is imposed on gasoline, cigarettes, and alcohol. Additionally, some local jurisdictions may impose their own sales taxes.
The state does not have a sales tax exemption certificate, but residents working or shopping in a state with a sales tax may need to pay sales tax and should check the sales tax laws of that state.
Alaska
Alaska has no general sales tax, but it does have a few exceptions. For example, sales tax is imposed on prepared food, hotel rooms, and car rentals. While the Last Frontier doesn’t have a sales tax on the state level, on the county and city levels, local governments can collect an optional sales tax of up to 7.5%.
Online businesses, like US and non-US-based SaaS companies with economic nexus in Alaska, may be required to collect sales tax from buyers in participating jurisdictions. That’s down to the Alaska Remote Seller Sales Tax Code passed on January 6, 2020.
Delaware
Over two-thirds of Fortune 500 companies call Delaware home since the state doesn’t impose sales tax or personal income tax on non-residents, making it easier to attract top talent. But that’s not the only reason. Delaware’s General Corporation Law and business-friendly legal system provide stability and certainty for businesses.
No, the second smallest state doesn’t levy a general sales tax on online sellers. Yes, of course, there are exceptions. Like New Hampshire, Delaware imposes a gross receipts tax (GRT) levied on businesses rather than consumers. GRT tax rates range from .0945% to .7468%, depending on the business activity. As ever, visit Delaware’s Department of Revenue online for a clear view of where things stand.
No sales tax doesn’t mean no exposure
While operating in a state without sales tax may seem like a dream come true, it’s essential to remember that your business is still subject to other taxes. Property tax, payroll taxes, and income taxes are just a few examples of taxes that companies may still need to navigate.
Additionally, even if you don’t have sales tax obligations in one state, you may have liabilities in other states where physical or economic nexus is triggered.
Recordkeeping Requirements
Whether a state has free sales tax or not, keeping precise records of your sales transactions, exemptions claimed, and any sales tax collected is crucial. This practice ensures you meet reporting needs, are ready for audits, and gain insights into your business’s financial health and performance.
Navigating Local Jurisdictions
The big caveat of doing business in states with no sales tax is that local jurisdictions often impose tax obligations, adding another layer of complexity to the intricate web of tax regulations. Staying informed about these local nuances is essential for maintaining compliance and avoiding potential penalties.
Conquer sales tax with Complyt
States with no sales tax can be an excellent place for businesses to set up shop. However, ecommerce businesses must stay up-to-date with sales tax laws in more than 12,000 tax jurisdictions in the U.S. Each state has a specific tax breakdown and code to follow for ecommerce stores. Most states have substantial sales thresholds for sales tax nexus.
Complyt’s cloud-based SaaS solution automates sales tax calculation, considering each jurisdiction’s specific tax rates and rules of each jurisdiction. It also helps you to stay up-to-date with changing regulations and reduces the risk of errors and penalties for businesses operating in states with no sales tax capabilities. Reach out today, no matter the size of your business.
