Sales tax is collected from your customers but owed by you. Because it is a trust fund tax, unpaid amounts can follow owners personally, and states can look back years when they find unregistered sellers. The rules are administered by more than ten thousand jurisdictions, each with its own rates and definitions, which is why sales tax is one of the most common compliance gaps we find in growing businesses.
Nexus: where you have to collect
Nexus is the connection that obligates you to collect a state's sales tax. A physical presence (an office, store, warehouse, employee, or inventory) creates it immediately. Since the Supreme Court's 2018 Wayfair decision, states can also require collection based on economic activity alone. Most economic nexus thresholds are $100,000 in annual sales into the state; some larger states set higher thresholds, and a few also count the number of transactions. Inventory stored in a marketplace warehouse can create physical nexus without you realizing it.
What is taxable
Taxability varies more than most sellers expect. Tangible goods are generally taxable with exemptions that differ by state; groceries, clothing, and prescription items are treated very differently from one state to the next. Services are taxable in some states and not others. Software and SaaS subscriptions are taxable in a growing number of states but exempt in many. Shipping charges may or may not be taxable depending on how they are billed. The answer has to be determined product by product, state by state.
Collecting the right rate
Most states use destination sourcing, where the rate is based on where the customer receives the goods: combining state, county, city, and special district rates. A minority use origin sourcing for in-state sales. ZIP codes cross jurisdiction lines, so accurate rates require address-level lookup, typically through automated tax software connected to your store or invoicing system. The local business sales tax guide covers sourcing and filing in more detail.
Marketplace facilitator laws require platforms such as major online marketplaces and delivery apps to collect tax on sales through them. You still report those sales, but you must not collect and remit the tax a second time.
Registration and filing
- 1Register in each state before collecting tax there: collecting without a permit creates its own problems.
- 2Configure your checkout or invoicing system to charge tax only where you are registered and only on taxable items.
- 3File on the frequency each state assigns (monthly, quarterly, or annually) including zero returns for periods with no taxable sales.
- 4Remit the tax collected, taking any timely-filing discount the state offers.
- 5Maintain exemption and resale certificates for every untaxed sale to a business or exempt buyer.
Exemption certificates
When you sell to a reseller, a nonprofit, or another exempt buyer, the exemption is only valid if you hold a properly completed certificate. In an audit, an untaxed sale without a valid certificate becomes a taxable sale, and the tax is owed by you. We set up a process to collect, validate, and store certificates at the time of sale.
If you are already behind
Finding out you should have been collecting in several states is common, and it is fixable. We start with a nexus study that identifies where you have obligations and quantifies the exposure by state and period. For significant exposure, voluntary disclosure agreements usually limit the lookback period and reduce or waive penalties, but only if you come forward before the state contacts you. After that, we register, file the covered periods, and put ongoing compliance in place.
Industries with special rules
Contractors are often treated as the consumer of materials rather than the seller, restaurants face higher local rates on prepared food, and businesses that mix products and services need careful item-level setup. The contractor guide, the restaurant guide, and the local business accounting guide cover these cases.
Common sales tax mistakes
- Charging tax in states where you are not registered, which still has to be remitted.
- Using ZIP-code tables instead of address-level rates.
- Treating marketplace sales as if you owed the tax on them.
- Accepting exemption claims without collecting a valid certificate.
- Skipping zero returns, which leads to penalties and eventually a revoked permit.
Sales tax audits
Sales tax audits usually sample a period of transactions and project any error rate across the full audit period, so a small, repeated mistake can produce a large assessment. Auditors focus on untaxed sales without certificates, use tax on purchases where no sales tax was paid, and reconciliation between filed returns and recorded revenue. Clean books and a certificate file are the best defense; when an audit notice arrives, we manage the document requests and review the sampling method before any findings are accepted.
Use tax on your own purchases
Sales tax has a counterpart: use tax. When your business buys taxable items for its own use from a seller that did not charge sales tax, common with out-of-state online purchases, you generally owe use tax to your state at the same rate. It is reported on the sales tax return or a separate use tax return, and it is one of the first things auditors check.
Keeping it clean
Sales tax collected should sit in a liability account and ideally a separate bank account until it is remitted, never in revenue, and never spent. Monthly bookkeeping keeps those balances reconciled to each return, which makes filings fast and audits straightforward. If sales tax has started to feel like more than you can track, that is one of the clearest signs it is time to bring in an accountant.