Factoring in tax rates is an essential part of effectively managing a business’s finances. While tax rates increase the amount a small business charges, tax rates may also have consequences for consumers. Here’s an overview of sales tax rates, tax rates for previous years, and what raised tax rates could mean for consumers and small business owners.

What Are Sales Taxes?

Sales taxes are a type of tax that the government charges for goods or services. When you purchase an item at a store or small business, you’ll pay sales tax for the item’s cost.

Small businesses must charge sales tax if there is a nexus that can occur if the small business:

  • Has employees who regularly solicit business there, such as salespeople
  • Has a physical location in the state
  • Has property, including intangible property, within the state
  • Has resident employees working in the state 

For consumers and small business owners, some of the most common taxes are sales tax.

What Are Sales Tax Rates?

Sales tax often consists of at least two separate taxes, combined to form one rate. These taxes are:

  •  a local (or county) tax and
  •  a state tax

Sometimes, there may even be a city tax added to the county and state taxes.

Five states do not charge a state sales tax: 

  • Alaska 
  • Delaware
  • Montana
  • New Hampshire
  • Oregon

While Alaska doesn’t have a state sales tax, nearly half of its cities charge a city tax to its residents. 

Delaware doesn’t charge a state sales tax. Instead, the state charges a different tax (a gross receipt tax) to providers of services and sellers of goods.

Previous Years’ Tax Rates

There has been a gradual increase in both local sales tax rates and state sales tax rates. A description of tax rates from 2018 to 2020 is below:

Tax Rates for 2018

There were several tax rate changes for the year 2018. Notable sales tax changes that occurred in 2018 were:

  • In 2018, the five states with the highest local sales tax rates were:
    • Alabama (5.10 percent)
    • Louisiana (5.02 percent)
    • Colorado (4.62 percent)
    • New York (4.49 percent)
    • Oklahoma (4.41 percent)
  • In 2018, the five states with the highest state sales tax rate were:
    • California (7.25 percent)
    • Indiana (7 percent; tied for second)
    • Mississippi (7 percent; tied for second)
    • Rhode Island (7 percent; tied for second)
    • Tennessee (7 percent; tied for second)
  • New Jersey reduced its state tax rate from 6.875% to 6.625%. 
  • With local and state taxes combined, the five states with the highest tax rates were: 
    • Louisiana (10.02 percent)
    • Tennessee (9.46 percent)
    • Arkansas (9.41 percent)
    • Washington (9.18 percent)
    • Alabama (9.10 percent)
  • With local and state taxes combined, the five states with the lowest tax rates were: 
    • Maine (5.50 percent)
    • Wyoming (5.46 percent)
    • Wisconsin (5.42 percent)
    • Hawaii (4.35 percent)
    • Alaska (1.76 percent)

Tax Rates for 2019

There were several tax rate changes for the year 2019. Notable sales tax changes that occurred in 2019 were:

  • In 2019, the five states with the highest local sales tax rates were:
    • Alabama (5.14 percent)
    • Louisiana (5.00 percent)
    • Colorado (4.73 percent)
    • New York (4.49 percent)
    • Oklahoma (4.42 percent)
  • In 2019, the five states with the highest state sales tax rate were:
    • California (7.25 percent)
    • Indiana (7 percent; tied for second)
    • Mississippi (7 percent; tied for second)
    • Rhode Island (7 percent; tied for second)
    • Tennessee (7 percent; tied for second)
  • The District of Columbia increased its sales taxes from 5.75 percent to 6 percent.
  • With local and state taxes combined, the five states with the highest tax rates were: 
    • Tennessee (9.47 percent)
    • Louisiana (9.45 percent)
    • Arkansas (9.43 percent)
    • Washington (9.17 percent)
    • Alabama (9.14 percent)
  • With local and state taxes combined, the five states with the lowest tax rates were: 
    • Maine (5.50 percent)
    • Wisconsin (5.44 percent)
    • Wyoming (5.36 percent)
    • Hawaii (4.41 percent)
    • Alaska (1.43 percent)

Tax Rate Changes for 2020

There were even more tax rate changes last year. Notable sales tax changes that occurred in 2020 were:

