Sales Tax Guide for Businesses

Sales Tax is one of the most frequently misunderstood aspects of doing business in the U.S. While many non-residents often assume it doesn't apply to them, understanding Sales Tax regulations is essential for any business looking to operate in the U.S. This guide will cover the fundamentals of Sales Tax, which businesses are subject to it, and practical steps for compliance.

What is Sales Tax?

Sales Tax is a consumption-based tax imposed by state and local governments on the sale of goods and certain services. The tax is collected from the end consumer at the point of purchase and is usually a percentage of the sale price. While businesses are responsible for collecting Sales Tax from customers, they do not pay this tax out of their own funds; they act as intermediaries, passing the collected tax to the state tax authority.

The rate and rules of Sales Tax vary significantly by state and jurisdiction, meaning not all items are taxed equally or at the same rate across the U.S. Generally, most tangible personal property is subject to Sales Tax, but certain goods like food, medicine, and clothing may be exempt or taxed at a reduced rate, depending on local laws.

Key takeaways

• Sales Tax is not a federal tax; it's applied at the state and local levels.
• It's a consumer tax, but sellers are responsible for its collection and remittance.
• It's vital to know which goods and services are taxable in your jurisdiction.

States that do and do not collect sales tax

Currently, 45 states and the District of Columbia impose Sales Tax. There are five states where Sales Tax is not collected at the state level:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon.

Note: While Alaska and Montana do not collect Sales Tax at the state level, they allow local jurisdictions to impose their own sales taxes.

States with the highest Sales Tax rates

Here is a list of states with the highest combined Sales Tax rates, including both state and local taxes:

State	Combined Sales Tax rate
Tennessee	9.55%
Louisiana	9.52%
Arkansas	9.51%
Washington	9.23%
Alabama	9.22%

These rates combine both state and local taxes and are subject to change based on local jurisdictions. Local rates can vary significantly within a state, so it is crucial to verify the applicable rate in the specific area where you plan to conduct business.

Why should entrepreneurs pay Sales Tax?

The primary purpose of Sales Tax is to generate revenue for states and municipalities. As a seller, you do not pay the Sales Tax directly but are responsible for collecting it from consumers and remitting it to the relevant tax authorities. This ensures that the tax is properly allocated to the appropriate jurisdiction.

Common misconception

Many entrepreneurs believe that because Sales Tax is a consumer tax, they don't need to deal with it. However, if you have a "Sales Tax Nexus" (a significant connection to a state, discussed further below), you are obligated to collect and remit Sales Tax for any taxable goods or services you sell.

Sales Tax Nexus: when does your business owe Sales Tax?

This connection, or "Nexus," is determined by the nature and extent of your business activities within the state. A state considers you to have Nexus if your business has a sufficient physical or economic presence, or other qualifying activities, in that jurisdiction. Once Nexus is established, you are legally obligated to register for a Sales Tax permit, collect Sales Tax on sales to customers in that state, and remit the tax to the state authorities.

Different types of Nexus

Nexus Type	Description
Physical Nexus	Having a physical presence in the state, such as an office, warehouse, or employees.
Inventory Nexus	Storing products in warehouses (like Fulfillment by Amazon) within the state.
Economic Nexus	Meeting a sales threshold in the state (e.g., $100,000 in sales or 200 transactions).
Affiliate Nexus	Having affiliates or contractors in the state who help facilitate sales.

Each state has its own rules on what constitutes Nexus, so it's essential to understand your business activities in each state.

Economic Nexus: the modern standard for online sellers

The concept of "Economic Nexus" has gained prominence, especially after the 2018 U.S. Supreme Court ruling in "South Dakota v. Wayfair Inc." This ruling allowed states to require remote sellers (e.g., online businesses) to collect and remit Sales Tax if their economic activity in the state exceeds certain thresholds.

State thresholds for Economic Nexus

Economic Nexus thresholds differ from state to state. This table will help you see how these thresholds vary from state to state:

