How to Charge Sales Tax in the US

US sales tax is a consumption tax made up of a percentage of a sale applied to the sale of a product (and sometimes a service.) Sales tax is charged to buyers by a retailer and remitted by that retailer to the state. 

For example, if you buy an iPhone in Seattle, Washington, for $999, you’ll pay 8.8% of the purchase price in sales tax. If you purchased the same gadget in Savannah, Georgia, you’d pay 7% in sales tax. And some combined sales tax rates make for complicated numbers. For example, you’d pay a precise 8.125% sales tax if you buy your phone in Beacon, New York.

In this article, we’ll explore how charging sales tax works in the United States, providing you with examples along the way and specific examples and information for e-commerce retailers.

What Is Sales Tax?

Sales taxes are paid to the government after a good or service is purchased. It’s typically calculated and paid for by the customer at the point of sale, collected by the seller, and remitted to the government. How often the seller needs to remit sales taxes depends on the seller’s volume, products, and state requirements.

When to Charge Sales Tax

As a business, you only need to collect sales tax if you meet state criteria for establishing a significant business presence or sales tax nexus. Most goods and services are subject to sales tax, but some may be exempt or taxed at a different rate, depending on the state or where you are located.

How Sales Tax Works

Forty-six states and the District of Columbia all have some form of sales tax on purchases. 

Each state sets a statewide sales tax rate. This rate is generally between 4% and 7.25%. On top of that, counties, cities, and other special taxing districts are allowed to set their own rates. These jurisdictions use the sales tax they collect on purchases to pay for budget items. 

For example, a state may allocate sales tax funds to support roads. A county or city may use the sales tax collected on their behalf to pay for the local school system. And a consortium of cities and/or counties may band together to create a special taxing district.

One example is New York’s Metropolitan Commuter Transportation District (MCTD). A portion of sales tax collected on purchases in the MCTD goes to fund mass transit in New York City and surrounding areas. 

The fact that states, counties, cities, and special taxing districts all levy a sales tax is why the sales tax you see on your receipt at the store sometimes shows a complicated number like 8.515%.

How to Identify Your Sales Tax Obligations

Determining your sales tax obligations hinges significantly on the nature of your business operations. Whether you run an online venture, operate a brick-and-mortar establishment, or provide services, each scenario carries distinct implications for tax requirements.

For online businesses, navigating sales tax regulations may entail grappling with a different set of rules than their brick-and-mortar counterparts. The digital realm introduces complexities that demand careful attention to compliance measures.

Similarly, service-oriented businesses may be subject to unique exemptions or regulations that deviate from those governing tangible goods. Understanding these nuances is essential for accurately fulfilling tax obligations.

The concept of nexus looms large in the realm of sales tax compliance. Simply put, a sales tax nexus is the connection between your business and a taxing jurisdiction that requires you to collect and remit sales tax in that area. 

There are two main types of nexus: physical nexus and economic nexus. Let’s break these down:

• Physical Nexus: This one's a bit more straightforward. If your business has a physical presence in a state—think offices, warehouses, or even employees—you've got a physical nexus.
• Economic Nexus: Here's where things get digital. Economic nexus is based on your sales within a state, regardless of physical presence. This could mean hitting a sales or transaction threshold.

How E-Commerce Sales Tax Works for Retailers

As a retailer, it’s important to note that sales tax is levied as the sales tax rate where the sale occurs. For brick-and-mortar retailers, this process is fairly simple. Charge sales tax at the total combined sales tax rate where your store is located. 

But if you sell online, sales tax calculation becomes more complicated. With e-commerce sales, the buyer’s ship-to address is considered the point of sale. So, while brick-and-mortar retailers can generally charge just one combined sales tax rate per location to all customers, online retailers must calculate sales tax rates wherever their buyer is located. (Granted that the online retailer has sales tax nexus in the buyer's state.)

An online retailer located in Marathon, Texas, has nexus in twelve states and may need to be able to accurately calculate the correct combined total sales tax rates for a buyer in the rural Upper Peninsula of Michigan and in crowded New York City, where the sales tax rate can change between two blocks.

