The Good, Bad and the Ugly: Sales Tax by State

The Good, Bad and the Ugly: Sales Tax by State

Where you live is a huge factor when considering how much you pay in sales tax. For example, for five states there is no sales tax at all — Alaska, Delaware, New Hampshire, Oregon and Montana. The state with the highest sales tax, on the other hand, is California, at 7.25%. Mississippi, Tennessee and New Jersey are close behind at 7%. However, each county and municipality can add their own taxes so an exact comparison is hard to make. All the same, these figures can be used as a ballpark idea of where you are going to pay more for your purchases.

Why do some states have higher sales taxes than others? Well, with the exception of states like Alaska, which actually use low taxes to encourage citizens to live there, they all use similar techniques to fund their yearly budgets. Each state has its own formula when deciding the tax levels on income, fuel, booze, cigarettes and, of course, sales.

However, the actual differences in tax levels can be extreme. If you live in Wyoming, for instance, the state with the lowest taxes, you will only pay $7 for every $100 you make to the state. At the other extreme you have New Jersey, where you can expect to pay $12 for every $100. These figures combine all the state taxes, so which state is cheaper for you will depend on what your personal spending patterns and habits are. For example, if you are a heavy drinker you might want to move to Maryland, which only charges you $1.50 a gallon for your liquor. If you enjoy smoking, though, South Carolina is your place to live. If shopping is your poison, the five states we listed in our first paragraph will not charge you a dime on your general purchases.

Unfortunately, we cannot all move to the state that best fits with our lifestyle. Rather, it is easier to adapt to our state tax laws and find ways to save. If you live in a state with high fuel taxes, for example, buy a more economic vehicle. If property taxes are exorbitant, though, purchase a smaller home, and wherever you live you can always save cash by not smoking or drinking.

How can you save on your sales tax? A very popular tax break is to deduct the amounts you’ve paid toward state sales tax from you overall tax bill. However, it is not as simple as it sounds. You must decide whether you want to deduct what you paid on state sales tax, state income tax, or even local sales tax.

This is an easy choice to make if you live in states like Florida, Washington, and Tennessee, that do not charge an income tax, but make up for it on the sales tax. Nevertheless, in states that do charge an income tax, it will be up to each taxpayer to work out which option is best for them. Just remember that many counties and municipalities charge their own sales tax even in states that have low or no sales tax.

If you decide to deduct your sales tax payments, you still have another choice to make, and here is where saving your receipts becomes very important. The Treasury has developed a list of sales tax tables for each state that is published in the IRS Publication 600. These tables provide you with an amount of sales tax you can deduct automatically based on your income level. However, this set amount is a sort of average of what taxpayers pay in sales tax for every state. If you have spent above that average on large purchases you could be losing out. Fortunately, that is not a problem, as you have the option of deducting what you personally paid in state sales tax. Of course, you need to make sure you have the receipts to prove it. This is especially important with large purchases like a car, a boat, or your latest 10-foot flat screen TV. Simply add up your receipts and see what works best for you.