This guide explains what sales tax is, how it works, when you need to collect it, what nexus means, how to register and file, and how to stay compliant across multiple states.
Key Takeaways
- Customers generally pay sales tax, and sellers collect it.
- There is no federal U.S. sales tax. States and local jurisdictions establish their own rules.
- Rates vary by location. A customer’s combined rate can include state, county, city, and special district taxes.
- Not every product or service is taxable. Taxability depends on the state and, in some cases, the local jurisdiction.
- Nexus and taxability are separate questions. Having nexus in a state does not automatically make every sale taxable.
- Online businesses can have obligations even without a physical location in a state. Economic nexus can create an obligation based on sales activity.
- Registration generally comes before collection. Once a business determines that it has a sales tax obligation, it may need to register with the state before collecting tax.
- Sales tax rules and rates change. Businesses selling in multiple states need an ongoing process for monitoring nexus, taxability, rates, registration, and filing requirements.
What is Sales Tax?
It is a consumption tax charged on certain purchases of taxable goods and services. The buyer generally pays the tax, the seller collects it, and the seller remits it to the applicable state or local tax authority.
Sales tax is an indirect tax because the business collecting it generally does not bear the economic cost. Instead, the business collects the tax from the customer and passes it on to the government.
The United States does not have a nationwide federal sales tax. Instead, sales tax is imposed primarily by states and local jurisdictions such as counties, cities, and special taxing districts.
This is why the sales tax rate and rules can change depending on where a transaction takes place.
Who pays sales tax?
The customer generally pays sales tax as part of the purchase price.
Who collects sales tax?
The seller generally collects sales tax from the customer when the seller is legally required to do so.
Who receives sales tax?
The seller generally remits the tax to the appropriate state or local tax authority.
Is sales tax the same in every state?
No. States have different sales tax rates, taxability rules, exemptions, nexus rules, registration requirements, and filing obligations.Some states also use taxes that operate differently from a traditional sales tax. Arizonaimposes a Transaction Privilege Tax (TPT), Hawaii imposes a General Excise Tax (GET), and New Mexico imposes a Gross Receipts Tax (GRT). These taxes are often discussed alongside sales tax because they apply broadly to business transactions and affect ecommerce sellers.
How Does It Work?
A typical transaction involves four basic steps:- Determine whether the seller has nexus in the jurisdiction.
- Determine whether the product or service is taxable.
- Determine the applicable rate and sourcing rules.
- Collect, report, and remit the tax when required.
How Is It Calculated?
Sales tax is computed as a percentage of the sales price, with rates varying by jurisdiction, and some local governments also collect their own.
To calculate your tax, you must list the price of your taxable product, including any taxable shipping charges. After that, determine the combined sales tax rate that applies to the transaction’s location. Then convert the state’s combined sales tax rate to decimal form.Once you convert the rate to decimal format, multiply your product’s price by the decimal. The result is your estimated sales tax for that transaction.- Here’s the simplified formula breakdown:Price of Goods + Shipping Fee xState Sales Tax Rates +Local Sales Tax Rates= Your Total Sales Tax
- You’re selling a taxable product worth $50 with a $10 shipping fee. This brings your total sale price to $60.
- The product was shipped to New York City, New York, where shipping is taxable. The combined state, county, city, and other local rates in New York City, New York, are 8.875%.
- Convert the state’s combined sales tax rate into decimal format. 8.875% turned into decimal format is: 0.08875
- Now, multiply your sale price by the decimal form of the combined city, county, and state sales tax rate. 60 x 0.08875 is = $5.325 When rounded off, this amount becomes = $5.33
- Finally, add everything to your base sales price to collect sales tax accurately. [Product Price] $50 + [Shipping Fee] $10 + [Calculated Sales Tax] $5.33 TOTAL = $65.33
State and Local Sales Tax: What Is The Difference?
A state sales tax is imposed by the state government.
A local sales tax is imposed by a local jurisdiction, such as a county, city, or special taxing district.
The rate charged to a customer can therefore be higher than the state’s base rate.
For example, a state may have a statewide sales tax rate while a particular city or county adds additional local taxes.
Businesses should not assume a state’s published rate automatically applies to every transaction.
The applicable combined rate depends on the jurisdiction and the rules governing the transaction.
Are All Goods and Services Subject To Sales Tax?
Not every product or service is taxable in every state. State law determines taxability, which can vary significantly between jurisdictions. For example:
- A product may be taxable in one state but exempt in another.
- A service may be taxable in one state but not another.
- A product may be exempt from state tax but subject to a local tax.
- Digital products and software may be subject to different tax rules than physical goods.
