Sales Tax
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
A consumption tax charged on retail sales of goods and certain services.
Sales tax is a transaction-based consumption tax that sellers collect from customers at the point of sale and remit to state and local taxing authorities. 45 states plus the District of Columbia impose statewide sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon do not, though Alaska allows local sales tax). Combined state-and-local rates range from roughly 4% to over 10% — Tennessee, Louisiana, and Arkansas top the list near 9.5%+ combined. After the 2018 Supreme Court decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect sales tax based on "economic nexus" — typically $100,000 in sales or 200 transactions per year into the state (thresholds vary; verify each state's current rules). Physical nexus (a warehouse, office, employee, inventory in an Amazon FBA fulfillment center) also triggers collection duty. Taxability rules differ by product category and state: groceries, prescription drugs, and clothing are exempt in many states; SaaS is taxed in some states (e.g., Texas, New York) and exempt in others (e.g., California). Marketplace facilitator laws (in nearly every state) now require platforms like Amazon, Etsy, and eBay to collect and remit on behalf of third-party sellers.
Formula
Sales Tax = Taxable Sale Amount × Combined State and Local Rate. Economic Nexus Threshold (most states) = $100,000 in sales OR 200 transactions per year (varies by state; verify with each state's Department of Revenue).Example
An e-commerce store sells a $50 t-shirt to a customer in Austin, Texas. The combined state (6.25%) plus local (2%) sales tax rate = 8.25%. The store charges the customer $50 + ($50 × 8.25%) = $54.13. The $4.13 sales tax sits in a liability account until the monthly Texas Comptroller filing, when it is remitted along with sales tax collected from other Texas customers that period. If the store ships to Oregon (no sales tax), no tax is collected. If the store ships to California and has surpassed $500,000 in California sales (economic nexus threshold), it owes California sales tax even without physical presence.
Why It Matters for Your Business
Collecting and remitting sales tax is a strict-liability legal obligation — states actively audit and frequently assess back taxes, penalties, and interest on years of uncollected tax, and the business (not the customer) is on the hook for any amount not properly collected.
Practical Tips
- •Use automated sales tax software (TaxJar, Avalara, Anrok, Sovos) the moment you cross your second state — manual multi-state compliance is impossible to do correctly at scale
- •Register for a sales tax permit BEFORE collecting tax in a state — collecting without a permit is itself a violation, and back-registration usually triggers a 3–4 year lookback audit
- •Verify product taxability for each SKU in each state — taxing exempt items (or failing to tax taxable ones) accumulates liability quickly
- •Monitor economic nexus thresholds monthly — most states require registration within 30 days of crossing the threshold, and several use sliding 12-month lookback windows
Common Questions About Sales Tax
How is sales tax calculated?
The formula is: Sales Tax = Taxable Sale Amount × Combined State and Local Rate. Economic Nexus Threshold (most states) = $100,000 in sales OR 200 transactions per year (varies by state; verify with each state's Department of Revenue).. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of sales tax?
An e-commerce store sells a $50 t-shirt to a customer in Austin, Texas. The combined state (6.25%) plus local (2%) sales tax rate = 8.25%. The store charges the customer $50 + ($50 × 8.25%) = $54.13. The $4.13 sales tax sits in a liability account until the monthly Texas Comptroller filing, when it is remitted along with sales tax collected from other Texas customers that period. If the store ships to Oregon (no sales tax), no tax is collected. If the store ships to California and has surpassed $500,000 in California sales (economic nexus threshold), it owes California sales tax even without physical presence.
Why does sales tax matter for my business?
Collecting and remitting sales tax is a strict-liability legal obligation — states actively audit and frequently assess back taxes, penalties, and interest on years of uncollected tax, and the business (not the customer) is on the hook for any amount not properly collected.
How does FiscalInsights help with sales tax?
FiscalInsights tracks sales tax automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
More Taxes Terms
Tax Deduction
An expense that reduces taxable income.
Estimated Taxes
Quarterly tax payments made by self-employed individuals and businesses.
Form 1099
IRS forms reporting various types of income other than wages.
Form W-2
Annual statement from employers showing employee wages and taxes withheld.
Payroll Tax
Taxes withheld from employee wages for Social Security and Medicare, plus employer-side employment taxes.
Related Taxes Guides
Automate Your Finances with AI
FiscalInsights uses AI to automate bookkeeping, track expenses, and forecast cash flow — so you can focus on your business.
Start Free Trial