Sales Tax Guide for Small Business Owners

What Is Sales Tax?

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and certain services. As a small business owner, you are typically responsible for collecting this tax from customers at the point of sale and remitting it to the appropriate tax authority.

Sales tax is not your money to keep. You are acting as a collection agent for the government. Failing to collect or remit sales tax can result in penalties, interest, and even personal liability for business owners.

Key Terminology

Before diving deeper, here are essential terms you need to know:

• Sales tax rate: The percentage added to a taxable sale (varies by state and locality)
• Nexus: The connection between your business and a state that triggers a tax obligation
• Tax-exempt: Certain items or buyers that are not subject to sales tax
• Remittance: The act of sending collected tax to the government
• Use tax: A companion tax that applies when sales tax was not collected (usually on out-of-state purchases)
• Marketplace facilitator: Platforms like Amazon or Etsy that may collect tax on your behalf

Understanding Nexus

Nexus is the single most important concept for determining your sales tax obligations. If you have nexus in a state, you must collect and remit that state's sales tax.

Physical Nexus

You have physical nexus in a state if you have:

• A storefront, office, or warehouse in the state
• Employees or contractors working in the state
• Inventory stored in the state (including Amazon FBA warehouses)
• Temporary physical presence (trade shows, pop-up shops)
• Property or equipment in the state

Economic Nexus

Since the landmark 2018 Supreme Court decision in South Dakota v. Wayfair, states can require sales tax collection based on economic activity alone, without any physical presence.

Common economic nexus thresholds:

| Threshold Type | Typical Requirement | States Using This | |---------------|-------------------|-------------------| | Revenue only | $100,000 in sales | Most states | | Transaction count | 200 transactions | Some states (declining) | | Revenue or transactions | $100,000 OR 200 transactions | Several states | | Lower revenue threshold | $50,000 in sales | A few states |

Important: Thresholds are measured per state. You could have nexus in 15 states while doing business from a single location.

Marketplace Nexus

If you sell through marketplaces like Amazon, Etsy, eBay, or Walmart, the marketplace itself may be required to collect and remit sales tax on your behalf. As of 2025, all states with sales tax have marketplace facilitator laws. However, you should verify what the marketplace handles and what remains your responsibility, particularly for sales through your own website.

States Without Sales Tax

Five states have no statewide sales tax:

1. Alaska -- no state tax, but some local municipalities impose sales tax
2. Delaware -- no sales tax at all
3. Montana -- no sales tax (some resort taxes apply)
4. New Hampshire -- no sales tax
5. Oregon -- no sales tax

If all your customers are in these states, sales tax may not apply. But if you sell to customers in other states and meet nexus thresholds, you still must collect tax for those other states.

Tax-Inclusive vs. Tax-Exclusive Pricing

This distinction affects how you display prices and what customers actually pay.

Tax-Exclusive Pricing (Most Common in the U.S.)

The displayed price does not include tax. Tax is added at checkout.

Example:

• Displayed price: $100.00
• Tax rate: 8.25%
• Tax amount: $8.25
• Customer pays: $108.25

This is the standard approach in the United States. Customers expect to see tax added at the register or checkout.

Tax-Inclusive Pricing (Common Internationally)

The displayed price already includes tax. Common in Europe, Australia, and many other countries.

Example:

• Displayed price: $108.25 (includes tax)
• Tax rate: 8.25%
• Tax portion: $8.25
• Pre-tax price: $100.00

Calculating tax from a tax-inclusive price: Tax amount = Inclusive price - (Inclusive price / (1 + tax rate)) Tax = $108.25 - ($108.25 / 1.0825) = $108.25 - $100.00 = $8.25

Which Should You Use?

