When you make a purchase or sell an item in the US, you need to factor in sales tax. Sales tax is a type of indirect tax levied on the sale of certain goods and services. It's called an "indirect tax" because it's 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.

Below is a guide to collecting sales tax, including how to register for a sales tax permit, how to calculate sales tax, and how to file and remit it.

What's in this article?

• What is sales tax?
  
• How to register for a sales tax permit
  
• Calculating sales tax
  
• Collecting sales tax
  
• How Stripe Tax can help
  

What is sales tax?

Sales tax is a consumption tax levied by state and local governments on the retail sale of eligible goods and services. It's categorised as an indirect tax. That's because the business has the legal obligation to collect and remit the funds, but the customer pays the financial cost at checkout.

Businesses collect sales tax from customers on behalf of taxing jurisdictions. However, a business collects sales tax only in states where it has established a legal connection known as sales tax nexus. Nexus is established either through physical presence or economic activity. Once a business creates nexus in a state, it must register for a state sales tax permit before it can legally collect tax from buyers there.

The money collected at checkout is never business revenue. Instead, the business acts as a custodian, holding the funds in trust until its scheduled filing date. The business then remits the money to the appropriate state or local agency. Those authorities use these funds to finance public infrastructure and municipal services, including roads, public transit, emergency services, and public schools.

How to register for a sales tax permit

Before you begin researching sales tax rates, the first step to collecting tax is to register for a sales tax permit in the state (or states) where you've established physical or economic nexus. You can create physical nexus by having enough of a tangible physical presence or activity in a state to merit paying sales tax in that state. You create economic nexus when you exceed a state's economic threshold for total revenue or transaction volume. These thresholds vary by state.

You need to assess where you've met sales tax nexus requirements and register for a permit in those states. To register for a sales tax permit, you'll need to prepare general business information and sometimes pay a small fee for registering. Registration is done online.

To simplify this process, let Stripe manage your tax registrations in the US and benefit from a more convenient process that prefills application details.

Calculating sales tax

To determine the correct sales tax rate, research each state and jurisdiction individually to ensure you're collecting the correct amount of tax. Average state sales tax rates, combined with local tax rates, are generally between 6% and 9%, but might rise as high as 10%. You can calculate sales tax using an online sales tax calculator, and many payment processing platforms automatically calculate how much tax you must collect and remit based on jurisdiction.

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". A business in an origin-based state might 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 in Texas, for example, you'd determine the sales tax rate at your home, warehouse, store, or other headquarters. You would then charge that sales tax rate for all your customers in the state.

Businesses in destination-based states are required to charge the sales tax rate at the customer's "ship-to" address or where the customer is located. Most states use this type of sales tax sourcing. Interstate sales are always subject to destination-based sourcing.

In most states, there's a statewide sales tax rate. And in many, there are additional local sales tax rates at the county, municipal, and district levels.

A sales tax rate for any particular state could include the statewide sales tax plus any local sales taxes. There are more than 12,000 tax jurisdictions in the US, all with different rates and regulations. It's important to note that there are five states that don't have a statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, there could still be local sales taxes to consider in these states.

Collecting sales tax

Once you determine the correct tax rate, you can start charging and collecting sales tax from customers. You'll then file a return and remit the collected tax to the relevant tax authority.

Due dates and filing frequency (monthly, quarterly, or annual) vary by state and by your tax liability. Check each authority's website for specifics. Filing on time avoids penalties and interest. Even if you collected no tax during a period, you might still owe a "zero return".

How Stripe Tax can help

Stripe Tax reduces the complexity of tax compliance so you can focus on growing your business. 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 helps you monitor your obligations and alerts you when you exceed a tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US, automate US filings in the Dashboard, and manage global filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, value-added tax (VAT), and goods and services tax (GST) on:

• Digital goods and services in all US states and over 100 countries

• Physical goods in all US states and 42 countries

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: If you need to register for a sales tax in the US, let Stripe manage your tax registrations. You'll benefit from a simplified process that prefills application details – saving you time and simplifying compliance with local regulations. If you need help registering outside of the US, Stripe partners with Taxually to help you register with local tax authorities.

• 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 automates US filings in the Dashboard, powered by TaxJar. For global filings, 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. US tax filings can be automated in the Stripe Dashboard, powered by TaxJar.

Learn more about Stripe Tax or get started today.