Do You Have to Charge Sales Tax for Your Business?

Sales tax is a consumption tax levied by state and local governments on the sale of goods and services in the United States. It is calculated as a percentage of the purchase price and added to the final cost paid by the consumer. This revenue funds public services and infrastructure. Businesses act as collectors for the government, adding the tax to sales and later remitting it to the appropriate authorities.

Determining Your Sales Tax Obligation

A business’s requirement to collect sales tax hinges on “sales tax nexus.” Nexus signifies a sufficient connection or presence between a business and a state, triggering a sales tax collection obligation.

Historically, sales tax nexus was based on a physical presence within a state. This “physical nexus” is established when a business has a tangible connection, such as a physical store, office, warehouse, or other property in the state. Having employees, agents, or independent contractors working in a state, even remotely, can also create physical nexus. Storing inventory in a state, including through third-party fulfillment services like those used by online retailers, constitutes a physical presence as well.

The landscape of sales tax obligations changed with the 2018 Supreme Court decision in South Dakota v. Wayfair. This ruling introduced “economic nexus,” allowing states to require out-of-state businesses to collect sales tax even without a physical presence. Economic nexus is established when a business meets certain thresholds of economic activity within a state, typically defined by a specific dollar amount of sales or a number of transactions over a set period, often 12 months. Common thresholds are $100,000 in sales or 200 separate transactions, though these figures can vary by state, with some states having higher thresholds. Businesses must continuously track their sales and transaction volume into each state to determine if they meet these economic nexus thresholds.

Beyond physical and economic presence, other activities can also establish sales tax nexus. These include affiliate nexus, where a business has in-state referrers, or marketplace facilitator laws, which place collection responsibility on the marketplace rather than individual sellers. Remote sellers, those without a physical footprint, may now have sales tax obligations in numerous states where they previously did not due to economic nexus rules.

What Goods and Services Are Taxable

Sales tax applies to the sale of tangible personal property. This includes a wide array of physical items consumers commonly purchase, such as clothing, electronics, and furniture. Most states impose sales tax on these types of goods at the point of sale.

The taxability of services varies significantly across states. Some services are commonly taxed, such as telecommunications, utilities, and specific repair or maintenance services. Other services, like professional services offered by lawyers or accountants, are exempt from sales tax in many states. Businesses must consult specific state regulations to understand which services are taxable.

Several common exemptions reduce the scope of sales tax. Items purchased by a business for resale are exempt from sales tax, provided the buyer furnishes a valid resale certificate, preventing multiple taxation through the supply chain. Other exemptions include certain food items, particularly groceries, which are distinguished from prepared foods that remain taxable. Prescription drugs and some medical devices are also exempt from sales tax. The taxability of digital goods or software as a service (SaaS) can also vary, with some states exempting them and others imposing sales tax.

Navigating State and Local Sales Tax Rules

Sales tax rates are not uniform across the United States; each state establishes its own sales tax rate. In addition to state-level taxes, many states permit local jurisdictions, such as counties, cities, and special districts, to impose their own sales taxes. This results in varying sales tax rates even within the same state, as local rates are added on top of the statewide rate.

When making sales across state lines, businesses must determine which sales tax rate applies, a process known as sales tax sourcing. The two primary methods are origin-based and destination-based sourcing. In origin-based states, the sales tax rate is determined by the seller’s location, meaning the tax applied is based on the seller’s address regardless of the buyer’s location. Conversely, in destination-based states, the sales tax rate is determined by the buyer’s location, requiring sellers to calculate the tax based on where the product is delivered or where the service is performed. Most states, particularly for remote sellers, utilize destination-based sourcing.

Businesses are responsible for applying the correct tax rate based on these sourcing rules. For example, if a business is in an origin-based state, it charges its local rate to in-state customers. If it is in a destination-based state, or is a remote seller into another state, it must apply the rate of the customer’s delivery address. Some states also offer sales tax holidays, which are temporary periods during which certain items, such as back-to-school supplies, are exempt from sales tax.

Registering for Sales Tax

Once a business determines it has a sales tax obligation, or nexus, in a particular state, the next step is to register with that state’s tax authority. It is unlawful to collect sales tax without first being registered and holding a valid permit. Registration is done with the state’s department of revenue, comptroller’s office, or an equivalent tax agency.

The information required for registration includes the business’s legal name and any “doing business as” (DBA) names, physical address, and contact information. Businesses also need to provide their Federal Employer Identification Number (FEIN) or, for sole proprietors, their Social Security Number. Details about the business entity type (e.g., sole proprietorship, LLC, corporation) and a description of the goods or services sold are also requested. States ask for the anticipated start date of sales tax collection and an estimate of the business’s annual sales volume.

The application process is completed online through the state’s official tax portal. While the specific terminology for the required authorization may vary—it can be called a sales tax permit, seller’s permit, or vendor’s license—its purpose is consistent: to legally authorize the business to collect sales tax. Once the application is approved, the state issues this permit, allowing the business to begin its sales tax collection duties.

Collecting, Reporting, and Paying Sales Tax

After a business has registered and obtained its sales tax permit, the practical steps of collecting, reporting, and remitting sales tax begin. Businesses must collect sales tax from customers at the point of sale, whether through a physical register or an online invoicing system. Display the collected sales tax as a separate line item on receipts or invoices for consumer transparency. Many businesses utilize sales tax software or accounting systems to automate the calculation of the correct sales tax rate and facilitate collection.

Businesses are required to report the collected sales tax by filing returns with the state tax authority. States assign a filing frequency—monthly, quarterly, or annually—based on the business’s sales volume or the amount of sales tax collected. Businesses with higher sales volumes are assigned more frequent filing schedules, such as monthly. Sales tax returns are due on a specific day of the month following the reporting period, around the 20th. Even if no sales tax was collected during a period, a return may still be required.

The information needed for filing a sales tax return includes total sales, taxable sales, collected sales tax, and any applicable deductions or credits. Remitting the collected sales tax, or paying it to the state, is done electronically through the state’s online portal using methods like electronic funds transfer (EFT) or ACH withdrawals. Some states may offer small discounts for timely electronic filing or payment.

Maintaining accurate records is a requirement for sales tax compliance. Businesses must keep detailed records of all sales, sales tax collected, any exemptions claimed, and all filed returns. These records are important for potential audits and should be retained for a period of three to seven years, depending on specific state laws. Proper record-keeping ensures that businesses can substantiate their sales tax collection and remittance activities.