• U.S. domestic sales: Tax-exclusive is expected and standard
• International sales: Tax-inclusive is often required by law
• Dual approach: Some e-commerce platforms let you show prices differently by market

State-by-State Overview

Sales tax rates and rules vary enormously across states. Here are some key highlights:

Highest Combined State + Local Rates

| Rank | State | State Rate | Avg. Local Rate | Avg. Combined | |------|-------|-----------|----------------|---------------| | 1 | Tennessee | 7.00% | 2.55% | 9.55% | | 2 | Louisiana | 4.45% | 5.10% | 9.55% | | 3 | Arkansas | 6.50% | 2.97% | 9.47% | | 4 | Washington | 6.50% | 2.89% | 9.39% | | 5 | Alabama | 4.00% | 5.29% | 9.29% |

Lowest State Rates (Among States With Sales Tax)

| State | State Rate | |-------|-----------| | Colorado | 2.90% | | Alabama | 4.00% | | Georgia | 4.00% | | Hawaii | 4.00% | | New York | 4.00% | | Wyoming | 4.00% |

Critical note: State rate alone is misleading. Local rates (county, city, district) can add 1% to 5% or more. Always determine the combined rate for each customer's location.

Taxability Varies by State

What is taxable differs significantly:

| Item | Generally Taxable? | Notable Exceptions | |------|-------------------|-------------------| | Physical products | Yes (most states) | Some food and clothing exemptions | | Groceries (unprepared food) | Varies widely | Exempt in about 30 states | | Clothing | Varies | Exempt in PA, NJ, MN, and a few others | | Digital products | Varies | Some states exempt, others tax | | SaaS / software | Varies | Rapidly evolving; more states taxing | | Professional services | Usually no | Some states tax certain services |

Online Sales Tax Rules

The Wayfair decision transformed online sales tax. If you sell online, here is what you need to know:

Your Obligations as an Online Seller

1. Determine where you have nexus -- Check each state's thresholds against your sales data
2. Register for a sales tax permit in each nexus state (never collect without a permit)
3. Calculate the correct rate based on the customer's shipping address (destination-based sourcing) or your location (origin-based sourcing), depending on the state
4. Collect tax at checkout using accurate, up-to-date rates
5. Remit collected tax on the required filing schedule

Origin-Based vs. Destination-Based Sourcing

Origin-based states (about 11 states): Tax rate is based on where the seller is located.

• Simpler for the seller
• Same rate for all in-state transactions

Destination-based states (majority of states): Tax rate is based on where the buyer is located.

• More complex -- thousands of possible tax jurisdictions
• More accurate for the buyer
• Essentially required for interstate sales

Shipping and Handling

Tax treatment of shipping charges varies:

• Taxable in some states if shipping is part of the sale
• Exempt in other states if separately stated on the invoice
• Partially taxable in others based on specific conditions

Always check the rules in each state where you collect.

Calculating and Collecting Sales Tax

Step 1: Register for a Sales Tax Permit

In every state where you have nexus, apply for a sales tax permit (sometimes called a seller's permit or resale certificate). This is free in most states and done through the state's department of revenue website.

Never collect sales tax without a valid permit. Collecting without authorization can result in penalties.

Step 2: Determine the Correct Rate

For each transaction, you need the correct combined rate (state + county + city + district). This can mean dealing with over 13,000 distinct tax jurisdictions in the United States.

Methods for determining rates:

• Tax calculation software: TaxJar, Avalara, Vertex -- automate rate lookups
• State rate lookup tools: Most state revenue departments offer free tools
• API integrations: Stripe Tax, Square's built-in tax engine
• Manual lookup: Feasible only if you sell in very few jurisdictions

Step 3: Apply Tax Correctly

Ensure your point of sale or e-commerce platform:

• Calculates tax based on the correct address
• Applies product-specific taxability rules
• Handles exemptions for tax-exempt buyers
• Displays tax separately on receipts and invoices

Step 4: Track Everything

Maintain records of:

• Total sales by state and jurisdiction
• Taxable vs. non-taxable sales
• Tax collected
• Tax-exempt transactions (keep exemption certificates on file)

