If you’ve purchased a product or service in the US, you’ve probably paid sales tax without even noticing it. However sales tax compliance isn’t as straightforward for businesses. There is a process to becoming sales tax compliant and maintaining compliance, as rules, rates, and laws often change.

Below, we’ll cover what you need to know about sales tax, including when you should be collecting it from your customers, why rates vary from state to 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
  
• How Stripe Tax can help
  

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 is the same.

Sales tax is governed at the state level, which can make it challenging for businesses to maintain sales tax compliance. Some aspects of sales tax that vary from state to state include:

• 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 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 $100,000 in revenue or 200 transactions from customers in Georgia. Other states require businesses to exceed both the revenue and transaction thresholds before collecting sales tax. Since sales tax is governed at the state level, these thresholds vary across the US. To find specific details on each state’s economic nexus threshold, visit the state tax authority’s website (each state has one) or visit the Internal Revenue Service’s list of state resources.

Businesses that sell to customers in multiple states, such as ecommerce companies, need to be aware of multistate nexus, as they might be required to collect sales tax in several states where they don’t have a physical location. Ecommerce businesses also need to be aware of dropshipping sales tax and digital product sales tax, which can vary by state. Freelancers or businesses that sell their products on an ecommerce marketplace platform should determine whether they or the merchant hold responsibility for collecting taxes. In many situations, the responsibility is with the merchant. Marketplace platforms are often subject to marketplace facilitator laws, which differ by state but generally require online sales platforms to collect and remit sales tax on behalf of the freelancers who use their site.

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 tradeshow or other event
  

Sales tax exemptions: When you don’t need to collect

Just because you have met a nexus threshold in a state does not mean you are required to collect sales tax. Not all goods and services are taxable, and if the items 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 nonprescription medicine
  
• Supplements
  

This is not a complete list, so keep in mind that some states may exempt other types of items. Some states also exempt sales tax on shipping, but this depends on the state and where your business is located. 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 since they will charge sales tax to the end customer.

What is the sales tax rate in the US?

In most states, there is a state-wide 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 state-wide 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 state-wide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, these states could still have local sales tax rates.

A standard formula for determining sales tax owed is Taxable Sales x Combined Tax Rate (State + Local) = Tax Owed. To determine your rates, research each state and jurisdiction individually to ensure you're collecting the correct amount of tax. State sales tax rates are generally between 4% and 11%.

Origin-based vs destination-based sales tax rules

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 “ship-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. Since 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 might 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 Streamlined Sales and Use Tax Agreement (SSUTA). This agreement was created to simplify and modernize 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 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.

To streamline this process, businesses can let Stripe manage tax registrations in the US, thereby benefitting from a simplified process that prefills application details and ensures compliance with local regulations.

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 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 might only be required to file bimonthly or quarterly returns. To remain compliant in case of an audit, hold on to the following tax document for three to seven years (depending on the state) from the end of the tax year:

• Sales invoices
  
• Exemption certificates
  
• Tax returns
  
• Payment confirmations
  
• Rate documentation
  

Filing on time is the best way to avoid the penalties and interest that come with a delinquent filing. Filing after the deadline can lead to late filing penalties. If you’ve submitted your return but haven’t yet paid the tax owed, you might also be subject to failure-to-pay penalties as well as interest charged on the tax amount that hasn’t yet been paid. Some states suspend licenses of businesses that don’t pay their state taxes.

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.

Stripe Tax can make filing and remittance easier. Users benefit from a seamless experience that connects to your Stripe transaction data—letting our trusted global partners manage your filings so you can focus on growing your business.

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 tax are cigarettes, gasoline, and airline tickets. Excise tax and sales tax can be applied to the same purchase, or excise tax can be applied when sales tax is not. In addition, excise tax is generally a flat rate, rather than a percentage of the sales like a sales tax.

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 API.

Stripe Tax helps you monitor your obligations and alerts you when you exceed a sales tax registration threshold based on your Stripe transactions. It can also register to collect tax on your behalf in the US and manage filings through trusted partners. Stripe Tax automatically calculates and collects sales tax, VAT, and 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 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.