Sales Tax Guide for Small Business
Nexus, registration, collection, and filing sales tax across states.
Sales tax is a consumption tax collected by businesses on behalf of state and local governments. If you sell taxable goods or services, understanding your collection obligations is critical—sales tax non-compliance can result in back taxes, penalties, and interest that accumulate quickly. This guide covers nexus, registration, collection, and filing.
Understanding Sales Tax Nexus
Nexus is the legal connection between your business and a state that triggers a sales tax obligation. Physical nexus exists when you have a physical presence in a state: an office, warehouse, employees, inventory, or even attending a trade show. If you have physical nexus, you must collect and remit sales tax on sales within that state.
Since the Supreme Court's 2018 South Dakota v. Wayfair decision, economic nexus also applies. States can now require out-of-state businesses to collect sales tax when they exceed a threshold of sales into the state, typically $100,000 in revenue or 200 transactions per year. Each state sets its own threshold.
Five states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska allows local jurisdictions to impose their own sales taxes. For the remaining 45 states plus D.C., you must evaluate nexus in each state where you make sales.
Registering for Sales Tax Permits
Once you have nexus in a state, register for a sales tax permit before collecting tax. Collecting sales tax without a permit is illegal in most states. Registration is typically done through the state's department of revenue website and is usually free, though some states charge a small registration fee or require a surety bond.
You will need your EIN or Social Security Number, business formation documents, and details about your business activities in the state. Some states approve permits instantly; others take several weeks. Do not begin collecting sales tax until your permit is active.
If you have nexus in multiple states, the Streamlined Sales Tax Registration System (SSTRS) allows you to register in 24 participating states through a single application. For non-participating states, you must register individually with each state's tax authority.
Collecting and Calculating Sales Tax
Sales tax rates vary by state, county, and city. A single transaction may be subject to state, county, city, and special district taxes that combine into a total rate. For example, a sale in Los Angeles might be subject to a combined rate of 9.5% or higher, while a sale in Portland, Oregon has no sales tax.
Determine the correct rate based on the destination of the sale (where the customer receives the product), not your location. Some states use origin-based sourcing (tax rate where the seller is), but the majority use destination-based sourcing. This means you may need to calculate different rates for different customers.
Certain products and services are exempt from sales tax in many states, including groceries, prescription medications, and clothing (in some states). Digital products and SaaS services have varying treatment across states. Sales tax automation software can determine the correct rate and taxability for each transaction based on the product type and customer location.
Filing Sales Tax Returns
Filing frequency depends on your sales volume and the state's rules. Most states assign you a monthly, quarterly, or annual filing frequency when you register. High-volume sellers typically file monthly, while lower-volume sellers file quarterly or annually.
Sales tax returns report your total sales, taxable sales, exempt sales, and the tax collected during the period. You remit the collected tax to the state along with the return. Many states offer a small discount (1–3% of tax collected) for timely filing and payment as compensation for collection efforts.
Late filing penalties and interest accumulate quickly. Most states charge a percentage of the unpaid tax as a penalty (typically 5–25%) plus daily or monthly interest. If you collected sales tax from customers but failed to remit it, some states treat this as a trust fund violation with potential personal liability and criminal penalties.
Key Takeaways
- ✓Evaluate both physical and economic nexus in every state where you sell—thresholds are typically $100,000 or 200 transactions.
- ✓Register for a sales tax permit in each nexus state before collecting tax.
- ✓Most states use destination-based sourcing—charge the rate where the customer receives the product.
- ✓Use sales tax automation software to calculate correct rates across jurisdictions.
- ✓File and remit sales tax on time—penalties for non-compliance are severe, especially for collected-but-not-remitted tax.
Frequently Asked Questions
Do I need to collect sales tax on services?
It depends on the state and type of service. Many states tax only tangible goods, but an increasing number tax certain services (e.g., lawn care, IT services, consulting). SaaS products are taxable in about half the states. Check each state's rules for your specific service type.
What is the difference between sales tax and use tax?
Sales tax is collected by the seller at the point of sale. Use tax is a complementary tax owed by the buyer when sales tax was not collected—for example, when purchasing from an out-of-state seller who did not charge tax. The rates are typically the same; the difference is who reports and pays it.
How do I handle sales tax for online sales?
For e-commerce, evaluate economic nexus in each state where customers are located. Use a sales tax automation tool (like TaxJar, Avalara, or native e-commerce platform features) to calculate, collect, and remit sales tax based on the customer's shipping address. Most e-commerce platforms integrate with these tools.