Discover the States with Lowest Sales Tax Rate in 2025

Navigating the complexities of sales tax is a critical aspect of running a successful business, especially as tax policies evolve. For 2025, certain states stand out with the lowest sales tax rates, creating unique opportunities for businesses and consumers alike.

These low-tax states not only foster increased consumer spending but also provide businesses with a competitive edge in pricing and compliance. In this article, we’ll explore the states with the lowest sales tax rates, their economic implications, and what they mean for businesses aiming to thrive in today’s ever-changing tax landscape.

Sales Tax and State Revenue: A Delicate Balance

Sales tax is a cornerstone of state revenue, contributing to critical services such as infrastructure, education, and healthcare. On average, sales tax accounted for 30% of state revenue across the U.S. in 2022. States with higher sales tax rates, such as California, rely heavily on this stream, while those with lower or no sales tax seek alternative revenue sources like property taxes or excise taxes.

States with no sales tax often offset the gap with creative taxation strategies. For example, New Hampshire substitutes its sales tax with excise taxes, while Oregon leans heavily on income tax and property tax. The absence of a general sales tax fosters a business-friendly environment while driving unique taxation landscapes.

States With No Sales Tax

The absence of state sales tax fosters distinct fiscal environments across the “tax-free” states. These “tax-free havens” allow companies to operate without the administrative burden of collecting and remitting sales tax. However, these states often implement alternative taxation models

1. Alaska

Alaska does not impose a statewide sales tax, but some local jurisdictions levy local sales taxes to generate revenue. The state primarily funds its budget through oil and gas revenues, federal funding, and tourism-related taxes. Property taxes and sin taxes (on alcohol, tobacco, and gambling) also contribute to Alaska’s revenue stream. Local sale taxes in Alaska can reach up to 7.5% in certain areas.

2. Delaware

Delaware compensates for its lack of sales tax by relying on corporate income taxes, franchise taxes, and business registration fees. It is known as a corporate haven, attracting businesses due to its favorable corporate tax structure and legal environment. The state also generates revenue from property taxes, personal income taxes, and excise taxes on specific goods. Delaware funds itself through a gross receipts tax on businesses, generating over $250 million annually.

3. Montana

Montana generates revenue primarily through income taxes, property taxes, and natural resource extraction taxes. The state benefits from significant revenue from oil, gas, and mining industries, helping to fund public services. Tourism also plays a role, with lodging and rental car taxes contributing to state income.

4. New Hampshire

New Hampshire does not have sales or income tax but relies on high property taxes and business taxes to generate revenue. The state imposes business profits tax and business enterprise tax, which apply to corporations and larger businesses. Additional revenue comes from excise taxes on tobacco, liquor, and lottery sales, making these a significant part of the state’s budget.

5. Oregon

Oregon funds its budget primarily through high personal income taxes, which account for a large portion of state revenue. The state also levies corporate excise taxes and payroll taxes, particularly on businesses operating within the state. Revenue from lottery funds, property taxes, and fuel taxes helps maintain infrastructure and public services.

This strategic mix of taxes allows each state to provide essential services while maintaining a business-friendly tax environment. These approaches ensure essential services are funded while maintaining an attractive environment for businesses and consumers.

States With The Lowest Sales Tax

When it comes to managing sales tax obligations, operating in states with the lowest sales tax rates can provide significant advantages for businesses and consumers alike. These states offer a more favorable tax environment, allowing for competitive pricing and increased consumer spending power. Let’s explore the states with the lowest sales tax rates, per Investopedia and see what makes their taxation systems unique.

Alabama (4%)

Alabama’s state sales tax rate of 4% is relatively low, but its local jurisdictions can impose additional taxes, resulting in some of the highest combined rates in the nation. Local tax rates can add as much as 7%, bringing the total to over 11% in certain areas. Businesses must navigate the complexities of home rule jurisdictions, which can make compliance challenging.

Colorado (2.9%)

Colorado boasts the lowest state sales tax rate at 2.9%, but its system is far from simple due to numerous local taxes imposed by cities, counties, and special districts. Combined rates can exceed 10% in some areas, making compliance a multi-layered challenge. The state also taxes some services, requiring businesses to carefully track both taxable sales and use tax obligations.

Georgia (4%)

Georgia maintains a low state sales tax rate of 4%, complemented by local taxes that can push the total rate to 8% or higher in some areas. The state provides a straightforward structure for taxable sales but imposes use tax for purchases made outside Georgia but used within the state. Retailers must manage accurate reporting to avoid liability issues.

Hawaii (4%)

Hawaii’s 4% sales tax rate operates as a general excise tax (GET), which applies broadly to goods and services at every stage of production. While the state has no additional local sales tax, the GET can effectively raise the cost of goods due to its cascading nature. Businesses in Hawaii must understand its unique taxation approach to remain compliant.

Louisiana (4.45%)

Louisiana’s 4.45% state sales tax rate is paired with complex local taxes, resulting in combined rates often exceeding 10%. The state operates as a home-rule jurisdiction, meaning local governments have significant control over their tax systems. Businesses must navigate varying tax bases and filing requirements, adding complexity to compliance.

Missouri (4.23%)

Missouri’s state sales tax rate of 4.23% is among the lowest, but local taxes can add up, with total rates surpassing 10% in some areas. The state offers numerous exemptions and reduced rates for specific goods, such as groceries. Accurate reporting and use tax management are critical for businesses to avoid audits and maintain compliance.

