What sales tax is and who collects it
Sales tax is a percentage of the purchase price that a buyer pays at the point of sale. The seller collects it and sends it to the state or local tax authority. The rate varies by state and sometimes by county or city — it ranges from zero percent in states like Oregon and Montana to over 10 percent in some local jurisdictions.
You are responsible for collecting sales tax if you sell taxable goods or services in a state where you have nexus — a legal connection that can mean you have a physical location there, employees there, or meet a sales threshold. The threshold varies by state; some states require you to collect once you hit $100,000 in annual sales, others use $500,000 or higher. A few states have no threshold at all.
Not all goods and services are taxable. Most states exempt groceries, prescription medications, and medical equipment. Some exempt clothing or services like haircuts. Your state's tax authority publishes a list of what is and is not taxable in your jurisdiction.
Key Takeaways
- You must collect sales tax only if you have nexus in a state — usually a physical location, employees, or sales above that state's threshold.
- Sales tax rates vary by state and locality; you must charge the rate that applies to the buyer's location, not yours.
- You register for a sales tax permit with your state's Department of Revenue or equivalent agency before you start collecting.
- You file sales tax returns on a schedule set by your state — usually monthly, quarterly, or annually — and send the tax collected to the state.
- Keeping records of all sales, exemptions, and tax collected is required; most states audit based on these records.
Registering for a sales tax permit
Before you collect sales tax, you must register with your state's tax authority and receive a sales tax permit (also called a resale certificate or seller's permit, depending on the state). You do this through your state's Department of Revenue website or by mail. The process usually takes one to two weeks, though some states issue permits immediately online.
You will need your business name, address, the type of business you run, your estimated monthly sales, and your Social Security number or Employer Identification Number (EIN). Some states also ask for a lease or proof of business location. There is usually no fee, though a few states charge $10 to $50.
Once you have the permit, you receive a permit number. You use this number on all tax filings and when you buy goods for resale without paying sales tax yourself (if your state allows that). Keep the permit active by filing returns on time, even if you had no sales in a given period.
Determining what rate to charge
The rate you charge depends on where the buyer is located, not where you are. If you ship to a customer in California, you charge California's rate. If you sell to someone in your own state, you charge your state's rate. This applies whether you sell online, by phone, or in person.
Most states have a base state rate, but counties and cities add their own tax on top. A customer in Denver, Colorado pays the state rate plus Denver's local rate. Your state's tax authority provides a lookup tool or a list of all rates by location. Some point-of-sale systems and tax software update these rates automatically.
A few states have different rates for different types of goods. For example, some states tax prepared food at a higher rate than groceries. Read your state's rules carefully, or use tax software that knows the rules for your state.
Filing sales tax returns and paying what you owe
You file a sales tax return on a schedule your state sets. Most states require monthly or quarterly returns; a few allow annual returns if your sales are very small. The return shows how much tax you collected, how much you owe, and any credits or adjustments. You submit the return and pay the tax owed by the deadline, which is usually 15 to 30 days after the end of the filing period.
You can file by mail, online through your state's website, or through tax software. Most states now require online filing if you have a permit. Payment can be made by check, electronic transfer, or credit card, depending on what your state accepts. If you miss the deadline, you owe a penalty — usually 5 to 10 percent of the unpaid tax, plus interest.
Some states allow you to keep a small percentage of the tax you collect as a collection allowance, usually 1 to 2 percent. This is meant to cover your administrative costs. Check your state's rules to see if you may have access to.
Record-keeping and what to save
You must keep records of all sales, including the date, amount, customer location, and whether tax was charged. You also need to keep records of any sales you did not tax and why — for example, if you sold to a reseller who provided a resale certificate. These records must be kept for at least three to seven years, depending on your state.
Most states accept digital records, including point-of-sale system reports, spreadsheets, or accounting software records. Keep receipts, invoices, and bank statements that show what you sold and what you collected. If you are audited, the state will ask to see these records to verify that you reported correctly.
If you made a mistake on a return — you underreported tax or overclaimed a credit — you can file an amended return. Most states allow you to do this within three to five years of the original return date. Filing an amended return is usually faster and cheaper than dealing with an audit.
Handling exemptions and special situations
Some buyers do not pay sales tax. Resellers who buy goods to resell them can provide you with a resale certificate to show they are tax-exempt on that purchase. You keep the certificate on file and do not charge them tax. If you do not have the certificate and you charge tax to a reseller, you are responsible for sending that tax to the state, not the buyer.
Nonprofits, government agencies, and some other organizations may also be exempt. They usually provide a certificate or letter showing their exempt status. Do not assume someone is exempt just because they say so — ask for documentation and keep it on file.
If you sell across state lines, the rules get more complex. Some states tax services differently than goods. Some tax digital products, others do not. If you sell to multiple states, use tax software that knows each state's rules, or consult a tax professional who knows your industry.
What happens if you do not collect or file
If you are supposed to collect sales tax and do not, the state can assess the tax you should have collected, plus penalties and interest. The penalties are steep — often 25 to 50 percent of the unpaid tax. If the state believes you did this intentionally, you may face criminal charges.
If you do not file returns on time, you owe a late-filing penalty even if you do not owe any tax. If you do not pay tax you collected, the state can place a lien on your business or personal assets. States also share information with the IRS, so unpaid sales tax can affect your federal tax status.
If you realize you should have been collecting tax but were not, contact your state's tax authority and ask about a voluntary disclosure program. Many states have programs that reduce or waive penalties if you come forward and file back returns. The sooner you do this, the better.
Frequently Asked Questions
Do I have to collect sales tax if I sell online?
Yes, if you have nexus in the state where the buyer is located. For online sales, nexus usually means you have a warehouse, office, or employee in that state, or you meet the state's sales threshold. Most states now have economic nexus thresholds ranging from $100,000 to $500,000 in annual sales. If you cross that threshold, you must register and collect tax in that state.
What if I sell services instead of products?
Most states do not tax services, but some do. A few states tax all services; others tax only specific ones like haircuts, repairs, or consulting. Check your state's rules. If you sell services in multiple states, each state has different rules, so you may need to research each one or use tax software that covers your industry.
Can I charge sales tax to a customer and then not send it to the state?
No. Sales tax you collect belongs to the state, not to you. If you do not send it, the state will pursue you for the full amount plus penalties and interest. This is one of the most common reasons small businesses face tax problems.
What if a customer asks for an invoice without sales tax?
You must charge sales tax unless the customer provides proof they are exempt — a resale certificate, nonprofit letter, or other documentation your state recognizes. Do not skip tax just because a customer asks. If you do, you are responsible for paying the tax yourself.
How do I know if my state has economic nexus?
Check your state's Department of Revenue website or call their sales tax line. They will tell you the threshold and what counts toward it. Most states count all sales in the state, whether in-state or out-of-state. Some states count only in-state sales. The rules changed significantly after 2018, so if you have not checked recently, check now.