Longmont, Colorado Combined Sales Tax Example

Let’s say you sell a product through your online store to a customer in Longmont, Colorado. This is a breakdown of the sales tax you’d be required to charge your customer:

Determining Sales Tax Jurisdictions

One of the trickiest aspects of collecting sales tax as an e-commerce seller is determining the sales tax rate at the buyer’s location. Sales tax jurisdiction boundaries are often different from city boundaries or county lines. In fact, two buyers who live on opposite ends of the exact same street with the exact same zip code+4 can fall into two different taxing jurisdictions and be required to pay two different sales tax rates!

That’s why your e-commerce business’s sales tax engine must be able to determine sales tax rates at the rooftop level. 

Shipping Taxability

Some states also consider shipping charges taxable. For example, if you charge your customer $2.99 in shipping, states with taxable shipping will require you to charge sales tax on the products and the shipping charge. Other states do not consider shipping a taxable part of a retail sale.

Charging sales tax on shipping can get complicated when some items in a parcel are taxable, and some are not.

Read more about sales tax on shipping charges here.

Understanding Sales Tax on Products

Most tangible personal property (and some services and digital goods) are taxed at the combined sales tax rate. 

But, there are exceptions. Just as states and local areas set their own sales tax rates, they can also decide which products are and are not taxable.

Sales Tax on Groceries

For example, many states don’t tax grocery items since these products are necessary. Other states tax these items but at a lower rate. For example, Illinois’ state-level sales tax rate for most products is 6.25%. But for grocery items, this rate is reduced to just 1%.

In yet other states, a state might decide that an item is tax exempt, but still allow local areas to tax that item. 

For example, groceries are tax-exempt in Georgia, but they allow counties and cities to decide on their own sales tax on these items. So, while groceries are considered non-taxable at the 4% Georgia state rate, counties can charge sales tax. If you sell a grocery product to a customer in Cherokee County, Georgia, you would only charge the 2% county sales tax rate on that item.

You’ll often find that necessities like food, clothing, and medication are not taxed or taxed at a lower rate. But states can also use sales tax to emphasize political priorities. For example, some states that do not tax groceries tax sweets like candy and soda to encourage healthy choices.

Sales Tax on Digital Goods

Another type of product that is often taxed differently are digital goods, like books and ebooks, films, music, and video games. Some states define these products as “tangible personal property” (even though you can’t literally touch them) and consider them subject to the same tax as their physical counterparts. Other states consider these items nontaxable. 

Sales tax exemptions are up to the individual states and local areas and are also subject to change depending on state rules and regulations.

Sales Tax Holidays

Some states have periodic sales tax holidays. These are a period of a few days when states declare certain items sales tax-free. 

Sales tax holidays are often designed to encourage consumers to make certain purchases. For example, many states have “Back to School,” “Disaster Preparedness” and “Energy Efficiency” sales tax holidays. 

For retailers, some states (and local areas) require vendor participation in sales tax holidays while others allow vendors to opt-in.  This means you’re required to understand when sales tax holidays occur in your sales tax nexus states and if any of the products you sell are subject to the holiday. From there, you’ll want to ensure that your sales tax collection engine supports the sales tax holiday. 

Read our comprehensive sales tax holidays overview here.

How to Handle Complex Sales Tax Issues

Dealing with complex sales tax matters means managing exemptions and addressing challenges in multi-state compliance. Exemptions may be relevant to certain products or services, requiring thorough documentation and adherence to regulations. Achieving compliance across multiple states involves understanding the tax laws in each jurisdiction where your business operates.

Additionally, businesses must prepare for potential sales tax audits and know how to dispute sales tax assessments if necessary. Keeping meticulous records and having a deep understanding of relevant laws are crucial for navigating these processes successfully.

Key Strategies for Audit Preparedness

Before diving into the specifics, remember that the goal of audit preparedness is not just to survive the audit process but to emerge from it with your business's integrity and financial health intact.

Here’s how you can do it:

Charging Sales Tax: FAQ

Below are frequently asked questions about charging sales tax in the US.

How do you calculate sales tax?

1. Determine the sales tax rate at the point of sale
2. Multiply the price of the item by the sales tax rate. That’s the amount in sales tax the buyer would pay.
3. Add the result from #2 to the price of the item to get the total amount of the sale

Sales tax calculation example:

You sell an item for $100 and the sales tax rate at the point of sale is 5%.

