State Sales Taxes and Exemptions

January 15, 2014

Sales tax increases correspond with increased sales tax exemptions, say Andreea Militaru and Thomas Stratmann of the Mercatus Center.

States range in terms of the amount of revenue that they get from sales taxes. Those states without a sales tax, of course, derive no revenue from them, while a state such as Washington -- which relies heavily on its sales tax -- gets 44 percent of its revenue from sales taxes. Only Alaska, Delaware, Montana, New Hampshire and Oregon do not have a statewide sales tax.

The sales tax base also varies between states. Most states apply the sales tax to sales of "tangible personal property," though states define that term differently and some tax services under that definition.

Federal law puts a number of limits on the ability of states to impose sales taxes:

  • The Commerce Clause prevents states from taxing interstate commerce transactions as well as assets used in interstate commerce, such as trains and aircraft. The National Maritime Transportation Security Act of 2002 prevents states from taxing any vessel or watercraft, as well as the passengers or crew of a vessel or watercraft.
  • Purchases of food through the food stamp program are exempt from all state sales taxes, as are purchases made using checks issued by the Special Supplemental Food Program from Women, Infants and Children (WIC).
  • States cannot charge sales taxes on purchases and sales made by federal agencies.

Seventeen states have adopted sales tax holidays in which specified items are not subject to sales tax. The most common of these is the "Back to School" sales tax holiday.

Militaru and Stratmann suggest that as tax rates rise, lobbying -- and ultimately tax exemptions -- increase, because those facing higher taxes have an incentive to lobby in an effort to get them lowered. This explains why estimates of revenue increases from a sales tax increase are often optimistic, they conclude.

Source: Andreea Militaru and Thomas Stratmann, "A Survey of Sales Tax Exemptions in the States: Understanding Sales Taxes and Sales Tax Exemptions," Mercatus Center, January 7, 2014.

 

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