U.S. Sales Tax Rates Hit Record High

Shopping blues: Top tax 12%. Chicago’s 10.25% highest big-city rate. More Internet tax fights loom.

While President Obama’s push to raise federal income taxes for the wealthy gets lots of attention, the continuing upward creep in the sales tax rates imposed by state and local governments has gotten less notice.

But Vertex Inc., which calculates sales tax for Internet sellers, reports that the average general sales tax rate nationwide reached 8.629% at the end of 2009, the highest since the Berwyn, Pa., company started tracking data in 1982. That was up a nickel on a taxable $100 purchase from a year earlier and up nearly 40 cents for the decade. The highest sales tax rate in the country now stands at 12%.

During 2009 seven states and the District of Columbia raised sales tax rates, with one jurisdiction — North Carolina — actually doing it twice. Only four states hiked rates in 2008 and only one in 2007. Given state budget problems, the 2009 state sales tax increases aren’t surprising. States have also been raising income tax rates on the wealthy and on corporations and boosting excise taxes on alcohol and tobacco. With states now facing record budget shortfalls, more tax increases seem likely.

State level sales tax generally accounts for only about two-thirds of the total sales tax bill. The rest comes from levies assessed by counties, municipalities, Indian tribes and special-purpose taxing districts funding mass transit, urban renewal and even stadiums. Among lower level jurisdictions such as counties and towns, Vertex counted 649 new or increased sales tax rates during 2009 and just 192 reductions.

The result is a wide range of combined sales tax rates across the country. At the bottom: 0%, found in all of Delaware and New Hampshire, and most of Montana, Oregon and Alaska. The country’s highest rate now is 12%, in the tiny portion of tiny Arab, Ala., (population 7,500) sticking into Cullman County. The rest of the northern Alabama town, in no-sales-tax Marshall County, pays just 8%.

Right now Chicago has the highest big-city rate, 10.25%. But in a move forced by Cook County lawmakers, the rate is scheduled to drop on July 1 to 9.75%, matching that of Los Angeles. In New York City the total bite is 8.875%. Other high big-city rates include San Francisco and Seattle(9.5%), New Orleans (9%), Houston, Dallas and Charlotte (8.25%), Las Vegas (8.1%) and Philadelphia and Atlanta (8%).

In Arizona, voters will go to the polls May 18 to pass judgment on a 1% rise in the state’s 5.6% rate for three years. If approved, the rate in Phoenix would jump from 8.3% to 9.3%.

Some of the highest sales taxes in the nation are designed to grab dollars from tourists. The New Orleans International Airport has a special 10.75% rate, while Snowmass Village, the ski resort in Colorado, levies a 10.4% sales tax. (Many locales also impose special higher taxes on services purchased by tourists, such as rental cars and hotel rooms.)

Nationally, sales taxes in 2008 generated more revenue for state and local governments — about $450 billion, a recent Government Accountability Office report suggests — than did either property taxes ($411 billion) or personal income taxes ($310 billion).

At the federal level and in some states, the income tax is progressive, with higher rates imposed on upper-income taxpayers. But rich and poor pay the same sales tax rate. In many states, however, there’s no sales tax on food or medical prescriptions.

The combined local sales rate is what local merchants charge for in-person customers. Through a parallel system called the use tax, it’s also what residents in a given jurisdiction are supposed to pay on purchases over the Internet from out-of-state sellers, but such payments are widely flouted. Congress has declined to pass legislation that would require large Internet only sellers like Amazon.com and Overstock.com to collect sales taxes for all states. (Currently, they only have to do so for states in which they have some physical presence.)

Many big online merchants, including Wal-Mart, Dell, Office Depot Inc. and Staples Inc., collect sales taxes from Internet buyers. Some states, with New York in the lead, have adopted new “Amazon” laws designed to force the Web giant and others to collect their taxes. More such laws are likely this year.

West Virginia adopted the country’s first sales tax in 1921. Periodically, the federal government has considered a national sales tax, but such proposals have never gotten traction.

In Canada, which has a national 5% sales tax, all but two of the provinces (Alberta and Saskatchewan) have combined sales taxes of 12% or higher. The highest is the 15.5% hit on Prince Edward Island.

Don’t Buy Here

Five states — Alaska, Delaware, Montana, New Hampshire and Oregon — have no general sales taxes. The others all do, often allowing counties, municipalities and even special purpose districts to pile on. The result is thousands of different local tax bites across the country. Some really add up. From Vertex Inc., which helps Internet vendors determine the correct tax, the following are the worst places to be when shopping as a resident or a tourist passing through.

Arab, Ala., 12%

The tiny sliver of this northeastern Alabama city of 7,500 jutting south into Cullman County has the dubious distinction — by far — of the country’s highest local sales tax rate. Here’s the breakdown: 4% to Alabama, 4% to the county and 4% to Arab. The city’s name comes from Washington, D.C., bureaucrats who a century ago misread Arad on an application to open a post office.

Bellwood, Ill., 11.5%

The portions of this struggling Chicago suburb of 20,000 sitting in the St. Charles Road and Mannheim Road business development districts carry the nation’s second-highest rate. The rest of the city is a still-high 10.5%. Bellwood is the hometown of astronaut Eugene Cernan, the last man to walk on the moon.

Mansfield, Ark., 11.125%

Located near the Oklahoma border south of Fort Smith, Mansfield has only 1,110 residents in its two square miles. But those in the eastern part living in Scott County face the country’s third-highest sales tax rate. Local legend holds that the city’s name came from a surveyor laying out the railroad in the 1880s who reported one day he had gotten as far as some “man’s field.”

Kayenta, Ariz., 11.1%

Much of the sales tax take in this Navajo Indian Reservation town of 4,900 comes from hotels and restaurants serving tourists visiting nearby Monument Valley. Keyenta’s official Web site has a section for frequently asked questions–except none has been asked.

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Posted in Finance, Taxes.

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