Ranking Sales Taxes on the 2020 State Business Tax Climate Index

Today we continue our map series on the 2020 State Business Tax Climate Index with a map showing states’ rankings on the Index’s sales and excise tax component. A state’s sales tax rate and structure can make a state more or less attractive to businesses for two key reasons: (1) some states apply the sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. to business inputs, which drives up the costs of production, and (2) as sales taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rates increase, consumers may cut back on purchases or move their shopping to lower tax jurisdictions. The sales tax component accounts for 24 percent of each state’s overall Index score.

An ideal sales tax applies to a broad base of final consumer goods and services, with few exemptions, and is levied at a low rate. Broad-based, low-rate tax structures minimize tax-induced economic distortions that can occur when people change their purchasing behavior because of tax differences. In addition, sales tax exemptions narrow the tax base, driving up the sales tax rate on those goods and services that remain subject to the tax or forcing greater reliance on less economically efficient taxes.

It is important to note that a well-structured sales tax applies only to the final consumer at the point of sale. It does not apply to the sale of machinery, raw materials, and other business inputs, as those taxes increase the costs of production and ultimately get passed along to consumers in the form of higher prices. States that avoid taxing business inputs perform better on the Index.

In light of states’ differing responses to the Wayfair v. South Dakota Supreme Court decision, this year’s Index also looks at how states are applying their sales taxes to remote sellers. While most states have adopted safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few diverge from these practices, imposing substantial compliance costs on out-of-state retailers. Alabama, Alaska (which only has local sales taxes), Colorado, and Louisiana lack uniform administration, while Kansas does not offer a safe harbor for small sellers.

However, since July 1, a number of Alaskan municipalities created a commission which would provide central collection for local sales taxes. The agreement needed signatures from seven localities for it to go into effect and currently has 15, the latest being Ketchikan Gateway Borough. The commission is set to begin collections in early 2020 at the soonest.

Explore Our Interactive Tool

As shown on the map above, the highest-scoring states on the sales tax component of the 2020 Index are those without a state sales tax: New Hampshire, Delaware, Montana, Oregon, and Alaska. (They do not receive perfect scores because each state does impose excise taxes with varying degrees of competitiveness.) The states with the next best scores—Wyoming, Wisconsin, Maine, Michigan, Nebraska, Virginia, and Idaho—have well-structured sales taxes and modest excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. rates.

States that rank poorly on this component have high sales tax rates, high excise tax rates, or apply the sales tax to a variety of business inputs while exempting many final consumer purchases. The lowest-scoring states are Alabama, Washington, Louisiana, Tennessee, and Arkansas.

To learn more about your state’s score on the sales tax component, click here.

To see whether your state’s sales tax structure has become more or less competitive in recent years, check out the table below.

Sales Tax Component of the State Business Tax Climate Index (2017–2020)

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states. Source: Tax Foundation.
State	2017 Rank	2018 Rank	2019 Rank	2020 Rank	Change from 2019 to 2020
Alabama	49	49	50	50	0
Alaska	5	5	5	5	0
Arizona	44	44	40	40	0
Arkansas	46	46	45	46	-1
California	41	40	46	45	1
Colorado	37	37	37	37	0
Connecticut	31	30	30	26	4
Delaware	1	1	2	2	0
Florida	29	31	22	23	-1
Georgia	34	29	29	29	0
Hawaii	26	26	33	30	3
Idaho	15	16	12	12	0
Illinois	27	27	35	33	2
Indiana	9	9	13	20	-7
Iowa	20	20	17	15	2
Kansas	28	28	27	38	-11
Kentucky	13	15	18	14	4
Louisiana	50	50	48	48	0
Maine	8	8	9	8	1
Maryland	18	19	16	19	-3
Massachusetts	19	12	11	13	-2
Michigan	10	11	19	9	10
Minnesota	25	25	26	28	-2
Mississippi	39	39	36	34	2
Missouri	23	24	25	24	1
Montana	3	3	3	3	0
Nebraska	12	13	8	10	-2
Nevada	42	43	44	44	0
New Hampshire	2	2	1	1	0
New Jersey	40	42	42	42	0
New Mexico	43	41	41	41	0
New York	45	45	43	43	0
North Carolina	21	21	24	21	3
North Dakota	35	35	31	27	4
Ohio	32	32	28	32	-4
Oklahoma	36	36	39	39	0
Oregon	4	4	4	4	0
Pennsylvania	22	22	21	17	4
Rhode Island	24	23	23	25	-2
South Carolina	30	33	34	31	3
South Dakota	33	34	32	35	-3
Tennessee	47	47	47	47	0
Texas	38	38	38	36	2
Utah	17	18	14	22	-8
Vermont	16	17	20	16	4
Virginia	11	10	10	11	-1
Washington	48	48	49	49	0
West Virginia	14	14	15	18	-3
Wisconsin	7	7	7	7	0
Wyoming	6	6	6	6	0
District of Columbia	34	35	25	36	-11

To learn more about how we determined these rankings, read our full methodology here.

Share this article