America is a competitive place and states battle to be the best at whatever they can. Who has the best schools, the best food, the friendliest people, etc.? As a business owner, you definitely need to know which are the most business friendly.
Like any ranking, this is a matter of opinion and you can spend all day arguing over which state is truly number one. When you dig into the data though, some states have clear advantages over others in terms of taxes and economic strength.
State corporate tax
A good place to start comparing states is the corporate income tax rate. The less your business owes in state corporate taxes, the better your bottom line so of course we want to keep this low.
South Dakota, Nevada and Wyoming don’t charge a corporate tax, so you can’t do any better than that. Colorado, Georgia, Kentucky, Michigan, North Dakota, Oklahoma, South Carolina, Utah and Virginia also are decent as they cap corporate taxes at 6% or less.
State income tax
State income taxes are another cost of doing business and in a perfect world would be as low as possible. The good news is several states waive this tax altogether to create a more business friendly environment.
If you’re operating out of Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming, you won’t have to pay any state taxes when you draw income out of your business. In terms of taxes, South Dakota, Nevada, and Wyoming start to look pretty appealing because business owners in these states avoid both corporate and individual income taxes.
Sales taxes are a difficult challenge business owners have to deal with. But wait, don’t your customers pay this? That would be mostly right. Your business won’t pay sales taxes out of its profits if you are collecting them correctly at the point of sale. However, your business is responsible for determining the following:
- IF you are required to collect tax (your business has nexus, or a physical presence, within that jurisdiction);
- WHICH items are taxable and at WHAT rate (some items and services are tax exempt, others are taxed at a rate different than general rates);
- HOW MUCH to collect (does the state use origin or destination sourcing, what is the current rate for each jurisdiction);
- WHERE to send the money (some states have you send it to a single office, others have you make payment to individual municipalities); and
- and HOW OFTEN you have to do this (this could be annual, quarterly, or monthly depending on the state and the size of your business)?
Collecting sales taxes adds to your item’s total price, so it is in your best interest to keep that amount as low as possible to give you a competitive advantage. (At least for now. The Marketplace Fairness Act could soon make this a thing of the past.)
Delaware, Montana, New Hampshire and Oregon don’t charge sales taxes. Alaska, Hawaii*, Maine, and Virginia are also competitive by keeping state and local sales taxes to 5% or less.
Use tax is a little different than sales tax. This is your responsibility. You owe your state use tax anytime your business makes a taxable purchase but your supplier didn’t charge you sales tax, or the difference between the two amounts if your state’s use tax rate is higher than what your supplier charged you.) Technically, you could be due a tax refund if your supplier charged you a higher sales tax rate inappropriately, but the burden of proof would fall upon you.
In Alabama, Arizona, Colorado, Missouri and Oklahoma the use tax differs from the general sales tax rate (normally, it is lower). Montana, New Hampshire and Oregon have no use tax. Illinois, Iowa, New Mexico, Vermont and Wisconsin have a statewide use tax, but no local use tax.
While avoiding taxes is nice, for your business to succeed you also need a thriving economy with buyers looking for your product. The American economy is still struggling as a whole which makes it tough to open a business. However, some states are definitely doing better than others.
North Dakota, South Dakota, Nebraska, Vermont, Iowa, Utah and Wyoming all have an unemployment rate of 4.6% or less. If you’re in one of these states, you’d never know the country’s in an economic downturn.
Of course, these states have relatively small economic volume and may be better suited to specific industries. As far as high volume economies go, Virginia, Texas and Massachusetts are outperforming others as these states have unemployment below 6.6%. Not great, but definitely better than other parts of the country.
States with high unemployment rates may offer temporary tax benefits designed to bring in new businesses. It’s always worth a phone call to the economic development office to see what they have to offer.
The bottom line
So how does this all add up?
Based just on these factors, Wyoming, South Dakota and Alaska take the lead as they are strong in all four categories; they combine low taxes with sound economies. The remoteness of these states might be a strike against them however.
For the bigger players; Texas, hands down, looks very business friendly, even with its exceptionally complicated tax jurisdictions. Nevada, Florida and Washington have encouraging tax laws but high unemployment, whereas Virginia and Massachusetts have better economies but higher taxes.
If you are searching for a home for your business be sure to keep these states in mind as they are the leaders in accommodating businesses.
*Technically, Hawaii has an excise tax rather than sales tax.