State	Sales threshold	Transaction threshold	Notes
Alabama	$250,000	-	A state with a single sales threshold; no specific transaction count is required to establish Nexus.
Alaska	$100,000	200 transactions	Alaska does not impose state-level Sales Tax but allows local jurisdictions to set their own sales thresholds.
Arizona	$100,000	-	Economic Nexus is determined solely by sales volume; no transaction threshold is applied.
Arkansas	$100,000	200 transactions	The threshold includes all sales made into the state, whether taxable or exempt.
California	$500,000	-	One of the highest thresholds for establishing Nexus, focusing only on sales and not on the number of transactions.
Colorado	$100,000	-	The state requires remote sellers exceeding this threshold to collect Sales Tax.
Connecticut	$100,000	200 transactions	Nexus can be established either by exceeding the sales threshold or the transaction count.
Florida	$100,000	-	Florida requires registration for Sales Tax once this sales volume is met, with no minimum transaction count.
Georgia	$100,000	200 transactions	The state requires compliance from remote sellers reaching either of the two thresholds within the state.
Illinois	$100,000	200 transactions	This threshold includes gross sales, whether they are taxable or not.
Indiana	$100,000	200 transactions	The thresholds must be met either in the current or previous calendar year.
Iowa	$100,000	-	Iowa has a single sales threshold, with no requirement for a minimum number of transactions.
Kansas	$100,000	-	Kansas applies an economic Nexus threshold based solely on sales volume, without considering the transaction count.
Kentucky	$100,000	200 transactions	The Nexus requirement is established upon meeting either the sales or transaction threshold.
Louisiana	$100,000	200 transactions	The state requires sellers meeting these thresholds to collect and remit Sales Tax to the state.
Maryland	$100,000	200 transactions	Businesses that surpass either threshold within the calendar year must register to collect Sales Tax.
Massachusetts	$500,000	100 transactions	A high sales threshold with a relatively low transaction requirement.
Michigan	$100,000	200 transactions	The state considers both the sales and transaction thresholds for determining economic Nexus.
Minnesota	$100,000	200 transactions	Nexus applies to either taxable or exempt sales once these thresholds are met.
New York	$500,000	100 transactions	A high sales threshold paired with a relatively low transaction count for Nexus compliance.
North Carolina	$100,000	200 transactions	Either threshold can trigger the requirement to collect and remit Sales Tax in the state.
Ohio	$100,000	200 transactions	Economic Nexus is established once either threshold is reached in a given year.
Oklahoma	$100,000	-	Only a sales threshold is required to create Nexus; transaction count does not apply.
Pennsylvania	$100,000	-	The sales threshold is the sole criterion for economic Nexus in this state.
Texas	$500,000	-	A high sales threshold without a transaction count, making it a state where larger businesses are more likely to be affected.
Washington	$100,000	-	Remote sellers need only exceed the sales threshold to establish economic Nexus in Washington.
Wisconsin	$100,000	200 transactions	Sellers reaching either threshold are required to collect Sales Tax for sales into Wisconsin.

These thresholds are typically based on a 12-month period, and meeting or exceeding them obligates your business to register for Sales Tax in that state.

How to comply with Sales Tax regulations

Navigating Sales Tax regulations in the U.S. can be complex, as each state has different rules and thresholds for compliance. The following steps provide a clear path to understanding and adhering to Sales Tax regulations for your business.

Step 1: Determine your Nexus

Understand which states your business has a Nexus in by evaluating your business activities, physical presence, and sales volumes.

Step 2: Register for a Sales Tax permit

Once you've determined where you have a Nexus, you'll need to register for a Sales Tax permit in each state. Registration is usually done online through the state's Department of Revenue.

Step 3: Collect Sales Tax

After you’ve registered, start collecting Sales Tax on any taxable goods or services sold in that state. Make sure to use the correct rate, as it can vary by state and locality.

Step 4: Remit the collected Sales Tax

Each state has its own filing requirements and due dates. Typically, you'll need to remit the collected Sales Tax on a monthly, quarterly, or annual basis, depending on your sales volume in the state. Be sure to submit the tax to the correct state agency by the due date to avoid penalties.

Step 5: File Sales Tax returns

Along with remitting collected tax, you will need to file a Sales Tax return detailing the taxes you've collected, exemptions, and other relevant information. Filing is usually done online through the state’s tax portal.

Step 6: Stay compliant

Sales Tax rates and laws can change frequently. Regularly check for updates in the states where you operate and ensure your business remains compliant.

Understanding Sales Tax exemptions and special rules

There are specific exemptions, rates, and rules that vary by state. Below are some key factors to consider.

Exemptions on certain goods and services

Some goods and services are exempt from Sales Tax in specific states. For example:

• Groceries and food items: often exempt, but not always. States like Tennessee, Arkansas, and Virginia apply a reduced rate.
• Medical supplies: prescription drugs are typically exempt, while non-prescription drugs may still be taxed.
• Clothing and footwear: exemptions exist in states like Minnesota and New Jersey, but other states tax them at a lower rate.

Special Sales Tax holidays

Certain states have designated "Sales Tax holidays," which provide temporary tax exemptions for specific items like school supplies, clothing, and hurricane preparedness supplies. These holidays usually occur annually and can benefit both retailers and customers.

Resale exemptions and certificates

If your business buys products for resale, you may be eligible for a "resale exemption." To benefit from this, you'll need to present a resale certificate to your supplier. The process and form differ by state, so be sure to verify the requirements.

Sales Tax and online marketplaces

If you sell on online marketplaces like Amazon, Etsy, or Walmart, you may benefit from the "Marketplace Facilitator Laws." These laws require the marketplace to collect and remit Sales Tax on your behalf for sales made through their platform. However, it's still crucial to understand your responsibilities:

• Ensure compliance: verify that the marketplace is collecting and remitting Sales Tax accurately.
• Marketplace vs. Own site: if you sell through your own e-commerce site (e.g., Shopify), you are responsible for managing Sales Tax collection and remittance.

