Do I Need to Collect Sales Tax for Out of State Sales?

Sales tax is a consumption-based tax levied on the sale of goods and services, collected by businesses from customers, and then remitted to state and local governments. This revenue supports public services like schools and infrastructure. While 45 states and Washington, D.C., impose a statewide sales tax, 38 of these states also allow local governments to add their own rates, creating a complex system of varying taxes. Understanding these obligations is important for businesses, especially when selling to customers across state lines.

Determining Your Sales Tax Obligation

A business’s sales tax obligation in a state hinges on “nexus,” a sufficient connection or presence that triggers the requirement to collect and remit sales tax. Nexus can be created through various activities, ranging from physical presence to economic activity within a state.

Historically, physical presence primarily determined sales tax nexus. This meant a business collected sales tax if it had a physical office, retail store, or warehouse in the state. Other activities creating physical nexus include having employees or independent contractors, storing inventory in a fulfillment center, attending trade shows where sales are made, or using company vehicles for deliveries. Even minimal physical activity, such as a single employee working remotely or attending a trade show, can establish nexus.

Sales tax obligations changed significantly with the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. This ruling overturned the physical presence rule, allowing states to require out-of-state sellers to collect sales tax based on economic activity alone. This new standard is known as economic nexus.

Under economic nexus laws, a business must collect and remit sales tax in a state if its sales volume or transaction count into that state exceeds certain thresholds, even without a physical presence. Thresholds vary by state, but common examples include $100,000 in sales or 200 separate transactions within the current or previous calendar year. Some states have only a sales dollar threshold, while others require both a sales dollar amount and a transaction count. For instance, while many states use a $100,000 sales threshold, states like California and Texas set a higher threshold of $500,000 in sales.

Beyond physical and economic nexus, other types of nexus can also trigger sales tax obligations. These include affiliate nexus, where a business has a relationship with an in-state entity that refers customers for a commission, and click-through nexus, which is similar but specifically tied to referrals from third-party websites or marketing efforts. Businesses must check state tax authority websites for current thresholds and rules applicable to their operations.

Registering to Collect Sales Tax

Once sales tax nexus is established in a state, a business must register with that state’s tax authority before collecting any sales tax. This process obtains a sales tax permit or license, authorizing tax collection on behalf of the state. Businesses should not collect sales taxes until this registration is complete and the permit is issued.

Registration requires specific information. This includes legal business name, any “doing business as” (DBA) name, and Federal Employer Identification Number (EIN). The business structure (sole proprietorship, LLC, or corporation) must also be specified.

Businesses also provide their primary business activity (often identified by a NAICS or SIC code) and contact information including address, phone number, and email. The effective date when sales activities began in that state is required, as this impacts the start of tax collection. Information about owners or officers, including their names and Social Security numbers, is also typically required.

Registration is typically managed through the official website of the state’s Department of Revenue or its equivalent tax authority. Most states offer online portals for businesses to submit their registration applications. Upon successful completion of the application, the state will issue the sales tax permit or license, allowing legal sales tax collection.

Collecting and Remitting Sales Tax

After registering and obtaining a sales tax permit, businesses must collect and remit sales tax to the state tax authority. Correct sales tax rates involve state-specific “sourcing rules,” dictating whether the tax rate is based on the seller’s location (origin-based) or the buyer’s location (destination-based). Most states use destination-based sourcing, where the sales tax rate is determined by the customer’s delivery address. Beyond the statewide rate, businesses must also consider local sales tax rates imposed by counties, cities, and special taxing districts.

The taxability of products and services also varies by state. While tangible goods are generally taxable, many states exempt certain items such as groceries, prescription drugs, or medical equipment. Services may or may not be taxable depending on the state and the specific type of service provided. Businesses must confirm the taxability of their products and services in each state where they have a collection obligation.

Businesses integrate sales tax calculation into e-commerce platforms, point-of-sale (POS) systems, or accounting software. These systems apply the correct tax rate based on the customer’s location and item taxability. Businesses should display the sales tax accurately to customers at the time of purchase.

States assign different sales tax return filing frequencies, typically based on sales volume. Common filing frequencies include monthly, quarterly, or annually. Businesses must adhere to assigned filing frequencies and deadlines to avoid penalties. Collected sales tax is usually remitted through online portals provided by the state’s tax authority, often via Electronic Funds Transfer (EFT). Maintaining accurate records of all sales, collected taxes, and filed returns is essential for compliance.

Sales Through Online Marketplaces

Sales tax obligations for businesses selling through online marketplaces can differ due to “marketplace facilitator” laws. Many states require these platforms (e.g., Amazon, Etsy, eBay) to collect and remit sales tax on behalf of third-party sellers. This shifts sales tax collection responsibility from the individual seller to the marketplace facilitator for transactions on their platform.

This arrangement simplifies sales tax compliance for sellers, as they may not need to register or directly collect sales tax in states where the marketplace facilitator is responsible. However, it does not eliminate all sales tax obligations for sellers. Businesses still need to understand their nexus for any direct sales made outside of these marketplace platforms.

Sellers may have remaining obligations even for marketplace sales. Depending on state requirements, they might still need to file “informational” sales tax returns, reporting sales made through the marketplace even if the tax was collected. Sellers are still responsible for collecting and remitting sales tax in their home state for all sales, regardless of whether on or off a marketplace. Businesses should consult marketplace policies and state tax authority websites to understand how marketplace facilitator laws impact their sales tax responsibilities.