How US sales tax works: a guide for small businesses

Who sets sales tax in the US?

States do, and within most states, counties, cities and special districts add their own local rates. There is no federal sales tax. Forty-five states and Washington DC have a statewide sales tax. Alaska, Delaware, Montana, New Hampshire and Oregon do not, although some Alaska localities charge their own. See states with no sales tax.

The rate on a sale is usually the state rate plus every local rate that applies at the relevant address, so the same product can carry different tax in two neighboring towns.

Who pays it and who collects it?

The customer pays sales tax. The seller collects it at the time of sale, holds it, and pays it over to the state. Money collected as sales tax belongs to the state, not to the business, and states treat failing to pay it over very seriously.

When does a business have to collect?

A business has to collect a state's sales tax once it has nexus in that state, meaning enough connection for the state to require it.

• Physical nexus comes from being present: an office, staff, or inventory stored in the state.
• The two are compared side by side in physical vs economic nexus.
• Economic nexus comes from selling enough into the state, even with no presence there. Since the Supreme Court's 2018 decision in South Dakota v. Wayfair, every state with a sales tax has adopted a threshold, most commonly $100,000 of sales a year. See economic nexus explained.

What does a business have to do?

1. Work out where you have nexus

   List where you have a presence and compare your sales into each state with its threshold.

2. Register before you collect

   Apply for a sales tax permit with each state's revenue department. It is illegal in most states to collect sales tax without one. See also seller's permits and business licenses.

3. Charge the right tax on each sale

   Apply the correct rate for the location and whether the product is taxable there.

4. File returns and pay on time

   States assign a filing frequency, usually monthly, quarterly or yearly depending on how much tax you collect. File even for periods with no sales if the state requires it.

5. Keep records

   Sales by state, tax collected, exemption certificates and filed returns.

What is taxable?

Most states tax sales of physical goods by default and list exemptions, such as groceries or prescription medicine in many states. Services are more varied: some states tax many services, others very few. Software, digital products and subscriptions are treated very differently from state to state. Check each state's rules for what you sell rather than assuming.

Services, software and shipping have their own rules. See sales tax on services, sales tax on SaaS and sales tax on shipping.

Which location's rate applies?

Most states use the destination, meaning the rate where the customer receives the goods. A few states use the seller's location for sales made within the state. For sales shipped across state lines, the destination rate is the norm.

See origin vs destination sales tax.

What are exemption and resale certificates?

Some buyers do not pay sales tax: businesses buying goods to resell, and exempt organizations such as some charities and government bodies. They give the seller a certificate, and the seller keeps it on file to show why no tax was charged. A business that buys stock to resell can usually give its suppliers a resale certificate and avoid paying tax on inventory. Without a valid certificate on file, the seller can be held liable for the tax it did not collect.

What if you sell on a marketplace?

Every state with a sales tax requires marketplace facilitators such as Amazon, eBay, Etsy and Walmart to collect and remit sales tax on the sales they facilitate. That covers your marketplace orders, but not your own website or other channels. For stores that ship directly from suppliers, see dropshipping taxes. Inventory held by a marketplace can still affect your own obligations. See sales tax for Amazon FBA sellers.

What is use tax?

Use tax is the other half of sales tax. When a buyer purchases something taxable without paying sales tax, for example from a seller that does not collect in their state, the buyer generally owes use tax to their own state at the same rate. Businesses meet it when they buy equipment or supplies from out-of-state sellers that did not charge tax. See sales tax vs use tax.

Common mistakes

• Assuming sales tax only applies in your home state.
• Collecting tax before you hold a permit.
• Using one rate for a whole state and ignoring local rates.
• Selling tax-free to "resellers" without keeping their certificates.
• Stopping filing returns when sales drop, instead of closing the account properly.

Where are the state-by-state sales tax guides?

Thresholds, rates, registration and filing for online sellers: Alabama, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington, Washington DC, West Virginia, Wisconsin, Wyoming.

This guide is general information. It is not tax or legal advice for your situation.