Sales tax is often one of the most confusing aspects of running a new business. If you sell physical products (and in some states, services or digital goods), you are generally required to collect sales tax. But how does it actually work?
Disclaimer: This guide provides general educational information about standard sales tax concepts in the United States. It is not accounting or tax advice. Tax laws change frequently and vary wildly by jurisdiction. Always consult a CPA.
What is Sales Tax?
Sales tax is a consumption tax imposed by the government on the sale of goods and services. The most important thing for business owners to understand is that sales tax is a "pass-through" tax.
You, as the business owner, do not pay sales tax out of your own profit. The customer pays the tax at the time of purchase. You collect that money, hold it in your bank account, and then "remit" (pass it along) to the state government quarterly or annually.
Collecting the Tax
To collect sales tax, you usually need to register for a Sales Tax Permit (sometimes called a seller's permit) in your state. Once registered, you must calculate the correct tax rate on every transaction.
Tax rates are not just set by the state; counties and cities often add their own local sales tax on top. For example, if the state rate is 5%, and the local city rate is 2%, you must charge the customer a total rate of 7%.
Understanding Economic Nexus
If you run a local brick-and-mortar store, you just charge your local tax rate. But if you run an e-commerce business, it gets complicated. Do you charge tax to customers in other states?
You only have to collect sales tax in a state if you have nexus (a significant presence) there.
- Physical Nexus: Having a warehouse, office, or employees in a state.
- Economic Nexus: Selling a certain amount of goods into a state. (e.g., Many states say if you sell more than $100,000 worth of goods or have 200 separate transactions in their state, you must start collecting their sales tax).
Tax-Exempt Customers
You don't always have to charge sales tax. The most common exception is B2B (Business-to-Business) wholesale.
If you manufacture wooden tables and sell them to a furniture store, you do not charge the furniture store sales tax, because they are buying it for resale. The furniture store will charge the final consumer the sales tax when the table is ultimately sold. To do this legally, the furniture store must provide you with a valid "Resale Certificate."
Next Steps
Always calculate sales tax accurately on your invoices. Under-collecting means you will have to pay the missing tax out of your own pocket when the state audits you. You can easily calculate exact tax amounts using our Sales Tax Calculator.