Ultimate Guide to US Sales Tax

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The US has one of the most complicated sales tax systems in the entire world. 

For retailers, especially e-commerce sellers, this can mean you end up spending your valuable time trying to solve sales tax problems rather than doing what you do best: running your business. 

Have you ever scratched your head trying to figure out in which states you’re required to collect sales tax? Are you still confused about how much to collect from each customer? 

Then you’re in the right place. This comprehensive sales tax resource covers everything from what this ubiquitous tax is to how to file a return in California (and every other state).

What Is Sales Tax?

Sales tax is an indirect tax on goods and sometimes services. It is a percentage of the sales price, generally between 4% and 8%.

In the US, sales tax is paid by the buyer, collected at the point of sale by the seller, and later remitted to the state by the seller to be spent on budget items like roads or public safety.

Sales tax is sometimes referred to as a “pass-through tax” since it is collected by a retailer but then passed to the state. It's also a "consumption tax" because buyers only have to pay sales tax on items or services they buy.

Forty-five US states and Washington DC all have a sales tax. Due to how the US government is set up, each state makes its own laws, rules, and regulations regarding how much sales tax to charge, what products are taxable, and how merchants should collect and remit sales tax. 

Five US states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have a state level sales tax. However, Alaska does allow local jurisdictions to impose a local sales tax.

What Is Use Tax?

You’ll often hear the phrase “sales and use tax.” This is because sales and use taxes are two sides of the same coin.

A merchant collects sales tax on items that they sell. But in some cases, the merchant isn’t required to collect tax. If the item is taxable in the state where the buyer resides, then the buyer must pay use tax directly to the state.

The use tax due is generally the same as the amount of sales tax the consumer would have paid had a tax been charged.

Like the name indicates, people pay use tax on an item they use that hasn’t already been taxed.

However, use tax is difficult to enforce on consumers. While state income tax returns generally have a field for consumers to report the use tax they should have paid, few taxpayers understand the concept of paying use tax.

Because of this, failure to pay use tax might go undetected unless the use tax is due on a large purchase such as a car.

Businesses are another matter. The state expects businesses to keep up with their use tax obligations. In fact, if you don’t report any use tax, you may be flagged for a sales tax audit.

States wanting their fair share of use tax is also a big reason that regulations such as economic nexus laws were passed. These laws require that high-volume online sellers charge sales tax on purchases to buyers in states where businesses have a significant volume or number of sales.

Who Has to Collect Sales Tax?

In most cases, US sales tax is collected by businesses and then remitted to the state taxing authority.

You are required to collect sales tax in a state if: 

• Your business has sales tax nexus in that state;
• The products or services you sell are taxable in that state; and
• The transaction is not through an online marketplace that is already collecting sales tax on your behalf.

We explain who is required to collect sales tax in our ultimate guide to sales tax nexus.

What Products and Services Are Taxable?

In most cases, tangible personal property (like a bookshelf or a toothbrush) is subject to sales tax.

However, taxation varies from state to state and, ultimately, it is up to the state to decide which items are taxable. For example, some necessities, like groceries or medication, are exempt from tax or taxed at a different rate in some states. 

Likewise, the taxability of services also varies from state to state. For example, a service like graphic design is generally not taxable but can be taxed if the service also provides a tangible product, such as a t-shirt with the graphic design. 

Tax law is notoriously slow to evolve with new technology, which means that states may have very different views or even unclear views on the taxability of Software as a Service or digital products, like e-books and music. 

Whether the product is taxable or not can depend on whether the state considers the product tangible personal property, if the product is downloaded, or if the buyer has permanent ownership of the product.  

As you can see, determining which products and services are taxable means being familiar with the laws of each state with a sales tax.

Quick product taxability links:

• Are groceries taxable?
• Is clothing taxable?
• Are digital goods taxable?
• Is Software as a Service (SaaS) taxable?

How to Get Compliant with States

States require that companies who need to collect sales tax first register for a seller's permit. 

When you register, the state will assign you a filing frequency depending on your sales volume. In most states, you’ll be required to file and remit monthly, quarterly, or annually.

States generally consider it unlawful to start doing business selling taxable property without registering first, so be sure to sign up for a sales tax permit right away.

Read about registering for a seller's permit here.

How to Collect the Right Amount of Sales Tax

This can get immensely tricky for e-commerce companies. 

Sales tax is collected based on the combined state, county, city, and any special district taxes at the point of sale. For e-commerce sales, the point of sale is the buyer’s ship-to address.

Because of the way boundaries and jurisdictions are drawn, two addresses on either end of the very same street might have two different tax rates. 

Read our guide to charging the right amount of sales tax here.

Free Download: Sales Tax Guide for E-Commerce

Sales tax is complex. That’s why we’ve broken down all the important information you need to ensure your e-commerce business is sales tax compliant.

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How to File and Pay Sales Tax

Once registered, the state assigns you a filing frequency and due dates. Once your filing due date rolls around, you must file a sales tax return and remit the state (and sometimes local) tax collected to the state.

Read all about how to file and pay sales tax here.

Common Questions about US Sales Tax

What are the US states with no sales tax?

Delaware, Montana, New Hampshire, and Oregon do not have a sales tax.

Alaska has no statewide sales tax, but some Alaska local areas have a sales tax.

Why is there a sales tax on used items? 

If other taxability requirements are met, the transaction is taxable even if the item being sold is used.

Why doesn’t the US include sales tax in the price of items?

Since sales tax varies from place to place, it would be difficult to price items accordingly, especially on a website where sales tax is charged at the buyer’s ship-to address.

Many states also specifically require that the seller show the buyer the tax amount separately from the price of the items being purchased.

Are small or seasonal businesses required to collect and pay sales tax?

Even though a business is small or seasonal, it's still required to be sales tax compliant. Some states have special licenses for seasonal businesses.  Whether a business must collect and remit tax depends on whether the business has nexus in the state where the buyer is located, not on the size or type of business.

Small Seller Exemption

Some businesses may wonder then what the “small seller exemption” is regarding economic nexus laws. 

This is when a state exempts smaller sellers from their state’s economic nexus law by setting a threshold that most small businesses do not meet. While thresholds vary, they are most often $100,000 in gross sales into the state per year or 200 separate sales into the state in a year. If your business doesn’t meet the state’s threshold, you are not responsible for collecting sales tax from buyers in that state.

We cover economic nexus and the small seller exemption in detail in our economic nexus overview here.

Buying Products for Resale

If you are buying products for resale, you do not need to pay sales tax on the purchase. 

However,  you must have a valid resale certificate (AKA exemption certificate, which can be the same as the state’s sales tax permit) that you provide to the seller at the time of purchase. Even if the vendor refuses your resale certificate, you can often claim a credit on that state’s tax return.

Keep in mind that you should only use resale certificates to buy goods that you intend to sell for resale or use in the making of products that you are selling for resale. Using a resale certificate for any other purpose, such as buying office supplies or items you intend for other personal or business uses, is unlawful.

We cover resale certificates in detail here.

About the author

The Zamp Team

The Zamp Team consists of experienced writers and editors who are dedicated to researching sales tax topics to help readers make smart decisions about their business and sales tax compliance. Collectively, the team has over 200 years of sales tax experience.