Sales tax in the US seems like a single system, but it’s actually many overlapping ones. Each state has its own rates, thresholds, exemptions, and filing schedules, and businesses that sell across state lines have to ascertain for each state when and how sales tax is applied. The idea of economic nexus is central here: it’s a legal standard used to determine when a business must collect and remit sales tax in a state, even without a physical presence.

Below, we’ll explain when sales tax is mandatory, how nexus works, which products and buyers are exempt, and what happens if you’ve been collecting incorrectly.

Highlights

• Economic nexus laws mean that selling into a state can be enough to create a tax obligation; no physical presence is required.

• Sales tax exemptions apply to specific products and buyers and vary by state.

• Businesses that discover past noncompliance have a structured path forward through voluntary disclosure agreements.

When does sales tax become mandatory?

In the US, there’s no federal sales tax. It’s administered primarily at the state level, with 45 states and Washington, DC, imposing one. The five states without sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon, although Alaska does let local jurisdictions impose their own taxes.

Sales tax becomes mandatory when you have nexus in a state. There are two main types of nexus:

• Physical nexus: If you have an office, warehouse, employee, or inventory in a state, you have physical nexus there. This was the only standard that mattered until 2018.

• Economic nexus: The US Supreme Court’s South Dakota v. Wayfair decision allows states to require out-of-state sellers to collect sales tax based purely on sales volume, with no physical presence required. Every state with a sales tax has since enacted economic nexus laws, with the most common threshold being $100,000 in sales or 200 transactions in a state within a calendar year.

Here are some other considerations:

• Fulfillment centers: Using a third-party fulfillment service creates physical nexus in whatever states those warehouses sit in, even if you’ve never been there.

• Sales reps and contractors: Having someone work on your behalf in a state, even part-time or on contract, can create nexus depending on the nature of their work.

• Trade shows: Attending and selling at a trade show can create nexus in some states, even for a single event.

What are the registration requirements for sales tax?

Before you can legally collect sales tax in a state, you have to register for a sales tax permit with that state’s tax authority. The registration process differs by state, but the information required is consistent:

• Business identification: Your Employer Identification Number (EIN), legal business name, and entity type.

• Business address: Your principal place of business and any in-state locations.

• North American Industry Classification System (NAICS) code: The industry classification for your business.

• Estimated monthly sales volume: Forecasts for sales in that state.

• Start date: When you expect to begin making taxable sales.

Typically, states let you register for a sales tax permit online through their department of revenue portals. Some charge a small registration fee, which ranges from $10–$100. After registration, you’ll receive a sales tax permit (sometimes called a seller’s permit or certificate of authority) and a filing frequency (monthly, quarterly, or annually, based on your sales volume or expected tax liability in that state). If you’re registering in multiple states at once, the Streamlined Sales Tax (SST) program offers a single registration process that covers 23 member states, plus Tennessee as an associate member that’s working towards full adoption.

There’s one thing that can surprise businesses: Alabama, Colorado, Georgia, Kentucky, Louisiana, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and Washington have a “notice and report” requirement for sellers below the economic nexus threshold. Instead of collecting tax, you’re required to report purchaser information to the state and notify customers that they might owe use tax.

What are the exceptions and threshold-based exemptions for sales tax?

Not everything you sell is taxable, and the exemptions depend on the state. Getting this wrong in either direction will cost you.

Product exemptions

Groceries are exempt or taxed at a reduced rate in all states but Hawaii, Idaho, Mississippi, and South Dakota. The definition of “groceries” varies; candy and soda are frequently excluded. Prescription drugs are exempt in virtually every state except Illinois, which charges a reduced rate of 1%, and Hawaii and South Carolina, both of which can charge tax on prescription drugs sold to medical facilities and hospitals. Clothing is exempt in Minnesota, New Jersey, Pennsylvania, and Vermont (with some conditions), but taxable in other states. Agricultural equipment and manufacturing machinery often qualify for exemptions to avoid taxing business inputs.

Buyer exemptions

If a buyer presents a valid resale certificate, you don’t collect sales tax. Instead, the buyer will collect it when they sell to the end customer. Nonprofits with 501(c)(3) status can often purchase taxable items and services tax-free, but they need to provide a valid exemption certificate, which must be kept on file. Accepting an invalid certificate shifts liability to your business so verification is necessary.

Small seller thresholds

Until you exceed a state’s economic nexus threshold, you have no obligation to collect there. For instance, a business that makes $80,000 in annual sales into Texas hasn’t exceeded the $500,000 threshold established for remote sellers and owes nothing. But the business should be tracking that figure, because the threshold can sneak up quickly. Once you exceed it, registration and collection are required going forward, not retroactively.

What are common mistakes when collecting sales tax?

Generally, sales tax errors come from the same set of oversights. Keep the following in mind.

Assuming that physical presence is the only nexus trigger

Economic nexus is the more likely source of obligations for growing online businesses. If you’re selling nationally and assuming you owe tax only in your home state, you’re probably mistaken.

Applying the wrong rate

Using the base rate rather than the combined rate (state plus local) is a common error. In Louisiana, where combined rates average 10.11%, the difference is significant. Tools like Stripe’s sales tax calculator can help you get the correct rate for each transaction based on the buyer’s address.

Not collecting on digital products

Many businesses wrongly assume software or digital downloads aren’t taxable. Whether they are depends on the state.

Failing to validate exemption certificates

Accepting a certificate is necessary but insufficient. You need to verify it’s from the right state, covers the right products, and hasn’t expired. Alabama, Arizona, California, Colorado, Connecticut, Florida, Kentucky, Louisiana, Maryland, Missouri, Nevada, New York, Pennsylvania, Rhode Island, and Washington all require periodic renewal.

Missing filing deadlines

Each state runs its own schedule. A business with nexus in 15 states might have returns due on different dates throughout the month. Late filing typically triggers automatic penalties and interest.

Not tracking nexus thresholds in real time

A business can exceed an economic nexus threshold midyear and not realize it until the following year, by which point several months of uncollected tax have accumulated.

What happens if you don’t collect sales tax when required?

Every state with sales tax can audit remote sellers. After South Dakota v. Wayfair, some have aggressively expanded those efforts. States can assess the full uncollected tax amount, plus interest accruing from the original due date, and penalties for late payment can also be added to your tax bill.

If you discover past noncompliance, almost all states offer a voluntary disclosure agreement (VDA) as a path to resolution. You come forward, pay back taxes and reduced penalties, and get a clean slate. The lookback period is typically three to four years rather than the full statute of limitations. The Multistate Tax Commission runs a program that lets businesses simultaneously file VDAs in multiple states.

If you’ve been undercharging customers by not collecting applicable tax, you can’t retroactively bill them for it. The practical resolution is usually for the business to absorb the back tax owed.

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.