Sales Tax Concepts Explained
Learn more about sales tax
To directly to more about:
- Sales tax nexus – what factors require your business to collect sales tax in a state
- Sales tax registration – when you need to register with a state and how to get registered
- Charging sales tax – how to charge the right amount of sales tax in each of the country’s 14,000+ taxing jurisdictions
- Filing sales tax – how and when to file sales tax correctly
- US sales tax for retailers based outside the US – sell in the US? You still may be required to collect sales tax
- Sales tax by state – Sales tax guidance for each individual US state
Sales Tax Simplified
Sales tax is a consumption tax charged at the point of sale. With sales tax, a retailer is required to collect a small percentage of the sale from the buyer. The retailer then periodically remits this sales tax to the state and local government to pay for state budget items like schools, roads and hospitals.
Sales tax is governed at the state level, and forty-six states and Washington DC all have a sales tax.
The states with no sales tax are Delaware, Montana, New Hampshire, and Oregon. Alaska allows local areas (counties, cities, etc.) to levy a sales tax, but has no statewide sales tax.
Sales Tax Nexus: Does my business have to collect?
A business is required to collect sales tax from buyers in a state if they have a “sales tax nexus” in that state. “Nexus” simply means a “tie” to the state.
Factors that create sales tax nexus include:
- A location, store, office, warehouse or other physical space in a state
- Employees, contractors, salespeople, repair people or other personnel in a state
- Temporarily doing business in a state – such as at a conference or trade show, or a craft fair, flea market or swap meet
- Click-through nexus – using affiliates to send business to your website
- Economic nexus – When your business’s amount of sales or number of transactions in a state exceeds that state’s threshold (usually $100,000 or 200 transactions, but this varies by state)
Do you need to collect sales tax from your customers in a state?
Learn more about sales tax nexus here.
Charging the Right Amount of Sales Tax
You may have noticed that you go shopping in one city and pay 9% sales tax, while in another place you only pay 6.25%.
Each state sets their own sales tax rate, then allows cities, counties and other “special taxing districts” to also set rates.
For example, the Poughkeepsie, NY sales tax rate is made up of:
|Locality||Sales Tax Rate|
|New York (state)||4%|
|Dutchess County (county)||3.75%|
|Transit Tax (special taxing district)||.38%|
As you can see, multiple factors go into how much sales tax you should charge to a customer.
Further, some products are not taxable in some states. For example, grocery items like flour and veggies are not taxable in most states. But each has their own rules and laws about what are considered “groceries.”
Clothing, textbooks, digital goods, and some other items are not taxed in some states, too. As an e-commerce retailer, it’s up to you to ensure you’re collecting (or not collecting) the right amount of sales tax from each customer and on each of your products.
Learn more about charging the right sales tax here.
Filing Sales Tax
When you register for a sales tax permit, the state will assign you a filing frequency. In general, the more sales you make in that state, the more often you’ll file.
High volume retailers will file monthly (or even more often.) Others will file quarterly, or annually. Some states have other frequencies, such as semi-annually (twice per year.)
But state filing frequencies aren’t uniform. Many states require that you file by the 20th of the month. But others require that you file by the last day of the month, or the 15th, or the 23rd. Some states require that certain retailers always file electronically.
And that’s not even getting into each state’s sales tax filing requirements. Most require that you break out your sales not just by state, but by county, city and other special taxing districts.
In other words, filing sales tax is very individualized by state.
Learn more about filing sales tax here.
Sales Tax Compliance as a Non-US-based Retailer
If you are based outside the US, you may be happy that you don’t have to deal with all this due to tax treaties.
Except… tax treaties only cover federal taxes, and sales tax is governed at the state level. If your business has sales tax nexus in a state, you are still required to register for and collect sales tax in that state.
This can be overly complicated, for many reasons, such as that many states require a US bank account in order to remit sales tax.
Learn more about US sales tax for non-US-based retailers here.
Sales Tax by State
Because sales tax is governed at the state level, many sales tax questions come down to a state’s rules and laws.
See our sales tax guide by state to answer your questions.