What Are the Best States for Business Taxes?

The “best” state for business taxes depends on a company’s specific structure and operations. A tax environment that is advantageous for one type of business may be a burden for another. The interplay between corporate, individual, sales, and property taxes creates a unique financial landscape in every state, influencing a company’s bottom line.

Understanding the State Business Tax Landscape

A corporate income tax is a direct tax levied on the profits of a corporation. The calculation generally begins with the company’s federal taxable income, which is then adjusted according to the specific rules of the state. These adjustments can include the addition or subtraction of certain types of income or deductions, ultimately arriving at the state-specific taxable income figure that is subject to the state’s corporate tax rate.

For businesses structured as pass-through entities, the individual income tax is important. This includes sole proprietorships, partnerships, Limited Liability Companies (LLCs), and S corporations. In these structures, the business itself does not pay income tax; instead, the profits and losses are “passed through” to the owners, who then report this income on their personal state income tax returns, making the state’s individual rates a direct factor in their tax burden.

State and local sales taxes are imposed on the sale of goods and certain services to the final consumer. While the state sets a base rate, many allow local jurisdictions like cities and counties to levy additional sales taxes. This can result in a combined rate that is substantially higher than the state rate alone.

Property tax is associated with real estate, such as office buildings, warehouses, and land owned by a company. In some states, property taxes also extend to tangible personal property, including machinery, equipment, and office furniture. The assessment of property value and the applicable tax rates are determined at the local level.

Unemployment insurance tax is a payroll tax that employers are required to pay. The funds are used to provide temporary financial assistance to workers who have lost their jobs. The tax rate an employer pays is based on their “experience rating,” which is influenced by the number of former employees who have filed for unemployment benefits.

Top-Ranked States for Business Taxation

Wyoming consistently earns a top spot for its favorable business tax climate. The state imposes no corporate income tax, allowing C corporations to retain and reinvest a larger portion of their profits. Wyoming also does not have an individual income tax, making it attractive for pass-through entities like LLCs and S corporations.

The state’s tax structure also omits a franchise tax and an inventory tax. While Wyoming has a sales tax, the statewide rate is a relatively low 4%, although counties can add to this amount. For property taxes, industrial property is assessed at a percentage of its fair market value to determine the final tax.

South Dakota is another state highly regarded for its business-friendly tax environment. A significant advantage is the absence of both a corporate income tax and a personal income tax. This dual exemption benefits all types of business structures, from large C corporations to small sole proprietorships.

In addition to the lack of income taxes, South Dakota does not impose a personal property tax on business assets like machinery and equipment. The state also forgoes an inheritance tax and a business inventory tax. The statewide sales tax rate is 4.5%, and new employers have a set unemployment insurance rate on the first $15,000 of each employee’s wages.

Alaska’s appeal comes from a different mix of tax policies. While it has a corporate income tax with a top rate of 9.4%, it is one of the few states with no statewide sales tax and no individual income tax. The absence of an individual income tax is a benefit for owners of pass-through businesses, though some local jurisdictions do impose their own sales taxes.

Florida attracts businesses with its lack of an individual income tax, making it ideal for owners of pass-through entities. While Florida does levy a corporate income tax, the rate is a competitive 5.5%. The state also does not have a state-level property tax or a property tax on business inventories.

Nevada is known for not having a corporate or individual income tax. Instead, it imposes a Commerce Tax, a gross receipts tax on businesses with annual revenue over $4 million. Nevada also has a 6.85% sales tax and a Modified Business Tax, a payroll tax on quarterly gross wages exceeding $50,000.

States with Notable Tax Considerations

California has a complex and high-tax environment. The state’s top marginal individual income tax rate is 12.3%, which impacts owners of pass-through entities, while the corporate income tax rate is a flat 8.84%. California’s sales tax is also among the highest in the nation, starting at a statewide rate of 7.25%. Every corporation doing business in the state is also subject to a minimum franchise tax of $800.

New York presents a challenging tax landscape, with a top individual income tax rate of 10.9% that affects owners of pass-through businesses. For corporations, New York has a franchise tax based on net income, with a rate of 7.25% for businesses with income over $5 million. The state sales tax is 4%, but local taxes can push the combined rate over 8%, and the property tax burden is one of the highest in the country.

New Jersey has one of the most difficult tax structures for businesses. The state has the highest corporate income tax rate in the nation, with a top rate of 11.5% for companies with income over $10 million. New Jersey is also known for having one of the heaviest property tax burdens in the country and has an inheritance tax, which can complicate business succession planning.

How Business Structure Influences Your Tax Burden

The legal structure a business chooses is a factor in how it is taxed at the state level. For C corporations, the state’s corporate income tax rate is the main consideration. A C corporation is a distinct legal entity that pays taxes on its own profits, so a lower rate translates directly to a lower tax bill, allowing the corporation to retain more earnings for reinvestment or expansion.

In contrast, for pass-through entities such as S corporations, LLCs, and partnerships, the state’s individual income tax rate is the most important factor. These business structures do not pay income tax at the entity level. Instead, profits are passed directly to the owners to be reported on their personal returns, meaning a state with no individual income tax is often the most favorable choice.

Beyond the Major Taxes Gross Receipts and Franchise Taxes

Some states levy taxes beyond the common income, sales, and property taxes. One such tax is the franchise tax, a fee for the privilege of doing business in a state. This tax is calculated based on a business’s net worth or capital, rather than its profitability. For example, any corporation incorporated in Delaware is required to pay a franchise tax, with minimum payments starting at $175.

Another is the gross receipts tax (GRT), levied on a company’s total sales revenue without deductions for business expenses. This can be burdensome for businesses with low profit margins, as they may owe tax even with little net income. Ohio’s Commercial Activity Tax (CAT) is levied on businesses with annual taxable gross receipts exceeding $6 million. Washington’s Business and Occupation (B&O) tax is another example, with rates that vary by business classification.

The Texas Franchise Tax is a notable example that functions as a hybrid GRT. It is imposed on most businesses and is calculated as a percentage of the company’s “margin,” which can be based on total revenue or revenue minus the cost of goods sold.