Which states have the highest sales and use taxes?

Unless you live in or frequently make purchases in a state without a sales tax, you’re probably keenly aware of the sales and use tax rates on the items you purchase. Most people accept sales tax as a part of life, and because we pay it so often, we might even forget it’s there.

So, which state has the highest sales and use taxes? Well, it’s complicated. To answer, we’ll look at:

• What makes up a sales tax rate 
• Which states qualify as having the highest sales tax

But it isn’t just about numbers. We’ll also take a look at:

• Why sales tax is so important 
• What businesses should know about sales tax rates 
• Why sales tax matters to a consumer

Sales tax is typically made up of two components: a state tax and a local tax.

Base rate

With the exception of Alaska, every state with sales tax has a base state sales tax rate, ranging from 2.9% (Colorado) to 7% (Indiana, Mississippi, Rhode Island, and Tennessee). The base rate refers to the portion of the tax collected by the state government. If it were that easy, the primary question of this post would be answered. But wait, there’s more.

Local rate

Most states also allow local jurisdictions to apply their own sales tax on top of the state’s base rate. Local sales tax can be collected by the city, county, or other local jurisdiction. Because each is applied independently, localities can determine their own tax rates. That’s why the rates can vary within a county or city — and why relying on ZIP codes is problematic when it comes to sales tax compliance.

When determining the states with the highest sales tax, the answer depends on which part of a state you’re buying stuff in. We’ve already looked at the states with the highest state sales tax rate, but when you add in local rates, the answer changes — probably more than you think.

If you’re asking about simple math (base rate + local rates), the top five high tax states are:

• Arkansas: 6.5% state tax rate, 0–5% local tax rate, 11.5% combined rate

• Oklahoma: 4.5% state tax rate, 0–7% local tax rate, 11.5% combined rate

• Louisiana: 4.45% state tax rate, 0–7% local tax rate, 11.45% combined rate

• Arizona: 5.6% state tax rate, 0–5.6% local tax rate, 11.2% combined rate

• Colorado: 2.9% state tax rate, 0–8.3% local tax rate, 11.2% combined rate

If you want an example of how convoluted sales tax can be, look no further than Colorado; it’s got the lowest base rate of any state. But depending on where you shop, you may end up paying one of the highest rates in the country.

Also, the bare numbers don’t tell the whole story, if you’re asking which state charges the highest sales tax. Rates don’t always translate to dollars paid. For a more practical answer to the question, it’s key to look at the highest effective tax rates people are actually paying.

In which case, the five states with the highest tax rate are:

• Louisiana: 4.45% state tax rate, 5.10% average local sales tax rate, 9.55% combined rate

• Tennessee: 7% state tax rate, 2.55% average local sales tax rate, 9.55% combined rate

• Arkansas: 6.5% state tax rate, 2.96% average local sales tax rate, 9.46% combined rate

• Alabama: 4% state tax rate, 5.25% average local sales tax rate, 9.25% combined rate

• Oklahoma: 4.50% state tax rate, 4.48% average local sales tax rate, 8.98% combined rate

Note: This list is not to be confused with the states with highest taxes overall.

The short answer is revenue.

State sales tax is a consumption tax levied on the sale of goods and services, and the revenue collected from this tax helps a state support its budget. Tax income is typically used to support services like public education, roads and infrastructure, healthcare, and more. 

Similarly, local governments levy their own sales taxes to fund local services such as public transportation or parks and recreation. Overall, sales tax income is a significant source of revenue for state and local governments. Without it, they’d have to rely on other forms of revenue, such as personal income tax, property taxes, excise taxes, and capital gains tax to fund programs and manage economic changes.

It’s important to note that state and local taxes are just one part of a total tax burden. We often talk about the highest taxed states and think of California or New York — both of which are absent from the lists of high taxes above.

But that’s exactly the point. Governments build budgets based on a network of state and local taxes. A lot of pieces go into determining who has the highest tax burdens vs. the lowest tax burdens. For example, Tennessee has high sales taxes but no state income tax, whereas Oregon has no sales tax but high state income taxes. Meanwhile, New Jersey has a fairly low sales tax rate but the country’s highest average property tax and third-highest burden for state income tax. Talk about highest taxed states.

In most cases, sales tax is something controlled by state legislatures, and the policies they institute can fluctuate and have immediate and lasting impacts on businesses and consumers alike.

As a business, you have zero control over how the state taxes goods and services. Rates are determined by state and local governments, and you’re required to collect and remit the taxes of those governments.

However, you can take steps to ensure you’re collecting the correct amount of sales tax. This includes keeping track of any changes in tax rates and making sure you’re charging the correct amount based on the transaction that takes place.

This can be simple enough if your business has a single, physical location. But expanding to more stores in different tax jurisdictions adds layers of complexity come tax time. If you sell online, tax rates vary widely, depending on where the customer lives.

Automating the management of sales tax compliance with software can help streamline the process and reduce the risk of errors often found during an audit.

You also need to know when you can reduce your business’s tax burdens through certain exemptions or deductions. For example, some states offer exemptions for certain types of products or sales to nonprofit organizations.

It’s worth noting, you should always consult with a tax professional to ensure that any exemptions or deductions are properly claimed and comply with applicable laws and regulations.

Almost no one likes paying taxes. Consumers are most likely to develop sales tax avoidance strategies in areas where there’s a significant difference between local sales tax rates.

Research indicates that consumers can and do leave high-tax areas to make major purchases in low-tax areas, such as from cities to suburbs. For example, evidence suggests that Chicago-area consumers make major purchases in surrounding suburbs or online to avoid Chicago’s 10.25% sales tax rate.

At the statewide level, businesses sometimes locate just outside the borders of areas with high local sales tax rates to avoid being subjected to those rates. A stark example of this occurs in New England, where even though I-91 provides a convenient thoroughfare on the Vermont side of the Connecticut River, many more retail establishments set up shop on the New Hampshire side to avoid sales taxes.

One study shows that per capita sales in border counties in sales tax-free New Hampshire have tripled since the late 1950s, while per capita sales in border counties in Vermont have remained stagnant. Delaware even used its highway welcome sign to remind motorists that Delaware is the “Home of Tax-Free Shopping.”

State and local governments should be cautious about raising rates too high relative to their neighbors. Doing so can yield less revenue than expected or, in extreme cases, revenue losses despite the higher rate. After all, people pay good money to avoid paying taxes.

With all the complexity around state rates, local rates, and exemptions, charging the right sales tax rate can be a challenge. However, Avalara has a retail solution designed to simplify the compliance process from determining rates to filing returns.

Get access to regularly updated sales tax rates, automatically applied or exempted based on the type of sale and the purchase location. And it isn’t just rate calculation; Avalara uses automation to help with state sales tax registration, licensing, exemption certificate management, returns preparation, and remittance.

To find out if Avalara is right for your business, schedule a call today.