  • In 2020, the five states with the highest local sales tax rates were:
    • Alabama (5.22 percent)
    • Louisiana (5.07 percent)
    • Colorado (4.75 percent)
    • New York (4.52 percent)
    • Oklahoma (4.44 percent)
  • In 2020, the five states with the highest state sales tax rate were:
    • California (7.25 percent)
    • Indiana (7 percent; tied for second)
    • Mississippi (7 percent; tied for second)
    • Rhode Island (7 percent; tied for second)
    • Tennessee (7 percent; tied for second)
  • Utah’s portion of state income tax increased from 5.95 percent to 6.1 percent in April 2019.
  • With local and state taxes combined, the five states with the highest tax rates are: 
    • Tennessee (9.53 percent)
    • Louisiana (9.52 percent)
    • Arkansas (9.47 percent)
    • Alabama (9.22 percent)
    • Washington (9.21 percent)
  • With local and state taxes combined, the five states with the lowest tax rates are: 
    • Maine (5.50 percent)
    • Wisconsin (5.46 percent)
    • Wyoming (5.34 percent)
    • Hawaii (4.44 percent)
    • Alaska (1.76 percent)

How Rising Tax Rates Affect Consumers  

Rising tax rates affect consumers in two important ways: they may influence customers to travel to a different location or by increasing prices if consumers choose to purchase products nearby.

Location

First, consumers buying a product from a small business may not do so if there’s a possibility of paying less sales tax. This is especially true if consumers live in a larger city that charges higher sales tax.

Second, consumers living in a large city may visit a city’s outskirts or suburbs to avoid sales taxes. This is more common in large cities, with smaller towns immediately nearby.

A third way that rising tax rates may affect consumers may occur if they live in a region with multiple states nearby. This may happen in the Midwest, New England, or the Northwest, where driving to another state is more feasible to avoid paying sales tax. 

Demand 

Fourth, increasing tax rates may have an unintended consequence on demand. While consumers can travel to avoid or pay less in sales tax, increasing sales tax rates can decrease demand.

The demand for a product may decrease if consumers choose not to purchase a product because of higher taxes. Instead, consumers will need to allocate money to use for additional items to pay for taxes.

How Rising Tax Rates Affect Small Businesses

Rising tax rates not only affect consumers, who must pay sales tax on products, but also small business owners. Small business owners should also keep in mind when it comes to sales tax. 

E-commerce Taxes and Online Nexus

Small business owners frequently turn to e-commerce to generate income. E-commerce offers a great way for small business owners to sell products without physical limitations.

While e-commerce is common for small businesses, there are a few scenarios in which nexus also applies. This means that you’ll have to charge sales tax to your consumers.

Depending on how an online customer purchases your products, nexus will apply in one of several ways:

  • A click-through nexus works as a link between your consumers and your small business. Consumers may use a click-through nexus when they find your small business link or website.
  • An affiliate nexus includes independent businesses that sell products through other businesses. These affiliates don’t work directly with your small business. However, they are associated with your business. States often use this form of nexus to collect sales taxes.
  • An economic nexus comprises sales, which may apply if your small business reaches a certain number of sales or quantity in total sales. This threshold varies by state. Companies that meet the number of sales or quantity of revenue must charge and collect taxes to the state’s residents. Companies that don’t meet the number of sales or quantity of revenue aren’t required to charge and collect taxes.
  • A fourth type of nexus exists, called a cookie nexus. You’ll use this nexus to determine a customer’s location. This nexus tracks a user’s location (by using software known as cookies) and uses the collected information to determine a location. 

Price

Small business owners can experience increased sales tax rates in two ways. If a city, county, or state requires a yearly sales tax rate increase, small businesses must increase tax rates. 

This will increase the price consumers pay and may require small businesses to keep prices as they are or increase prices to prepare for tax rate increases.

Finally, small business owners facing increased tax rates have fewer opportunities to profit from their products. As demand decreases, it may become more difficult for small businesses to benefit from their items without increasing prices even more.

Tax Pros Can Help You With Rising Tax Rates

Rising tax rates can impact both consumers and small business owners. Work with the tax pros at 1-800Accountant for answers and guidance for your tax-related problems and questions.

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Written by Joshua Meller

Josh Meller is Sr. Manager of Accounting Services in the Pacific zone at 1-800Accountant. Before shifting into tax & accounting, he work...