Sales tax applicability in the US depends on where your customer is based, whether you have nexus in that particular state, and whether what you’re selling is taxable there. If you assess any of these factors incorrectly, you could overcollect, undercollect, or file in the wrong jurisdiction entirely. Sales tax is an important revenue source for the 45 states that have a statewide sales tax; it makes up, on average, around a third of states’ total tax collections. The rules for sales tax often change, and they apply differently depending on what you sell, how you sell it, and where your business has a footprint.

Below, we’ll discuss what sales tax applicability means in practice, how the mechanics work at the transaction level, and where the compliance risks are.

Highlights

• Sales tax generally applies when two conditions are met: the customer is located in a state where you have nexus, and what you’re selling is taxable there.

• Nexus typically comes in two forms: physical and economic. You can have it without realizing it, especially if you use third-party fulfillment or have remote contractors.

• If you misconfigure tax rates, forget to register in a state, or make outdated assumptions about taxability, you can be subject to audits and penalties.

When is sales tax applicable?

Sales tax applies in a given state when a customer is located there, your business has nexus there, and the product or service you’re selling is taxable in that state. Five states do not have any state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon—though Alaska and Montana have some local sales taxes.

Here’s more information on the factors that determine sales tax applicability.

Customer location

Sales tax is destination-based in most states with statewide sales tax: that means you charge based on where your buyer is, not where you, the seller, are. However, some states—Arizona, California, Illinois, Mississippi, Missouri, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia—use origin-based sourcing, which means charging your buyer based on where you’re located. California is unique: it’s an origin-based state, where state, county, and city taxes are based on your business’s location, but district taxes are based on your customer’s address.

Nexus

Nexus is the relationship between your business and a state that creates an obligation to collect sales tax. It generally comes in two forms:

• Physical nexus: This applies if you have a physical presence in a state, meaning an office, a warehouse, or an employee in the state, or inventory stored at a fulfillment center in the state. Even a single independent sales representative working remotely from a state can create physical nexus.

• Economic nexus: Once you cross a sales threshold in a state, you can be responsible for sales tax even without any physical presence there. Since the Supreme Court’s 2018 South Dakota v. Wayfair decision, every state with a sales tax has enacted economic nexus laws. Though it varies by state, most use a threshold of $100,000 in sales or 200 transactions per year.

States might require third-party marketplaces to collect and remit tax on sales made through that platform. If you sell through a marketplace and your own website, you’re likely only responsible for collecting tax on your direct sales, though those marketplace sales still count toward your economic nexus thresholds.

Product taxability

Taxability is separate from nexus. Having nexus in a state doesn’t mean everything you sell there is taxable. Many states have sales tax exemptions for groceries or clothing. Some states have exemptions for software-as-a-service (SaaS).

How does sales tax applicability work?

Once you’ve established that a transaction is taxable and you have nexus in that state, you have to calculate the correct rate for the customer’s location, collect the tax from the customer at the time of sale, file a sales tax return with the state, and remit it to the relevant taxing authority on a schedule set by the state.

When you’re selling online, you can set rules within your store to make sure you’re charging the right tax for every customer. Local taxes can vary widely by ZIP code within a state. And some categories of products carry reduced sales tax rates or exemptions, so the same tax rate doesn’t necessarily apply to everything in a single order.

Stripe Tax can handle this calculation automatically. When it’s enabled, Stripe Tax determines the correct tax amount for each transaction based on the customer’s location and the tax codes assigned to your products. It also tracks your sales volume by state, so you can monitor nexus thresholds before you cross them.

What does sales tax applicability mean for how your business operates?

Once you have nexus in a state and you’re selling something taxable there, your business needs to pay close attention to tax rule developments.

Be sure to stay up-to-date in these four areas.

Registration

You need a sales tax permit from a state’s taxing authority before you can legally collect sales tax there. Registration has to happen before your first taxable sale in a new state, which means you need to proactively track your nexus exposure.

