Sales and use tax filing can feel like a moving target. The rules change from state to state, the thresholds aren't always obvious, and what counts as a taxable transaction often depends not only on the good or service sold but also how it's sold. The challenge for businesses selling across jurisdictions is to stay current. Below, you'll find a practical guide to filing sales and use taxes. In it, we discuss the kinds of transactions that are subject to these taxes, the sales information your business needs to track, and more.

What's in this article?

• What are sales and use taxes?
  
• What types of businesses are subject to sales and use taxes?
  
• What kinds of transactions are subject to sales and use taxes?
  
• What's the process for filing sales and use taxes?
  
• What challenges do businesses face when filing sales and use taxes?
  

What are sales and use taxes?

Sales tax is charged at the point of sale on taxable goods and services. The business collects it from the customer and remits it to the state or local tax authority.

Use tax applies when a purchase doesn't include sales tax – typically when goods or services are bought from out-of-state vendors. In those cases, the customer is responsible for paying the equivalent tax directly to their state.

The main distinction between the two is that sales tax is collected by the business, and use tax is self-reported by the customer. Both taxes collect revenue on taxable consumption for the state, but they place the responsibility for collecting it in different hands.

Businesses operating in the US need to understand how these taxes work and when each applies. Businesses selling into multiple states might need to collect sales tax in each one, wherever they have economic or physical nexus. Businesses that buy goods from out-of-state vendors that didn't charge tax might owe use tax in the state where they use the products. Tax compliance requires businesses to be aware of all tax responsibilities and promptly meet filing and payment obligations.

What types of businesses are subject to sales and use taxes?

In practice, any business that sells taxable goods or services, buys from out-of-state vendors, or operates across jurisdictions likely has some level of tax responsibility – whether they realise it or not.

The trigger for these obligations usually comes down to two factors: what you're selling and where your business activities create nexus. The more decentralised your operations (e.g. if you have remote teams, distributed inventory, or sell digital services), the more likely it is that you'll need to track and manage both sales and use taxes across multiple states. Businesses are likely to have sales tax obligations if they:

• Sell physical goods to customers in one or more states, either online or in person
  
• Provide taxable services, such as the repair or installation of property, data processing services, or information services
  
• Offer digital products, such as e-books, streaming subscriptions, or Software as a Service (SaaS)
  
• License intellectual property or software for use in specific states
  
• Use drop-shipping or fulfil orders from third-party warehouses in states where they don't have a physical office
  
• Exceed economic nexus thresholds (based on revenue or transaction count), even if they don't have a physical presence in that state
  

Businesses are likely to have use tax obligations if they:

• Purchase equipment, supplies, or software from out-of-state sellers
  
• Lease equipment that crosses state lines
  
• Bring inventory or capital assets into a new state for internal use after purchasing them elsewhere
  
• Outsource manufacturing or fulfilment across jurisdictions
  

What kinds of transactions are subject to sales and use taxes?

Sales and use tax rules are about what you sell, to whom, where, and how. A transaction that's taxable in one state might not be in another, and a sale that looks straightforward can quickly get complicated depending on the context. Here's what businesses need to evaluate.

What's being sold

Most states tax sales of tangible personal property (e.g. electronics, office furniture, clothing) by default. But services, digital goods, and software are often taxable, too.

The rules differ widely. Some states tax SaaS subscriptions when used for personal purposes but exempt them when used for business purposes. Others treat installation, maintenance, or training services as taxable if they're bundled with hardware. Digital media, data services, and online courses might be taxable, depending on the format and delivery method.

Who the customer is

The type of customer you're selling to matters for taxation. Many states allow certain customers to avoid paying sales tax, including:

• Government agencies
  
• Non-profits with tax-exempt status
  
• Resellers (i.e. those who purchase goods for resale) that have a valid resale certificate
  

Where the customer is located

In most states, sales tax is destination-based, which means you collect tax based on where the customer receives the product or service, and not where your business is located. This applies whether you're shipping goods, granting access to digital content, or providing services remotely.

How the transaction is delivered or fulfilled

The delivery method can also influence taxability. For example:

• Shipping charges might be taxable if they're part of the total sale.
  
• Drop shipments might trigger nexus in the state where the third-party shipper operates.
  
• Selling through online marketplaces could shift tax collection responsibility to the platform (depending on marketplace facilitator laws).
  

What's the process for filing sales and use taxes?

Filing sales and use taxes is a multistep process that requires accuracy, timing, and coordination across systems. Every state has its own rules, deadlines, and filing portals. Here's how the process typically works:

Confirm where and how often you need to file

Your filing cadence (e.g. monthly, quarterly, or annually) usually depends on how much tax you collect in each state. Some states require businesses to file even during periods with no taxable sales (i.e. file "zero returns").

Aggregate and validate your transaction data

Pull transaction records by state and tax jurisdiction. Reconcile this data against your sales system, accounting platform, or enterprise resource planning (ERP) system to confirm:

• Gross sales
  
• Taxable sales
  
• Tax collected (by jurisdiction)
  
• Exempt sales (with supporting certificates)
  

Calculate what you owe

Many states have multiple tax rates at the city, county, and special district level. Your totals need to reflect accurate sourcing, especially for destination-based sales, and include adjustments for returns, discounts, or shipping charges, if they're taxable.

File returns and remit payment

Submit your return through each state's online portal or via approved bulk-filing systems. Some states allow third-party filing, but you're still responsible for accuracy. Then, remit payment by Automated Clearing House (ACH) transfer, electronic transfer, or cheque, depending on the payment methods the state accepts.

Maintain strong records and audit trails

Keep detailed records of returns, calculations, payment confirmations, and exemption certificates. Missing documentation can lead to penalties and audits even if you correctly paid the taxes.

What challenges do businesses face when filing sales and use taxes?

Filing sales and use taxes can get complicated, especially for businesses operating in more than one state, selling through multiple channels, or managing hybrid product offerings. The rules are different from state to state, and they're also often inconsistent or subject to change. Here are some of the most common challenges that businesses face.

Conflicting state rules

Each state defines taxable products and services differently. Filing deadlines, exemption requirements, and reporting formats also vary, which means there's no single, standardised process to follow.

Economic nexus thresholds

Since the Supreme Court's 2018 "South Dakota v. Wayfair" decision, states now require out-of-state sellers to register and collect tax once they hit certain sales or transaction thresholds. But those thresholds vary – $250,000 in one state, $100,000 and 200 transactions in another – and they're not always well-publicised. It's easy to miss when you've crossed the limit.

Managing exemption certificates

A customer might be tax-exempt for a B2B sale, but only if they provide a valid exemption certificate. Tracking, validating, and storing these certificates is an ongoing administrative burden. Missing or expired documentation can result in the business being held liable for unpaid tax.

Data reconciliation and accuracy

Multistate tax filing relies on jurisdiction-level data. But that data might live in different systems (e.g. payment platforms, ERPs, accounting software), which don't always coalesce neatly. Inconsistent records can lead to incorrect filings, missed jurisdictions, or duplicate payments.

Audit exposure

Even minor errors can trigger an audit, and once you're under review in one state, others could follow. Many businesses aren't prepared to produce the necessary documentation across multiple years, especially if they've changed systems or filing methods during that time.

Sales and use tax compliance can be a risk to your company. The intricacy increases as your business grows, and staying ahead of it requires coordination across teams, systems, and state lines.