Do I Need to Collect Sales Tax in Every State?

Sales tax in the United States is primarily a state and local matter, not a federal one. This decentralized structure means businesses selling across state lines often face complexities in determining their collection obligations. The question of whether a business needs to collect sales tax in every state is a common concern, and the answer is not a simple yes or no. Instead, it involves understanding specific connections a business has with individual states, which dictate where sales tax collection is required.

Understanding Sales Tax Nexus

Sales tax nexus represents the sufficient connection a business must have with a state before that state can legally compel the business to collect and remit sales tax. Historically, this connection was established through physical presence. A business created physical presence nexus by maintaining an office, having employees, owning property, or storing inventory within a state’s borders. For instance, if a business operated a retail store or had a sales representative residing in a state, it generally established physical presence nexus there.

The landscape of sales tax nexus significantly evolved following the 2018 Supreme Court decision in South Dakota v. Wayfair, Inc. This ruling overturned the long-standing physical presence requirement, establishing that states can now require out-of-state businesses to collect sales tax based solely on their economic activity within the state. This new standard is known as economic nexus. Under economic nexus, a business can trigger a sales tax obligation by exceeding specific thresholds of sales revenue or transaction counts within a state, even without any physical presence. Most states have adopted economic nexus laws, with common thresholds typically set around $100,000 in gross sales or 200 separate transactions into the state annually.

Beyond physical presence and economic nexus, other types of nexus can also create sales tax obligations. Affiliate nexus, for example, can be established if a business has an agreement with an in-state person or entity who refers customers for a commission. Similarly, click-through nexus may arise when a business generates sales through links on websites of in-state residents who receive commissions. While these types of nexus exist, physical presence and economic nexus remain the primary drivers of sales tax obligations for most businesses operating across state lines.

Determining Your Nexus Footprint

Assessing a business’s sales tax obligations requires identifying where nexus has been established. For physical presence nexus, businesses need to review all activities that might create a physical tie to a state. This includes analyzing the locations of employees, regardless of whether they are full-time or part-time, or if they work remotely from their homes within a different state. Additionally, the presence of inventory in third-party warehouses, such as those used by fulfillment services, can create physical nexus. Attending trade shows or conventions where sales activities occur, even temporarily, may also establish a physical connection.

For economic nexus, the process involves tracking sales revenue and transaction counts for each state where sales are made. Businesses must monitor their gross sales, including both taxable and non-taxable sales, and the total number of separate transactions delivered into each state. This data then needs to be compared against each state’s specific economic nexus thresholds. These thresholds are not uniform across all states; some may have lower sales revenue requirements, while others might focus solely on transaction counts, or a combination of both.

Ongoing monitoring of sales activity is crucial. Businesses should implement systems to regularly aggregate sales data by state, perhaps monthly or quarterly, to determine if any economic nexus thresholds are being approached or exceeded. Many states have annual thresholds, meaning sales and transaction counts are measured over a calendar year. If a threshold is met, the nexus obligation typically begins at a specific point, such as the first day of the next calendar quarter. Proactively identifying where nexus exists is an ongoing compliance task.

Registering for Sales Tax Permits

Once a business has identified the states where it has established sales tax nexus, the next step is to register for a sales tax permit in each of those states. This permit, often referred to as a seller’s permit, sales tax license, or vendor’s license, grants the business the authority to collect sales tax on behalf of the state. It is generally illegal to collect sales tax without first being registered with the state’s taxing authority. Registration is typically handled through the respective state’s Department of Revenue or equivalent tax agency.

Each state maintains its own online portal or application process. Common information required includes:

• Business’s legal name
• Federal Employer Identification Number (EIN)
• Business address
• Type of business entity
• Primary business activity
• Estimated start date of sales activities in that state

The application process is generally straightforward and can often be completed online. It is important to accurately provide all requested information to avoid delays in processing the application. Once approved, the state will issue a sales tax permit number, necessary for reporting and remitting collected taxes. Businesses should retain this permit number and related documentation for their records. The time to receive a permit can range from a few days to several weeks.

Collecting and Remitting Sales Tax

After registering for sales tax permits, the ongoing process of collecting and remitting sales tax begins. The first component involves accurately collecting the correct sales tax amount from customers at the point of sale. This requires determining the appropriate sales tax rate, which can vary by state, county, city, and special taxing districts. Many states use destination-based sourcing, meaning the sales tax rate is determined by the customer’s location. Other states use origin-based sourcing, where the rate is based on the seller’s location.

Managing sales tax rates also involves understanding taxability rules for different products and services, as not all items are subject to sales tax. For instance, some states exempt certain necessities like groceries or prescription medications, while others might tax specific services. Businesses must also handle sales tax exemptions, such as sales for resale or to qualified tax-exempt organizations. In such cases, the business is responsible for obtaining and retaining valid exemption certificates from the purchaser to substantiate the non-collection of sales tax. Failure to obtain these certificates could result in the business being held liable for the uncollected tax.

The second component of ongoing compliance is remitting the collected sales tax to the state. This involves filing sales tax returns and making payments according to the state’s schedule. Filing frequencies vary based on sales volume; high-volume sellers might file monthly, smaller businesses quarterly or annually. States generally require returns to be filed and payments made electronically through their online portals, often via Automated Clearing House (ACH) debit or credit.

Businesses must ensure returns are filed and payments remitted by due dates to avoid penalties and interest. Penalties for late filing or payment can range from 5% to 25% of the unpaid tax, plus interest. Maintaining accurate records of all sales, collected taxes, and exemption certificates is paramount for successful compliance and to facilitate any potential audits by state tax authorities.