What Is Sales Tax?
Tax collected on retail sales, common in US states and localities.
Detailed Explanation
Nexus rules decide if you must collect. Rates vary by product and location.
Example
You add 8.25% sales tax for a Texas customer on the invoice.
Why It Matters
Under-collection creates liability out of your pocket.
Key facts
- Sales tax is a consumption tax imposed by U.S. states (and some localities) on the retail sale of goods and certain services — collected by the seller and remitted to the tax authority.
- 45 U.S. states plus D.C. impose state-level sales tax (rates from 2.9% in Colorado to 7.25% in California). 5 states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, Oregon.
- Local sales taxes (county, city, special district) often stack on top of state rates — combined rates can reach 9.5%-10.5% in major metros (Chicago, Seattle, NYC).
- Post-Wayfair (2018) economic nexus rules: most states require out-of-state sellers to collect sales tax once they exceed $100,000 in sales OR 200 transactions to in-state buyers in a calendar year.
- Marketplace facilitator laws (Amazon, eBay, Etsy, etc.) shift collection responsibility from individual sellers to the platform in most states — significantly simplifying compliance for small sellers.
How it shows up in practice
A small e-commerce business based in Idaho ships products nationwide. They monitor sales by state monthly: cross $100K in California revenue → register and start collecting CA sales tax (8.5% combined in most metros). Cross 200 transactions in New York (under $500K threshold) → register and collect NY sales tax. They use TaxJar to manage rates across 23 registered states, filing monthly or quarterly per state requirements.
Common mistakes
- Not monitoring economic-nexus thresholds — missed registration creates back-tax liability plus penalties.
- Confusing 'sourcing' rules (where to apply local rate) — origin-based vs. destination-based varies by state.
- Treating SaaS/digital products as universally non-taxable — about half of states tax them with varying rules.
- Not capturing valid resale or exemption certificates from B2B customers — leaves you liable for tax that should have been exempt.
- Under-charging on shipping — most states tax shipping when the underlying item is taxable.
Frequently asked questions
Do I need to charge sales tax on every order?
Only on taxable items shipped to states where you have nexus (physical presence or exceeded economic-nexus thresholds). Different states tax different categories — clothing exempt in some, food exempt in others, SaaS varies widely. Use a tax-automation tool for any nontrivial multi-state business.
What is economic nexus?
Economic nexus is the rule that an out-of-state seller must collect sales tax once their sales to a state exceed thresholds (commonly $100K in revenue OR 200 transactions in a calendar year). Established by the Supreme Court's 2018 Wayfair decision.
Are services taxable for sales tax?
Most professional services (legal, accounting, consulting) are not taxable in most states. But many states tax specific services: telecommunications, lodging, repair services, dry cleaning, lawn care. Check each state's specific service-taxability list.
How often do I file sales tax returns?
Frequency varies by state and your tax liability: monthly for high-volume sellers, quarterly for moderate, annually for small. Most states automatically assign frequency based on your liability after the first few months of filings.
What about sales tax holidays?
About 17 states hold annual 'sales tax holidays' — typically for back-to-school items (clothing, school supplies, computers) in early August. Specific exempt items and price caps vary by state and year. Sellers in those states must update systems to honor the holidays.
Related Resources
Last verified: May 2026
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