- Certain purchases may qualify for specific exemptions.
Having nexus does not automatically mean every sale the business makes is taxable. Before collecting sales tax, businesses should determine both where they have an obligation and what they must tax.
Which States Collect and Do Not Collect?
As of 2026, 45 states and the District of Columbia impose a statewide general sales tax or comparable broad-based consumption tax. Many states also allow local governments to impose additional sales taxes. However, the following eight states do not impose local sales taxes:New Jersey does allow certain local sales taxes. For example, local sales taxes apply to certain sales in Atlantic City and Cape May County. The state also has an Urban Enterprise Zone (UEZ), where qualified businesses can charge a reduced state sales tax rate of 3.3125% on certain qualifying sales.Meanwhile, the states that do not collect sales tax are called the NOMAD states, a name derived from the first letter of those states. The NOMAD states do not impose a statewide general sales tax, and those states are:NOTE: Alaska allows its local jurisdictions to impose and collect local sales tax. Oregon also imposes a Corporate Activity Tax (CAT), which is measured on a business’s commercial activity and is separate from a retail sales tax.What are the Sales Tax Rates in each State?
Check out the table below to know what the rates are in each state:
|
When to Collect Sales Tax?
A business generally needs to collect sales tax when:- It has sales tax nexus in a jurisdiction; and
- The transaction involves a taxable product or service; and
- The business must collect tax in accordance with that jurisdiction’s rules.
What is Sales Tax Nexus?
A sales tax nexus is a sufficient connection between a business and a state that can create a sales tax registration and collection obligation. Once a sales tax nexus is created, your business generally must register in the state and begin collecting and remitting sales tax. But how can you identify once a sales tax nexus exists for your business? Two types of sales tax nexus determine your business’s presence in a state: physical nexus and economic nexus.Physical Nexus
Physical nexusgenerally occurs when a business has a sufficient physical presence or business activity in a state. Common examples can include:
- A physical store or office
- A warehouse
- Inventory stored in the state
- Employees working in the state
- Sales representatives or other business representatives
- Certain contractors or agents
- Other activities specified under state law
Economic Nexus
Economic nexus is a sales tax connection created when an out-of-state business reaches a state’s specified level of economic activity, typically measured by sales revenue, transaction volume, or both. This matters for online sellers because a business can establish nexus without a traditional physical location in the state.Economic nexus thresholds differ by state and can change over time. For example, Alabama uses a $250,000 sales threshold under its current rules and has eliminated its former 200-transaction threshold.Other states use different thresholds, measurement periods, and rules. To check each state’s economic nexus threshold, read: Ultimate Guide to Understanding Economic NexusDo Online Sellers Have to Collect Sales Tax?
Online sellers do not automatically have to collect sales tax on every sale.An online seller generally needs to collect sales tax when it has the required nexus in the customer’s state, the transaction is taxable, and the state requires collection.This means an ecommerce business may have sales tax obligations in multiple states even if it operates from a single location.Marketplace sellers also need to understand how marketplace facilitator laws interact with their own nexus and registration obligations.A marketplace may collect and remit tax on a seller’s behalf, but marketplace collection does not necessarily eliminate the seller’s own nexus, registration, or reporting responsibilities.Who Should Register for Sales Tax
Businesses that have a sales tax collection obligation generally need to register with the relevant state before collecting sales tax.This can affect:- Businesses operating inside a state: A business with a physical presence, such as a store, office, warehouse, inventory, or employees, may establish physical nexus and therefore have a sales tax registration obligation.
- Remote and ecommerce businesses: An out-of-state seller can establish economic nexus by exceeding the applicable threshold or otherwise meeting a state’s requirements.
- Determine its registration requirement.
- Register for a sales tax permit.
- Configure its sales tax collection system.
- Begin collecting when required.
- File sales tax returns.
- Remit the tax collected.
- Continue monitoring its obligations.
How to File Sales Tax Returns
Once you register your business in a state, you become responsible for collecting and remitting sales taxes accurately and on time. If it’s your first time filing a sales tax return, a general rule is that each state has different procedures, requirements, and due dates.In today’s digital age, where most things can be done online, we can generalize the steps for filing sales tax returns online into this standard process:- Step 1: Prepare your ecommerce tax report (e.g., tax report from Shopify) – Make sure that your report is accurate and contains all the information you need to file your sales tax return correctly.
- Step 2: Search for your state’s filing website – For example, Colorado instructs filers to use “Revenue Online” for a simplified filing process. Usually, the filing website is the same page when you register a business online. However, other states could have unique links that may direct you to.
