If you've purchased something in the US, you're likely to have paid sales tax without even noticing it. However, as a business, sales tax compliance isn't as straightforward. There is a process to becoming sales tax compliant and maintaining compliance, as rules, rates and laws often change.

As with most complicated topics, it's best to start with the basics. Here’s a guide to what you need to know about sales tax, including when you should be collecting it from your customers, why rates vary for each state and what to do when it is time to file and remit.

What's in this article?

• What is sales tax?
  
• When am I required to collect sales tax from customers?
  
• What is the sales tax rate in the US?
  
• What is a sales tax permit?
  
• How to file and remit sales tax
  
• Sales tax versus excise tax
  

What is sales tax?

Sales tax is a type of indirect tax levied on the sales of certain goods and services in the US. It’s called an "indirect tax" because it is imposed on the business but paid by the customer. The business collects the tax from the customer and is responsible for sending (remitting) the tax to the appropriate government agency at a set due date.

States and localities use sales tax revenue to pay for projects such as schools, roads and public safety initiatives. In the US, sales tax is primarily regulated at the state level, and every state has different laws and rules. Certain states refer to sales tax as transaction privilege tax or general excise tax, but the concept remains the same.

Sales tax is governed at the state level, which can make maintaining sales tax compliance challenging. Some aspects of sales tax that vary from state to state are:

• Which products and services are taxable
  
• Customer-based exemptions
  
• How much sales tax is charged
  
• How often sellers are required to file sales tax returns
  
• Dates that sales tax returns are due
  

When am I required to collect sales tax from customers?

Generally, out-of-state and foreign businesses are required to collect sales tax from customers when they exceed certain thresholds. These thresholds are referred to as "economic nexus thresholds", and they are either revenue or transaction-based or both. For example, in the state of Georgia, businesses only need to collect sales tax from customers if they have exceeded US$100,000 in revenue or 200 transactions from customers in Georgia. Certain states only have revenue thresholds or require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. As sales tax is governed at the state level, these thresholds vary across the US.

Businesses can also meet sales tax obligations by having a physical presence or physical nexus in a state. Examples of business activities that can create physical nexus include:

• Location: An office, warehouse, store or other physical place of business. Storing inventory often creates physical nexus.
  
• Employees: Having an employee, contractor, salesperson, installer or other person doing work for your business in a state.
  
• Events: Selling products at a trade show or other event.
  

However, just because you have met a nexus threshold in a state does not mean that you are required to collect sales tax. Not all goods and services are taxable – and if the items that you are selling are not taxable, then you are not required to collect sales tax on those items. However, you may still have an obligation to register. Here’s a list of items that are commonly tax-exempt, depending on the state:

• Grocery food
  
• Clothing
  
• Certain books (textbooks, religious books, etc.)
  
• Prescription and non-prescription medicine
  
• Supplements
  

This is not a complete list, so bear in mind that some states may exempt other types of items. In addition, to avoid double taxation, many business-to-business purchases are tax-exempt. If a business purchases an item specifically to resell it, they can use a resale certificate to avoid paying sales tax on the item because they will charge sales tax to the end customer.

What is the sales tax rate in the US?

In most states, there is a statewide sales tax rate, and many states have additional local sales tax rates at the county, municipal and district level. A sales tax rate for any particular state would include the statewide sales tax rate plus any local sales tax rates. To put it into perspective, there are more than 11,000 tax jurisdictions in the US, all with different rates and regulations. It’s important to note that there are five states that do not have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. However, there could still be local sales tax rates to consider in these states.

To determine the correct sales tax rate, research each state and jurisdiction individually to ensure that you’re collecting the correct amount of tax. State sales tax rates are generally between 4% and 11%.

States usually require businesses to collect sales tax in one of two ways:

• Origin-based sales tax collection
  
• Destination-based sales tax collection
  

This concept is also commonly referred to as "sales tax sourcing". Businesses that are based in states with origin-based sales tax sourcing may be required to collect sales tax based on a location other than the customer’s address, such as the business’s location. If your business is based in an origin-based state such as Texas, for example, you would determine the sales tax rate at your home, warehouse, store or other headquarters. Then, charge all your buyers in Texas that sales tax rate.

Businesses that are based in states with destination-based sales tax sourcing are required to charge the sales tax rate at the buyer’s "deliver-to" or other destination-based address. As the business, you are required to charge the sales tax rates where your buyer is located. Most states use this type of sales tax sourcing.

Interstate sales are always subject to the destination-based tax collection.

What is a sales tax permit?

Before charging and collecting sales tax from customers, you need to register for a sales tax permit. As sales tax is governed by each state, you must register individually with each state once you meet the registration requirements, which are based on factors such as physical presence and transaction volume. Certain states may also require registration at the local level. To register for a sales tax permit, you’ll need general business information, and certain states charge a small fee for registering. Registration is done online, and you can find the registration links here.

There is an exception for states participating in the US Streamlined Sales and Use Tax Agreement (SSUTA). This agreement was created to simplify and modernise sales tax administration, which includes the sales tax registration process. Currently, 24 states have passed legislation to conform to the SSUTA: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming. Sellers can register for sales tax in these states using the free US Streamlined Sales Tax Registration System (SSTRS). Once registered, users will set up accounts individually with each state and will need to separately register if they have sales tax obligations in any non-SSUTA-conforming state.

How to file and remit sales tax

Once you collect sales tax from your customers, you will file a sales tax return and remit the sales tax that you collected to the correct state or other local tax authority. Each state tax authority’s website will have details on how to file and your due date. Due dates vary from state to state, and the frequency with which you file a return may also vary. Large companies with a higher tax liability will often file more frequently (monthly), and smaller companies may only be required to file bimonthly or quarterly returns. Filing on time is the best way to avoid the penalties and interest that come with a late filing.

Even if you have not collected sales tax during a reporting period, you may still need to file a return. These are called "zero returns", and while you will not remit any tax to the state, you are still required to file a return.

Sales tax versus excise tax

"Excise tax" and "sales tax" are terms that are often used interchangeably, but they are two separate taxes. Excise tax applies only to sales of certain products. Popular items that are subject to excise duty are cigarettes, petrol and airline tickets. Excise duty and sales tax can be applied to the same purchase, or excise duty can be applied when sales tax is not. In addition, excise tax is generally a flat rate compared to sales tax, which is a percentage of the sales.