What about international Sellers? Special considerations

If you’re a non-resident selling in the U.S., there are additional considerations for managing Sales Tax:

• Registering without a Social Security Number

As a foreign business, you may need to provide an Employer Identification Number (EIN) or Individual Taxpayer Identification Number (ITIN) for Sales Tax registration.

• Sales Tax treaties

Unlike income tax, there are no tax treaties for Sales Tax. Each state has its own laws, and you must comply based on your Nexus status.

Sales Tax compliance for e-commerce businesses

E-commerce businesses face unique challenges in complying with Sales Tax regulations. Here are key best practices for staying compliant.

Automating Sales Tax compliance

Using Sales Tax software can help you keep track of your Nexus, manage tax rate changes, and automate filing. Popular options include:

• TaxJar: integrates with multiple platforms, automates filing, and provides Nexus insights.
• Avalara: offers comprehensive tax compliance solutions for different business types.
• QuickBooks: for small businesses needing a simple solution to track taxes and automate returns.

Properly handling shipping and handling fees

States vary on how they tax shipping and handling fees. Some states tax shipping as part of the sale, while others do not. Be sure to check the regulations in each state where you collect Sales Tax.

Correctly applying tax rates

Sales Tax rates can vary even within a single state based on local jurisdictions. Tools like state tax rate calculators or Sales Tax software can help ensure you’re collecting the correct rate for each transaction.

Sales Tax tables by state

Below is a quick reference guide to state Sales Tax rates and combined rates as of 2023. Note that local rates vary and can significantly impact the final rate charged.

State	State Rate	Combined Rate (State + Local)
Alabama	4%	9.22%
Alaska	0%	1.76%
Arizona	5.6%	8.4%
Arkansas	6.5%	9.51%
California	7.25%	8.68%
Florida	6%	7.08%
New York	4%	8.52%
Texas	6.25%	8.19%
Washington	6.5%	9.23%

*Note: Combined rates include state and average local Sales Tax rates. Check the Department of Revenue website for each state to ensure the most current rates.

How Sales Tax impacts your business operations

Understanding and managing Sales Tax effectively is crucial for smooth business operations in the U.S. Sales Tax impacts various areas:

• Pricing strategy

Ensure your pricing accounts for Sales Tax to avoid absorbing it as a cost.

• Customer experience

Be transparent about tax charges to build trust and avoid disputes.

• Accounting and reporting

Properly document and report Sales Tax to maintain financial compliance and avoid penalties.

Penalties for non-compliance

Non-compliance with Sales Tax regulations can result in significant penalties and harm your business's financial health and reputation. Authorities take Sales Tax violations seriously, and penalties are designed to encourage businesses to comply promptly and accurately. Failure to adhere to these regulations can lead to:

• Late fees

When you fail to file or pay your Sales Tax on time, you may incur late fees, which are usually a percentage of the unpaid tax. These fees can increase monthly, quickly adding up and causing a financial strain on your business.

• Interest on unpaid tax

If you delay the payment of Sales Tax, interest will accrue daily on the unpaid amount. This interest compounds over time, making it more costly to settle your tax obligations later.

• Revocation of business license

In severe cases where a business consistently fails to comply, the authorities may suspend or revoke your business license. This action can halt your operations entirely, preventing you from legally conducting business.

To avoid these penalties, it's essential to take proactive measures to ensure compliance and meet all filing deadlines.

Steps to avoid penalties

To stay compliant and avoid the penalties associated with Sales Tax violations, you can take several key steps:

1. Once your business establishes a Nexus in a particular state, it's crucial to register for a Sales Tax permit as soon as possible. Waiting too long to register can result in penalties or back taxes for the period you were not compliant.
2. Keep detailed and organized records of all your taxable transactions, Sales Tax collected, any exemptions, and the taxes you’ve remitted to the state. Proper documentation is not only required for compliance but also makes it easier to manage your finances and report accurately.
3. Navigating the intricacies of Sales Tax compliance can be complex, especially for non-residents unfamiliar with U.S. tax regulations. Hiring a tax advisor who specializes in U.S. Sales Tax can help you stay compliant, reduce errors, and ensure that you're meeting all necessary requirements.

By proactively managing your Sales Tax obligations and seeking professional advice when necessary, your business can avoid costly penalties and operate smoothly across U.S. jurisdictions.

Final thoughts

While Sales Tax may seem daunting, understanding its fundamentals and how it applies to your business is crucial. Non-residents selling in the U.S. must take extra care to comply with Nexus regulations, properly collect taxes, and stay updated on state rules. The right preparation and tools will enable your business to remain compliant and operate efficiently.

Our team provides tailored solutions to help your business stay compliant with U.S. Sales Tax rules. From registration and reporting to ongoing guidance, we’re here to support your business every step of the way, ensuring you meet all legal requirements efficiently and effectively.