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, which together made up 75% of its revenue in 2022. 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:

Alaska – While it lacks a state sales tax, local municipalities can impose their own taxes, adding variability to taxation. Local sale taxes can reach up to 7.5% in certain areas.

Delaware – The state funds itself through a gross receipts tax on businesses, generating over $250 million annually.

Montana – Selective resort taxes fund local amenities, often in areas with high tourism.

New Hampshire – Excise taxes on tobacco, alcohol, and other goods substitute sales tax, accounting for 20% of the state's revenue in 2023.

Oregon – Revenue comes primarily from income and property taxes, which contributed to 75% of state revenue in 2022.

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.

This creates a competitive edge when compared to high-tax states, particularly for retail and e-commerce businesses that thrive on price-sensitive markets. For example, Delaware, known for its lack of sales tax, has become a hub for cross-border shopping, drawing consumers from neighboring states and stimulating the local economy.

However, states with lower or no sales tax must balance their budgets through alternative revenue streams such as property taxes, excise taxes, or resource-based revenues. Alaska, for instance, compensates for its lack of statewide sales tax by leveraging oil extraction taxes, which significantly contribute to its revenue.

This reliance on industry-specific taxes introduces vulnerability to economic fluctuations, particularly when resource prices decline. Similarly, New Hampshire offsets its absence of sales tax with higher property and excise taxes, which can place a heavier burden on property owners and specific industries, creating a mixed economic impact.

Tax changes in these states can ripple through their economies, influencing everything from consumer behavior to business competitiveness. Lower sales tax states often attract businesses seeking reduced tax liability, fostering a favorable business climate.

Yet, this can lead to comparison-based shopping behavior, where consumers from high-tax states flock to nearby low-tax jurisdictions, potentially straining infrastructure and services. Overall, while lower sales tax offers immediate benefits to consumers and businesses, it requires careful fiscal management to ensure economic stability and sustained growth.

Lower sales tax rates encourage consumer spending, boosting revenue for local businesses. For example, consumer spending in low-tax states has been observed to be 10% higher on average, creating a favorable climate for retail and e-commerce businesses. However, this economic advantage often comes with higher property taxes or licensing fees to balance state budgets.

Businesses in states like New Hampshire and Oregon benefit from simplified pricing strategies and increased consumer loyalty, making these locations attractive for growth and expansion.

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.

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.

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.

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.

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.

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 for free to experience stress-free tax management.