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Here are the 5 states that don't have sales tax, and what you need to know about each

Taxes are inevitable. But these five states give a break to consumers making purchases.

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Only two things in life are guaranteed: death and taxes. The three most common taxes we hear about are income tax, property tax and sales tax.

Property and income tax vary greatly based on where you live, your income and the value of your home. However, sales tax is based on where you make purchases. So yes, when you travel to another state, you are subject to their sales taxes.

But five states actually do not levy a sales tax. There are stipulations to each of these, however, varying from higher taxes on income and/or property, or the ability for local jurisdictions to implement their own sales tax.

Here's what you need to know about each state that does not charge sales tax on purchases.

The 5 states without sales tax

Sales tax is a large revenue driver for 45 states and the District of Columbia. According to the Tax Foundation, the average taxpayer will pay just over $1,000 per year in sales tax. In the 2020 fiscal year, income from state retail sales taxes totaled $340 billion. This makes up roughly a third of all state tax revenue, second only to income tax. Sales taxes are a key way to fund government initiatives.

While the states below do not charge sales tax, in some cases, counties and cities within these states can charge their own taxes.

Alaska

Known as 'The Last Frontier', Alaska is the most tax-friendly state in the country. It has no sales tax and no state income tax. Alaska charges a slightly higher than average property tax rate of 1.18%, but the state has several ways to apply for property tax exemptions.

Throughout Alaska, many of their counties, known as 'boroughs', do charge sales tax. For example, Juneau Borough charges a 5% sales tax on eligible purchases, and it collected over $47 million in sales taxes in 2020.

Delaware

The 'First State' also does not charge its residents or visitors any state sales tax. Additionally, no jurisdictions within Delaware exercise any sales tax measures. However, Delaware has a gross sellers tax that applies to businesses on the amount of total sales from goods and services sold.

While Delaware has no sales tax, low property taxes and is known as a corporate tax shelter, it offsets this by levying a moderate income tax.

Montana

Another sparsely populated state, Montana does not have a state sales tax. However, local municipalities that attract tourists such as Big Sky have the right to implement local sales taxes. Property taxes are on the heavier end of the scale, and income tax is near the average rate of all 50 states.

New Hampshire

The Granite State has also opted out of collecting sales taxes. The caveat to the lack of sales tax is that New Hampshire has one of the highest property tax rates in the country. Income tax is extremely limited as it only applies to interest (like from a high-yield savings account) and dividend income (like dividends from stock purchases).

Oregon

Lastly, the Beaver State does not collect sales taxes. However, the one caveat listed on the Oregon Department of Revenue website is if you purchase a new car outside of the state, you must pay sales tax in order to register the car.

To offset the lack of sales tax, Oregon has a very high income tax burden, and a moderately high property tax rate.

Sales tax isn't the only tax to consider

While you may think you pay a lot of sales tax because of how often you're charged it, of the list of taxes you will pay in your lifetime, sales tax actually doesn't amount to as much as you think. Even if you live in a state that has sales taxes, there are legal ways to sometimes avoid paying them, including sales tax holidays. In fact, you will likely pay more in loan interest than sales tax throughout your life.

But if you are considering what your tax burden may be in a new state, be sure to consider these larger tax bills:

  • Property Taxes: Ranging anywhere from roughly 0.30% in Hawaii to over 2% in New Jersey, property owners are sent a tax bill based on the purchase price of the home. However, as home values increase, so can property taxes in each respective state. This calculation is known as assessed value, and is completed by a county assessor. Each state calculates this differently, so be sure to check with the respective state's Department of Revenue. And keep in mind, you may be able to earn travel rewards or cash back by paying your property taxes with a credit card.
  • Income Taxes: If you are employed and paid as a W2 employee, rather than self-employed or working a side hustle, you will have income taxes automatically deducted from your paycheck. There are two different income taxes: federal and state income taxes (although a few localities, like New York City, have their own income tax). The federal income tax brackets can be found here. Each state has different income tax rates, so be sure to check what your income tax burden before working in a different state. There are currently nine states without income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
  • Payroll Taxes: Similar to income taxes, payroll taxes are also automatically deducted if you are a W2 employee. These taxes may appear on your paystub as "FICA" or "MEDFICA". These taxes are used to fund programs such as Social Security and Medicare, and are split between you and your employer. According to the IRS, the current tax rate for social security is 6.2% for the employer and the employee, or 12.4% total. The current rate for Medicare taxes is 1.45% for the employer and employee, or 2.9% total.

Bottom line

Paying taxes is an unavoidable part of life, but there are lawful ways to avoid paying more taxes than you need. And when it comes to your yearly tax filing, there is plenty of tax software to ensure you maximize your deductions and minimize your tax bill — and you can score discounts on it with the right credit card.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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