- Step 3: Log in using your sales tax account – Generally, this account refers to your state sales tax account, which is typically created when you register your business online.
- Step 4: Locate the “File Return” option – Different state websites have different layouts, but since your goal is to file a return, most of them should have this option, or it may be worded differently.
- Step 5: Begin filing your sales tax return – Make sure you select the correct filing period and enter your data based on your tax report. Usually, there’s an option to save your return as a draft and continue later if you can’t complete it immediately.
How to Stay Compliant with Sales Tax Regulations
Given the complexity of U.S. sales tax rules, staying compliant can feel like a difficult endeavor. To ensure your business complies with the various laws, here are 7 critical things every business should know to stay compliant.- Keep track of your nexus — It’s important to know where you stand in the “invisible bridge” that connects your business to a state’s economic system. Once you cross that bridge and establish a nexus, you’ll have to comply with tax regulations. Failure to comply can result in penalties that harm your business.
- Check every state’s specific rules – Never assume that one state’s sales tax rule is the same as another’s. Even if some rules seem common across many states, it’s still best to navigate safely by verifying each state’s specific rules.
- Always keep records – Your transactions are proof of your business activities. Once your business establishes a nexus, a good practice for staying compliant is to maintain records. These records will help your business stay clear during audits and avoid penalties.
- Register your business – Once a nexus is established, don’t delay your business’s registration. Otherwise, you risk being liable for non-compliance. If you need help registering your business, you can let TaxHero do it for you or read our state-by-state guides.
- Identify your product’s taxability – The taxability of goods and services varies depending on the state’s specific rules and guidelines. You must know where your product is subject to taxation and where it is exempt.
- Calculate with precision – Even a small difference in the report can cost you an audit. This is why tip #3 is crucial: your records can also help you accurately calculate your total sales tax. Always be mindful of local, district, and local option taxes that may apply to your transactions.
- Remit sales tax on time – After registering your business, make sure you never miss your returns and their filing due dates. Dates vary across states, so always check the correct due dates for the states you are selling in.
What Happens If You Don’t Collect or Remit?
Failure to comply can result in penalties, interest, assessments, and other enforcement actions.The consequences depend on the jurisdiction, the type of violation, the amount of tax involved, and other circumstances.Potential issues can include:- Failure-to-register penalties
- Failure-to-file penalties
- Failure-to-pay penalties
- Interest on unpaid tax
- Tax assessments
- Audit exposure
Frequently Asked Questions
1. I am an online seller. Do I have to collect sales tax on all the salesI make?+
No. Online sellers do not have to collect sales tax on every sale. Generally, collection is required when the seller has the necessary nexus in the applicable state, the transaction is taxable, and the seller is responsible for collecting the tax under that state’s rules.
2. What does sales tax holidays mean?+
A sales tax holiday is a limited period during which states allow tax-free purchases of specific items. States typically offer this to encourage consumer spending. Common types include:
- Energy Star Appliance – This holiday encourages buyers to purchase energy-efficient appliances such as refrigerators and washers.
- Emergency Preparedness – Common in states that are prone to hurricanes, such as Alabama, Florida, and Texas.
- Back-to-School – The most common holiday, typically occurring between late July and August. This holiday usually exempts goods like clothing, footwear, school supplies, and sometimes even personal computers or tablets.
3. Are products like food, clothing, SaaS, and shipping taxable?+
Grocery food is often exempt, but taxability varies by state and by the type of food. Prepared food, restaurant meals, candy, beverages, and other food products may be taxable.
Clothing is considered tangible property and may be taxable or non-taxable, depending on the state. Many states offer partial exemptions from sales tax for clothing that they deem necessary.
SaaS taxability varies by state. Some states tax SaaS and other electronically delivered products or services, while others exempt them or apply different rules. Businesses should check the rules in each state where they have an obligation.
Sales tax on shipping varies by state; some states impose it, while others don’t. There are also unique conditions that vary by state. For example, in Florida, shipping is exempt if the shipping option is optional and the buyer has a pick-up option. Additionally, the invoice must state the shipping charges separately for the exemption to be valid.
Meanwhile, in states like New York and Texas, businesses generally charge customers taxes on shipping charges by default, even if they itemize the goods separately.
The Bottom Line
Sales tax is not one nationwide tax with one set of rules. It is a collection of state and local tax systems with different rates, nexus rules, taxability rules, registration requirements, filing schedules, and exemptions. For an ecommerce business, compliance comes down to answering four questions:- Where do I have sales tax nexus?
- What products or services are taxable in those jurisdictions?
- How much sales tax should I collect?
- When and where do I need to file and remit it?