Should I Add Sales Tax to My Invoice?

The requirement to collect and remit sales tax is a component of business compliance in the United States. Navigating the rules set by different state and local governments determines whether this tax applies to your specific sales. Understanding your obligations is the first step in this process.

Determining Your Sales Tax Obligation

A business’s duty to collect sales tax hinges on “nexus,” a connection between your business and a state that creates a tax obligation. If your business has nexus in a particular state, you are required to register, collect, and remit sales tax there. This connection can be established through a physical presence or by your economic activity.

The traditional way to establish nexus is through a physical presence, which means having a tangible footprint in a state. This can include an office, a warehouse, or a storefront. Employing someone who works from their home in a state, storing inventory in a third-party fulfillment center, or temporarily doing business at a trade show can also create a physical nexus.

A more recent development is “economic nexus,” which is based on your sales volume within a state rather than physical presence. This principle was solidified by the 2018 Supreme Court case South Dakota v. Wayfair, which allowed states to tax remote sellers. While each state sets its own threshold, a common standard is $100,000 in sales within a calendar year. If your business surpasses a state’s threshold, you establish nexus and must collect sales tax.

The type of product or service you sell also dictates your sales tax obligation. Most tangible personal property—items like furniture, clothing, and electronics—is subject to sales tax. The taxability of services, however, varies significantly between states. Some states tax a wide range of services, such as landscaping or consulting, while others tax very few. You must check the specific rules of the state where you have nexus.

Preparing to Collect Sales Tax

Before you can legally add sales tax to an invoice, you must register with the appropriate state agency. Collecting sales tax without a permit is prohibited. The required authorization is called a sales tax permit or license, and it is issued by the state’s department of revenue.

To complete the registration process, you will need to provide specific details about your business. You should be prepared to supply your:

• Federal Employer Identification Number (EIN)
• Legal business name and any “doing business as” (DBA) names
• Primary business address
• Business structure, such as a sole proprietorship, LLC, or corporation
• Names and addresses of the business owners or corporate officers
• The date you began conducting business within the state
• A general description of the products or services you sell

Registration is completed online through the state’s official department of revenue website. The most direct way to find the correct portal is to search for “[State Name] department of revenue.” Once registered, you will receive your sales tax permit number, which authorizes you to begin collecting tax.

Calculating and Invoicing Sales Tax

Once you have registered for a permit, the next step is to accurately calculate the tax and add it to your customer invoices. Sales tax rates are not uniform and depend on the specific location of the transaction. States use either “origin-based” or “destination-based” sourcing rules to determine the correct rate. For origin-based states, you charge the rate at your business’s location, while for destination-based states, you charge the rate at the customer’s shipping address.

To find the precise rate, you must account for the combination of state, county, city, and special district taxes. The most reliable method is to use the official tax rate lookup tool on the website of the state’s department of revenue. These tools allow you to enter a full street address to get the exact combined rate for that location.

When preparing an invoice, the sales tax must be clearly and separately stated and not embedded within the price of the product. A compliant invoice will first show the subtotal for all taxable goods and services. Below the subtotal, a distinct line item should read “Sales Tax,” showing the tax rate and the resulting tax amount, followed by the total amount due.

Managing Collected Sales Tax

After you have collected sales tax from a customer, the money does not belong to your business. You are acting as a trustee for the government, and these funds must be held separately from your operating capital. It is a best practice to segregate the collected tax into a dedicated bank account to ensure the funds are available when it is time to pay the state.

The state that issued your sales tax permit will assign you a filing frequency, which dictates how often you must report and remit the taxes you have collected. This frequency is based on your estimated sales volume; businesses with higher sales volumes are required to file more often. Common filing schedules are monthly, quarterly, or annually. Your assigned frequency will be communicated to you when your permit is issued.

Filing your sales tax return is done through the same online portal where you registered for your permit. The return requires you to report your total gross sales for the period, your total taxable sales, and the amount of sales tax you collected. After submitting the return, you must remit the collected tax to the state, which is made electronically through the portal. Meeting the filing and payment deadlines is necessary, as states impose penalties and interest for late submissions.