Sales tax is one of the most-confusing topics for U.S. small business owners. 45 states + thousands of localities each have rules, exemptions, and rates. Here's the practical guide to what you actually need to know to stay compliant.

The basics

Sales tax is collected from the buyer at point of sale, then remitted to the state by the seller.

Sales tax rates: typically 4–10% combined (state + local). 5 states have no sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon.

Examples:

  • California: 7.25% state + up to 2% local = 7.25–10.25%.
  • Texas: 6.25% state + up to 2% local = 6.25–8.25%.
  • New York: 4% state + 4–4.875% local = 8–8.875%.
  • Tennessee: 7% state + 1.5–2.75% local = 8.5–9.75%.

Nexus: when do you have to collect?

"Nexus" is the legal connection between your business and a state that requires you to collect sales tax there.

Types of nexus:

  • Physical nexus: you have an office, warehouse, employee, or inventory in the state.
  • Economic nexus: you sell into the state above a threshold (often $100k or 200 transactions per year).

Once you have nexus in a state, you must register, collect, and remit sales tax there.

Economic nexus thresholds

Common thresholds (2024):

  • $100k or 200 transactions: most states.
  • $500k: New York, California (slightly different rules).
  • $250k: Connecticut.
  • $100k OR 200 transactions: many states (but not Wyoming, which removed transaction count).

This was set after the 2018 South Dakota v. Wayfair Supreme Court decision, which allowed states to require remote sellers to collect.

What's taxable?

Most tangible goods. But:

  • Software: taxable in some states; not in others. SaaS often follows tangible-software rules.
  • Services: usually not taxable, but some states tax specific services (Texas taxes cleaning services, etc.).
  • Food (groceries): exempt or reduced rate in many states.
  • Clothing: exempt up to certain amounts in NY, MA, PA, NJ, MN, RI, VT.
  • Digital downloads: taxable in most states now.
  • Subscription services: case-by-case.

Each state has its own taxability rules. Check carefully for your products.

How to register

Once you have nexus:

  1. Apply for a sales tax permit (also called "seller's permit" or "resale certificate") with the state's revenue department.
  2. Receive your registration number.
  3. Begin collecting tax at point of sale.
  4. File returns (monthly, quarterly, or annually depending on volume).
  5. Remit the tax collected to the state.

Filing frequency depends on volume. Monthly for high-volume sellers; annually for small ones.

E-commerce and marketplace facilitators

Big change since 2018: many states now require marketplaces (Amazon, Etsy, eBay, Walmart Marketplace) to collect sales tax for their sellers.

So if you sell only on Amazon, Amazon collects sales tax. You don't need to register or remit yourself for marketplace sales (in most states).

For your own website (Shopify, WooCommerce, custom store): you collect.

Mixed strategy: marketplace sales are handled by the marketplace; your direct sales need your own collection.

Sales tax software

Worth using if you have nexus in 2+ states:

  • TaxJar: most popular, $19–99+/month.
  • Avalara: enterprise-focused, more expensive.
  • Vertex: enterprise.
  • Stripe Tax: built into Stripe.
  • Shopify Tax: for Shopify stores.

These tools:

  • Auto-calculate correct rate by zip code.
  • Track your nexus status.
  • Generate filing-ready reports.
  • Some auto-file returns.

Common compliance mistakes

1. Not collecting in nexus states. Penalty: state can demand back-taxes you should have collected, plus interest.

2. Wrong rate. Sales tax varies by zip code. Use software, don't try to look up manually.

3. Missing filing deadlines. Penalties and interest add up. Even if zero tax due, file the return.

4. Treating sales tax as revenue. Sales tax collected is held in trust for the state. Spending it is illegal.

5. Ignoring economic nexus. If you cross threshold in a new state, you must register and start collecting. Keep watching your sales by state.

Sales tax holidays

Some states have annual "sales tax holidays" — typically back-to-school, hurricane preparedness, or energy-efficient appliances. Specific items are exempt for a weekend or week.

If you sell those items, you must NOT collect tax during the holiday period.

Resale certificates

If you buy goods to resell (rather than for use), you can present a resale certificate to your supplier — they don't charge you sales tax (you'll charge tax to your customer instead).

Each state has its own form. Many wholesalers want a copy on file before they'll sell to you.

Audit risk

States audit sales tax compliance, particularly:

  • Online sellers with high revenue but limited registration.
  • Cash-heavy businesses.
  • Businesses claiming exemptions.

Audits typically look at 3–4 years. Keep records of every sale, return filed, and tax collected.

International (if you sell abroad)

VAT (Value Added Tax) is the equivalent in most countries. Different rules; usually higher rates.

  • EU VAT: 17–27% depending on country.
  • UK VAT: 20%.
  • Canada GST/HST: 5–15%.
  • Australia GST: 10%.

For sales to foreign consumers, you may need to register and collect VAT in their country (especially in EU). Threshold rules apply.

The strategic question

For new businesses: don't worry about sales tax until you have nexus. Most startups don't trip economic thresholds for a year or two.

Once you do have nexus: invest in sales tax software. Compliance manually across multiple states is error-prone.

Worst case: you ignore sales tax, then a state audits you. Could result in $50k+ in back taxes and penalties.

Calculate sales tax

For specific transactions, use a sales tax calculator. Most states publish their rates online. For multi-state operations, software is essential.