How to Handle Your Business Sales Tax Obligations

Sales tax is a consumption tax applied by state and local governments to the sale of designated goods and services. For businesses, this is a direct compliance responsibility; they must collect the correct amount from customers and remit it to the appropriate government agencies. This system is a significant source of revenue for states, funding public services and infrastructure.

Determining Your Sales Tax Obligations

A business’s requirement to collect and remit sales tax in a state is determined by nexus. Nexus is the connection between a business and a taxing jurisdiction that establishes the obligation, formed through either physical presence or economic activity.

Sales Tax Nexus

Physical presence nexus is the traditional standard for determining a sales tax obligation, created when a business has a tangible footprint within a state. Common activities that establish a physical presence include owning or leasing property like an office or warehouse. Having employees operating within a state also triggers physical nexus, as does storing inventory there, whether in your own facility or through a third-party fulfillment service.

Economic nexus, solidified by the 2018 Supreme Court case South Dakota v. Wayfair, allows states to require out-of-state sellers to collect sales tax even without a physical presence. This obligation is triggered when a business meets a state’s economic thresholds. While these thresholds vary, a common revenue amount is $100,000 in sales. Although a transaction count was also a standard measure, many states have eliminated this requirement, focusing only on sales revenue. Businesses must track their sales activity to verify current requirements.

Product and Service Taxability

Once a business determines it has nexus in a state, the next step is to understand which of its sales are subject to tax. Not all goods and services are taxable, and the rules can differ significantly from one state to another.

Most states consider the retail sale of tangible personal property—physical items that can be seen and touched—to be taxable unless a specific exemption applies. This includes a vast range of products from electronics and furniture to clothing and office supplies. Conversely, many professional services, like consulting or legal advice, are often exempt from sales tax.

The lines are becoming increasingly blurred as states expand their tax bases. Services related to the fabrication or repair of tangible goods are often taxable. Furthermore, the taxability of digital products, such as electronically downloaded software, streaming media, and e-books, is a complex and evolving area. Businesses must verify the rules for their specific offerings.

Sales Tax Sourcing and Rates

Determining the correct sales tax rate to apply to a transaction is another layer of compliance. The method for identifying the applicable rate is known as sourcing, and it depends on whether a state follows origin-based or destination-based rules.

In origin-based sourcing states, the sales tax rate is determined by the seller’s location. A business operating in an origin-based state will charge the same sales tax rate—a combination of state and local taxes at its place of business—to all customers within that state. This method simplifies calculations for in-state sellers.

Most states, however, use destination-based sourcing. Under this system, the sales tax rate is based on the buyer’s location, specifically the “ship-to” address. This requires businesses to identify and apply the precise tax rate for the customer’s specific address, which can be a complex task. The total rate is often a combination of state, county, city, and sometimes special district taxes, resulting in thousands of different potential tax rates across the country. For remote sellers making sales into multiple states, all interstate sales are sourced to the destination.

Registering for a Sales Tax Permit

After determining that a sales tax obligation exists in a state, the next mandatory step is to register for a sales tax permit. This permit, sometimes called a seller’s permit or license, grants the business the legal authority to collect sales tax from customers. Collecting sales tax without being registered is illegal, and the registration process is handled by each state’s primary tax agency, often called the Department of Revenue.

Information and Documents Needed for Registration

To complete the application, a business should gather a comprehensive set of business identifiers and personal information for the owners or corporate officers. Required information includes:

• Federal Employer Identification Number (EIN)
• Legal business name and any “Doing Business As” (DBA) name
• Business legal structure (e.g., sole proprietorship, LLC, corporation)
• North American Industry Classification System (NAICS) code
• Personal details for owners or corporate officers, including names, addresses, and Social Security numbers
• The date nexus was established in the state
• Business bank account information

The Application Process

The vast majority of states offer an online application portal through their department of revenue’s website, which is the fastest method for registration. The online form will guide the applicant through a series of questions, prompting for the details gathered beforehand. Once the application is submitted, the state will process it; some states issue a permit number instantly online, while others may take several business days or weeks to send the official permit.

Managing Sales Tax Collection and Remittance

Once a business is registered and has its sales tax permit, it enters the ongoing cycle of collecting, filing, and remitting sales tax. This process is a continuous operational responsibility that requires careful record-keeping and adherence to state-mandated deadlines.

Collecting Tax from Customers

The practical act of collecting sales tax occurs at the point of sale. For e-commerce businesses, this is often an automated function integrated into the online shopping cart, using the customer’s shipping address to determine the correct tax rate. Businesses are responsible for ensuring this software is configured correctly based on their nexus footprint. For businesses that use manual invoicing, the process requires calculating the applicable sales tax and adding it as a distinct line item on the bill. The collected tax funds should be accounted for separately from business revenue, as they are held in trust for the state.

Filing Sales Tax Returns

After collecting the tax, businesses must report their sales activity by filing a sales tax return with each state where they are registered. State tax agencies assign a filing frequency—monthly, quarterly, or annually—based on the business’s volume of sales or tax collected. Higher sales volumes usually result in a more frequent filing requirement. The filing process is done through the state’s online tax portal, where a business enters summary data for the reporting period, including total gross sales, non-taxable sales, and taxable sales. Even if a business had no sales during a period, most states require a “zero return” to be filed.

Remitting the Tax

Filing the return is immediately followed by remitting the collected sales tax to the state. The payment must be made by the return’s due date to avoid penalties and interest, which commonly fall on the 20th of the month following the reporting period. States offer several electronic payment options through their online portals. The most common method is an ACH debit from a business bank account, but many states also accept payments via credit card, though this may include a processing fee. It is important to keep a record of the payment confirmation.

Handling Sales Tax Exemptions

Not all sales to all customers are taxable. Certain buyers, such as government agencies, non-profit organizations, or other businesses purchasing goods for resale, are often exempt from paying sales tax. To legally process a tax-free sale to an exempt entity, the seller must obtain a valid exemption certificate from the buyer at the time of the transaction. These certificates must be kept on file as proof of why tax was not collected on a particular sale. During a sales tax audit, an auditor will ask to see these certificates for any non-taxed sales; failure to produce a valid certificate can result in the seller being held liable for the uncollected tax.