New York (4%)

New York’s state sales tax rate of 4% is relatively low, but local taxes can raise the total to as high as 8.875%, particularly in New York City. The state imposes detailed rules for taxable goods and services, along with exemptions for specific items like clothing under $110. Businesses must carefully track sales and filing processes to meet state and local taxation requirements.

North Carolina (4.75%)

North Carolina’s 4.75% state sales tax rate combines with local taxes to produce an average total rate of 6.98%. The state applies sales tax broadly to goods and many services while providing exemptions for essentials like groceries. Accurate calculation and reporting are essential for businesses operating across multiple jurisdictions within the state.

Oklahoma (4.5%)

Oklahoma’s state sales tax rate of 4.5% is complemented by local taxes, often raising the total rate above 8%. The state’s tax base includes most tangible personal property and some services. Businesses must navigate varying local tax structures while ensuring proper remittance and compliance with both state and local regulations.

South Dakota (4.2%)

South Dakota’s 4.2% state sales tax applies broadly to goods and services, including many professional and digital services. While the state has fewer local taxes compared to others, combined rates can still exceed 6%. With its streamlined tax system, South Dakota emphasizes compliance with its economic nexus laws, making accurate sales tracking crucial.

Wyoming (4%)

Wyoming’s 4% state sales tax rate is paired with additional local taxes, which can bring the total to around 6%. The state applies sales tax to most tangible personal property and certain services while providing exemptions for specific items like manufacturing equipment. Businesses benefit from Wyoming’s relatively simple tax structure but must still ensure accurate filing and remittance to avoid liability.

Economic Implications of Lower Sales Tax

States with lower sales tax rates, such as New Hampshire, Delaware, and Alaska, enjoy unique economic advantages that shape their fiscal landscapes. By minimizing or eliminating sales taxes, these states reduce the financial burden on consumers, often encouraging higher spending and boosting local economies.

Here are some implications of lower sales tax.

1. Increased Consumer Spending

Lower sales tax reduces the overall cost of goods and services, encouraging higher consumer spending. Shoppers are more likely to make larger purchases, benefiting retailers and boosting local economies.

2. Boost to Local Businesses

Reduced sales tax makes local businesses more competitive, especially against out-of-state or online sellers. Small businesses may experience higher foot traffic and increased sales, strengthening the local economy.

3. Potential Government Revenue Shortfall

Lower sales tax rates can lead to reduced tax revenue for state and local governments, impacting public services. Governments may need to find alternative revenue sources, such as higher property or income taxes.

4. Encourages Business Growth and Job Creation

Businesses may expand operations, hire more employees, or reinvest savings due to lower tax burdens. This can lead to economic growth, job creation, and increased wages in affected regions.

5. Shifts in Cross-Border Shopping Behavior

Consumers may choose to shop in lower-tax states or counties, impacting sales in neighboring areas with higher tax rates. Businesses near tax borders can benefit from increased customer flow, while higher-tax areas may see declining sales.

How States With Lower Sales Tax Compensate

States with lower sales tax rates must find alternative ways to generate revenue to fund essential public services like education, healthcare, and infrastructure. These strategies vary widely across the United States and often include other forms of taxation or creative revenue streams.

1 .Higher Income Tax Rates

States with lower sales tax often offset the gap by imposing higher income tax rates. For example, Delaware, known for having no general sales tax, relies heavily on personal income taxes, which accounted for a significant portion of its revenue in 2024. This strategy allows these states to maintain public services while offering a consumer-friendly sales environment, though it may place a heavier financial burden on individual taxpayers.

2. Excise Taxes on Specific Goods

Many states with low sales taxes rely on excise taxes for goods like alcohol, tobacco, and fuel. Alaska, for instance, imposes excise taxes on oil production, a key driver of its revenue. These targeted taxes allow states to benefit from specific industries or consumer behaviors while keeping general sales tax rates low or nonexistent.

3. Property Taxes

Property taxes are another significant source of revenue in states with minimal or no sales tax. New Hampshire, for example, compensates for its lack of a sales tax with some of the highest property taxes in the United States. While this approach reduces tax burdens for shoppers, it shifts the financial responsibility to property owners, often impacting businesses with large physical assets.

4. Business and Franchise Taxes

States like Delaware leverage business-friendly tax structures, including franchise taxes and corporate registration fees, to attract companies. As a result, Delaware generates substantial revenue by serving as the legal home for many U.S. corporations, including over half of Fortune 500 companies. This approach creates a favorable climate for businesses while ensuring the state benefits financially.

5. Tourism and Local Taxes

States with significant tourism activity, such as Puerto Rico, often impose taxes on lodging, car rentals, and other tourist-centric services. These localized taxes allow states to capture revenue from out-of-state visitors, reducing the need to burden residents with higher taxes. For example, Puerto Rico’s tourism industry contributes significantly to its tax revenue through these targeted taxes.

By employing a mix of income tax, excise taxes, property taxes, and other targeted levies, states with lower sales tax rates or none at all, like Delaware and Alaska, effectively balance their budgets while maintaining economic appeal. This diversified approach ensures they remain competitive within the United States while addressing revenue needs.

Final Thoughts

States with the lowest sales tax rates offer unique advantages for businesses and consumers, fostering increased spending and economic growth. However, navigating the complexities of sales tax compliance, even in low-tax states, can be challenging due to varying local tax laws and other revenue-collection mechanisms.

To simplify your tax compliance process and ensure accuracy, consider leveraging Kintsugi’s powerful sales tax automation software. With features like real-time tax calculation, seamless integration, and automated filing, Kintsugi helps businesses stay compliant while focusing on growth. Book a demo today or sign up to experience stress-free tax management.