$100 x .05 = $5.00.

The total sales tax rate on the purchase is $5.00.

$100 + $5.00 = $105.00.

The transaction total is $105.00.

Are used goods subject to sales tax? 

Yes. If a product is taxable in the jurisdiction, then a retailer is still required to charge sales tax on it even if selling used or secondhand. Sales tax is a tax on the sale itself, and not the item. 

Why does sales tax vary from state to state? 

US states, counties, cities and other special taxing jurisdictions are all allowed to create their own sales tax rates. There is no uniform federal United States sales tax rate. 

Is sales tax state or local?

Sales tax can be both state and local. 

Forty-six US states and the District of Columbia all have a sales tax. Some of those states, like Kentucky, only have one statewide sales tax rate. Most states allow local areas to also require their own sales tax. 

This is why in some states retailers are required to collect a sales tax rate consisting of a state rate plus some combination of county, city and/or other special taxing district rates. 

What if I collect too much sales tax from a customer? 

If you collect too much sales tax from a customer you must either refund the excess amount to the customer or remit the excess amount to the state’s taxing authority. Whatever you do, don’t keep any excess sales tax collected! Knowingly collecting excess sales tax and pocketing it is one of the few ways a business owner can get in criminal trouble over sales tax. 

What happens if a buyer refuses to pay sales tax?

Collecting sales tax or its equivalent is part of a seller’s legal obligation to do business in a state. If a buyer refuses to pay, a seller can simply refuse the sale. Alternatively, the seller is allowed to pay the sales tax on the buyer’s behalf, but this is not recommended as a business practice since it cuts into the seller’s profit margin.

Do I charge sales tax at my state’s rate or the rate where the buyer is located?

Sales tax is charged at the point of sale. In most cases, this means the buyer’s ship-to address. There are exceptions, including intrastate sales in origin-based sales tax states. We cover that in more detail in our Origin-Based and Destination-Based Sales Tax article.

There is never an instance where you would charge another state’s sales tax rate to an out-of-state buyer. For example, say you live in Connecticut where the statewide sales tax rate is 6.35%. You’d never charge your state’s 6.35% sales tax rate to a buyer in Kansas. For that interstate transaction, you’d charge sales tax at the buyer’s ship-to address in Kansas. (This is, of course, assuming you have sales tax nexus and are required to collect sales tax from Kansas buyers.)

My customer’s billing address is different from their shipping address. Which sales tax rate do I charge? 

Sales tax is charged at the point of sale, and in e-commerce, this generally means the buyer’s ship to location. 

For example, your buyer’s billing address is in California but they are sending a birthday gift to their grandma who is in Louisiana. In this case, you would charge sales tax at the rate of the ship-to-address in Louisiana.

And if you don’t have sales tax nexus in Louisiana, then good news. You are not required to collect sales tax on this purchase. (Though the recipient is technically required to pay use tax on the item.)

What is sales tax, and why is it important for businesses?

Sales tax is a levy imposed on the sale of goods and services, collected by businesses on behalf of governmental bodies. It's crucial for businesses as it helps fund public services and infrastructure, and non-compliance can lead to hefty penalties or legal consequences.

How does the type of business affect sales tax obligations?

The type of business, whether online, brick-and-mortar, or service-based, influences sales tax obligations due to varying regulations and exemptions. Each business model carries unique considerations that impact tax collection and compliance.

What is nexus, and why is it important for sales tax compliance?

Nexus refers to the connection between a business and a taxing jurisdiction, which can trigger tax liabilities. Understanding nexus is vital for determining where a business is required to collect and remit sales tax, ensuring compliance across different locations.

How can businesses automate sales tax collection?

Businesses can utilize tools and software designed for sales tax management to automate calculations and streamline collection processes. These solutions help ensure accuracy, efficiency, and compliance with sales tax regulations.

What resources are available for staying informed about changes in sales tax regulations?

Various resources, including government websites, industry publications, and professional advisors, offer valuable insights and updates on sales tax matters. Engaging with these resources enables businesses to stay informed and adapt to evolving regulatory requirements effectively.