Before we take a peek into the past to see how sales tax became a part of our lives, let’s define our terms. Sales tax is a tax on the sale or exchange of an item or service and is usually paid by the consumer or purchaser. It is a source of revenue for state and local governments to fund public services, and it does not have a standard rate; rates are determined by each state, city, or county.

Taxes in the Ancient World

Some form of taxes on goods has been around since the ancient Egyptians around 5,000 years ago, when they levied taxes on goods, with officials collecting dues in the form of grain, textiles, labor, cattle, and other commodities. In 6 A.D., the Roman emperor Augustus applied a 1% general sales tax in order to fund his military efforts. So, taxes on goods have a long and varied history. But let’s fast forward to the sales tax as we know it in the United States.

U.S. Sales Tax Timeline

The first state to collect a sales tax was West Virginia in 1921, though it was only on a select number of things, including coal, oil, natural gas, timber, and electric lights and power. However, Mississippi is generally considered the first state to impose a general sales tax in 1930 because the tax was less specific and covered most items. Twenty-two other states adopted the idea throughout the 1930s as the Great Depression left states tight on money and in need of new revenue streams. In the 1940s and 50s, more states joined until 1969, when Vermont was the final state to add a statewide sales tax. Today, there are only five states that do not participate in a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

Photo courtesy of https://taxfoundation.org/data/all/state/when-did-your-state-adopt-its-sales-tax/

How Does the Sales Tax Affect My Retirement?

Sales tax is regressive, meaning it takes a larger percentage of income from those on a fixed budget than from higher earners because it remains the same percentage no matter your income. So retirees may feel this more heavily than others. Many retirees shift from “saving mode” to “spending mode,” and a significant portion of their monthly Social Security or pension check goes directly toward taxable goods. There are some exemptions that are put in place for seniors to help manage this burden, like exempt or reduced taxes on necessities like groceries and prescription drugs, a reduced sales tax rate specifically for residents over a certain age (e.g., 85+), or refundable tax credits to low-income seniors to offset the sales tax paid throughout the year. But, as with sales tax, each state has different rules and exemptions.

Reach out to us today to discuss your personal finance situation, and we can let you know what exemptions or strategies you might be able to take advantage of to help offset any sales tax burdens in your budget.