US Sales Tax Guide for Small Business (State by State)

US Sales Tax: Why It Is So Complex

Unlike countries with a single national consumption tax (like Australia's GST or the UK's VAT), the United States has no federal sales tax. Instead, sales tax is imposed at the state, county, and city level. This means there are over 13,000 distinct tax jurisdictions, each with potentially different rates, rules, and exemptions.

For small business owners, especially those selling online across state lines, this creates a compliance challenge that can feel overwhelming. But with the right understanding and tools, it is manageable.

The Basics: What Is Sales Tax?

Sales tax is a consumption tax charged on the retail sale of goods and, in many states, certain services. The seller collects the tax from the buyer at the point of sale and remits it to the relevant state and local taxing authorities.

States Without Sales Tax

Five states have no state-level sales tax:

• Alaska (though local jurisdictions may impose sales tax)
• Delaware
• Montana
• New Hampshire
• Oregon

If you only sell in these states, you may have minimal sales tax obligations. However, Alaska's local sales taxes still apply in some municipalities.

Nexus: Your Connection to a State

You only need to collect sales tax in states where you have "nexus" - a sufficient connection to the state that creates a tax obligation. There are two types of nexus:

Physical Nexus

You have physical nexus in a state if you have:

• An office, warehouse, or store in the state
• Employees or sales representatives in the state
• Inventory stored in the state (including Amazon FBA warehouses)
• Property or equipment in the state
• Attending trade shows or events in the state (in some jurisdictions)

Economic Nexus

Following the 2018 Supreme Court decision in South Dakota v. Wayfair, states can require remote sellers to collect sales tax based on their economic activity in the state, even without physical presence.

Most states have set economic nexus thresholds at:

• $100,000 in sales revenue, OR
• 200 transactions in the state within a calendar year

Some states use different thresholds. Check each state where you have significant sales.

State Sales Tax Rates

State-level rates range from 2.9% (Colorado) to 7.25% (California). But the total rate a buyer pays includes county and city taxes, which can push the combined rate above 10% in some areas.

For example:

• California - State rate 7.25%, but combined rates can exceed 10.25% in some cities
• Texas - State rate 6.25%, combined rates up to 8.25%
• New York - State rate 4%, but with city and county taxes, New York City is 8.875%
• Florida - State rate 6%, combined rates up to 7.5%

The rate that applies depends on the destination of the sale (in most states). This means you need to determine the correct combined rate for the buyer's location.

What Is Taxable?

Each state has its own rules about what is subject to sales tax:

Generally taxable in most states:

• Tangible personal property (physical goods)
• Digital products (in many but not all states)
• Certain services (varies widely by state)

Common exemptions:

• Groceries (exempt in many states, taxed in some)
• Clothing (exempt in some states like Pennsylvania and New Jersey)
• Prescription medications (exempt in most states)
• Business-to-business purchases (resale exemptions)

Software and SaaS - Treatment varies dramatically. Some states tax SaaS, others treat it as a non-taxable service, and some are still figuring it out.

Registration and Filing

How to Register

Register for a sales tax permit in each state where you have nexus. Most states allow online registration through their department of revenue website. Never collect sales tax without a valid permit - doing so is illegal in some states.

Filing Frequency

States assign filing frequencies based on your tax liability:

• Monthly - For businesses with higher sales volumes
• Quarterly - The most common frequency for small businesses
• Annually - For businesses with very low sales tax liability

Filing Returns

Each state has its own return form and filing system. For each return, you report:

• Total sales in the state
• Taxable sales
• Exempt sales
• Tax collected
• Tax due

Many states offer online filing portals. Some require electronic filing above certain thresholds.

Marketplace Facilitator Laws

If you sell through online marketplaces like Amazon, eBay, Etsy, or Walmart Marketplace, the marketplace may be responsible for collecting and remitting sales tax on your behalf. Most states have enacted marketplace facilitator laws that shift the collection obligation to the marketplace.

However, you still need to track your marketplace sales for your own records and ensure the marketplace is handling tax correctly. You may also need to file returns showing marketplace-facilitated sales, even if you do not owe additional tax.

Exemption Certificates

When selling to businesses that intend to resell your products, they may provide a resale exemption certificate. You must collect and retain these certificates to justify not charging sales tax on those transactions.

Keep exemption certificates organised and accessible. If audited, you will need to produce them.

Common Compliance Mistakes

Not registering where you have nexus - Ignoring economic nexus is a common and costly mistake. States are actively enforcing these rules.

Collecting the wrong rate - Using the state rate without including county and city taxes results in under-collection.

Not filing zero returns - If you are registered in a state but had no sales, you usually still need to file a zero return. Failure to file results in penalties.

Poor record-keeping - Keep detailed records of every sale, including the buyer's location, the tax rate charged, and the tax collected. SortBooks can help automate the categorisation of your transactions to support accurate tax reporting.

Missing filing deadlines - Late filings incur penalties and interest. Set calendar reminders for every filing deadline.

Tools for Managing US Sales Tax

Given the complexity, most businesses selling across multiple states use sales tax automation software:

• TaxJar - Automates rate calculation, filing, and remittance
• Avalara - Comprehensive tax compliance for businesses of all sizes
• Vertex - Enterprise-grade tax automation

These tools integrate with most e-commerce platforms and accounting software to calculate the correct rate at the point of sale and simplify filing.

US sales tax is undeniably complex, but it follows logical rules. Understand where you have nexus, register appropriately, collect the correct rates, file on time, and keep thorough records. With the right systems in place, compliance is achievable.