Product classification

Every product and service you sell needs a tax classification to determine its taxability in every state you have nexus in. Software is a good example of how complex this is: a downloadable desktop application, a SaaS subscription, and a mobile app can all be taxed differently in the same state.

Exemption certificates

Exemption certificates matter if you sell to businesses that will resell your product or to exempt organizations such as nonprofits or government entities. In these cases, you shouldn’t be collecting tax, but you need documentation to prove it. States can ask for these certificates during an audit, and if you can’t produce them, you’re liable for the uncollected tax.

Sales tax filing and remittance

Each state has its own schedule, forms, and rules for calculating local taxes. If you miss a deadline, you might owe penalties and interest. Businesses with nexus across many states often use automated filing tools to manage this. Stripe Tax integrates with services that handle filing directly, which removes a major amount of manual work.

What risks come with sales tax applicability?

Sales tax errors might not be apparent immediately, and state audits for sales tax compliance can go back several years. When an audit finds underreported tax, you owe the tax itself, plus interest and penalties. Many states offer voluntary disclosure programs that let businesses come forward proactively (usually with reduced or waived back penalties), but only if you engage before an audit starts.

These are some common risks when it comes to sales tax applicability:

• Nexus you didn’t realize you had: Storing inventory at a third-party warehouse or having a contractor working in a state can create physical nexus without any deliberate decision on your part.

• Taxability assumptions that aren’t current: States can change their sales tax rules regularly. A product that was exempt last year might not be this year.

• Overcollection: Collecting tax you weren’t supposed to collect is also a compliance problem. It’s less common than undercollection, but it creates its own remediation work.

• Marketplace complexity: Even if a marketplace is handling tax collection on your behalf, those sales typically count toward your economic nexus thresholds. You need to keep track of them in your own records.

Is your business ready to manage sales tax applicability?

Whether you’re prepared to manage sales tax applicability depends on where you have nexus, how many products you sell, and how fast you’re expanding into new states.

Consider these questions to determine if your business is ready to manage sales tax:

• Where do you currently have nexus? If you’re not sure, start with a nexus analysis. Physical presence is usually obvious; economic nexus requires pulling your sales data by state and checking it against each state’s threshold.

• Are your products correctly classified? If you sell services or digital goods, it’s worth having a tax professional confirm taxability in the states you sell into.

• Do you have a registration and filing process? If you’re already past a threshold in a state and haven’t registered, a voluntary disclosure agreement might be the right path forward.

• What’s your growth trajectory? A business close to reaching economic nexus thresholds in new states needs to be building compliance infrastructure now, not scrambling after the fact.

The businesses that handle sales tax well tend to treat it as an ongoing process, not a problem to solve once and move on from.

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. In addition, it automatically calculates and collects sales tax, value-added tax (VAT), and goods and services tax (GST) on both physical and digital goods and services—in all US states and in more than 100 countries.

Start collecting taxes globally by adding a single line of code to your existing integration, clicking a button in the Dashboard, or using our powerful application programming interface (API).

Stripe Tax can help you:

• Understand where to register and collect taxes: See where you need to collect taxes based on your Stripe transactions. After you register, switch on tax collection in a new state or country in seconds. You can start collecting taxes by adding one line of code to your existing Stripe integration or add tax collection with the click of a button in the Stripe Dashboard.

• Register to pay tax: Let Stripe manage your global tax registrations and benefit from a simplified process that prefills application details—saving you time and simplifying compliance with local regulations.

• Automatically collect tax: Stripe Tax calculates and collects the right amount of tax owed, no matter what or where you sell. It supports hundreds of products and services and is up-to-date on tax rules and rate changes.

• Simplify filing: Stripe Tax seamlessly integrates with filing partners, so your global filings are accurate and timely. Let our partners manage your filings so you can focus on growing your business.

Learn more about Stripe Tax, or get started today.