Filing and Remittance

Filing Frequency

States assign filing frequency based on your sales volume:

| Volume Level | Typical Frequency | |-------------|------------------| | Very low (under $100/month tax) | Annual | | Low to moderate | Quarterly | | Moderate to high | Monthly | | Very high | Semi-monthly or monthly with prepayments |

Filing Process

1. Calculate total tax collected for the period by jurisdiction
2. Complete the state's sales tax return (online in most states)
3. Remit payment by the due date
4. Keep copies of all returns and payment confirmations

Filing Deadlines

Most states require filing by the 20th of the month following the reporting period. However, deadlines vary. Mark every deadline on your calendar or use automated filing software.

Zero Returns

If you had no taxable sales in a period, you must still file a "zero return" in most states. Failure to file, even with no tax due, can result in penalties.

Discount for Timely Filing

Some states offer a small discount (typically 0.5% - 3% of tax collected) as an incentive for on-time filing. This is free money -- take advantage of it.

Common Sales Tax Mistakes

Mistake 1: Not Collecting When Required

If you have nexus and do not collect, you are personally liable for the uncollected tax plus penalties and interest. This can result in devastating back-tax assessments.

Mistake 2: Collecting Without a Permit

Collecting sales tax without a valid permit is illegal in most states. Register before you start collecting.

Mistake 3: Using the Wrong Rate

With thousands of jurisdictions, using a single state rate instead of the correct combined local rate is a common error. Automated tax software eliminates this problem.

Mistake 4: Taxing Exempt Items

Each state has different exemption rules for groceries, clothing, medicine, and other categories. Incorrectly taxing exempt items means over-collecting from customers and potential legal issues.

Mistake 5: Ignoring Economic Nexus

Many online sellers still believe they only need to collect tax in their home state. The Wayfair decision changed this. Monitor your sales by state and register when you cross thresholds.

Mistake 6: Missing Filing Deadlines

Late filing triggers penalties and interest. Even one day late can cost money. Set calendar reminders or automate filing.

Mistake 7: Not Keeping Exemption Certificates

When a buyer claims tax exemption (reseller, nonprofit, government), you must collect and retain a valid exemption certificate. Without it, you are liable for the uncollected tax if audited.

Mistake 8: Forgetting Use Tax on Business Purchases

If you buy supplies or equipment from out-of-state sellers who did not charge sales tax, you likely owe use tax to your state. This is often overlooked and frequently caught in audits.

Managing Sales Tax Efficiently

Use Automation

For businesses selling in multiple states, manual sales tax management is impractical. Consider:

• TaxJar: Automated calculations, filing, and remittance ($19-$99+/month)
• Avalara: Enterprise-grade tax automation (custom pricing)
• Stripe Tax: Built into Stripe payments (0.5% per transaction)
• Square: Built-in tax calculation for Square sellers

Keep Excellent Records

Maintain organized records for at least 3-4 years (longer in some states):

• All sales transactions with tax details
• Exemption certificates
• Filed returns and payment confirmations
• Nexus analysis documentation

Review Annually

Each year:

1. Re-evaluate nexus in all states (thresholds change, your sales change)
2. Verify rate accuracy in your tax engine
3. Confirm product taxability rules are current
4. Review exemption certificates for expiration
5. Assess whether your filing frequency should change

Conclusion

Sales tax compliance is one of the less glamorous aspects of running a business, but getting it right protects you from penalties, audits, and back-tax assessments that can threaten your business. The key principles are straightforward: know where you have nexus, register properly, collect the right amount, file on time, and keep clean records.

Start with our sales tax calculator to understand the rates that apply to your transactions, use our invoice generator to ensure tax is displayed correctly on every invoice, and use our receipt maker to provide customers with proper tax documentation.

When in doubt, consult a tax professional. The cost of expert advice is far less than the cost of a sales tax audit.