If your small business sells taxable goods or services in a state that imposes a sales tax, and you have a legal connection to that state, then yes, you have to charge sales tax for your small business, collect it from your customer, and send it to the state. Forty-five states and Washington, D.C. impose a sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon do not have a statewide sales tax, so a business operating entirely within one of those states has no state-level sales tax to collect (localities in Alaska may still impose their own). Everywhere else, the question is not whether sales tax exists but whether your specific business has crossed the line into being required to deal with it.
That line is called nexus, and it’s where every sales tax decision starts.
When You’re Required to Collect: Nexus
Nexus is the legal connection between your business and a state that gives the state authority to make you collect its sales tax. You can have nexus in more than one state at the same time, and each state sets its own rules for how nexus is triggered.
Physical Presence
Physical nexus exists when your business has a tangible presence in a state. A storefront, an office, or a warehouse all count. So do employees or contractors working there. Storing inventory in a third-party fulfillment center counts in most states. Selling at an out-of-state craft fair can create nexus for the duration of that activity and sometimes beyond it.
Economic Nexus (Sales Volume)
Before 2018, a business generally needed a physical presence in a state before that state could require it to collect sales tax. The Supreme Court changed that in South Dakota v. Wayfair, Inc., ruling that states can require remote sellers to collect tax based on sales volume alone.1Supreme Court of the United States. South Dakota v. Wayfair, Inc. The South Dakota law at issue set the threshold at $100,000 in sales or 200 separate transactions annually, and most states adopted similar benchmarks.
Those rules have kept moving. A growing number of states have dropped the 200-transaction test entirely, leaving only a dollar threshold, typically $100,000. The practical effect is that a business making many small sales into a state may no longer trigger nexus there, while one that crosses the dollar threshold with a few large orders will. Each state sets its own numbers, so check the specific threshold in every state where you have meaningful sales.
Click-Through and Affiliate Nexus
About fifteen states have laws that create nexus when an out-of-state business pays commissions to in-state residents who refer customers through website links. If you run an affiliate program and someone in one of those states generates enough referred sales, you may owe that state sales tax even with no physical or economic nexus. These laws usually include a minimum sales threshold. Several states have repealed their click-through statutes in favor of the broader economic nexus framework, so the area is shrinking but still matters if affiliate marketing is a meaningful part of your revenue.
Selling on Amazon, Etsy, eBay, and Similar Platforms
If you sell through a marketplace, you may not have to collect sales tax on those transactions yourself. Nearly every state with a sales tax has enacted marketplace facilitator laws that shift collection and remittance to the platform. Amazon, Etsy, Walmart Marketplace, and eBay calculate the tax, collect it from the buyer, and remit it to the state on your behalf.
There are limits to that relief. You still need to track your marketplace sales for your own records, generally for at least four years. If you also sell through your own website or at a physical location, you’re personally responsible for tax on those non-marketplace sales. And in some states, inventory stored in a fulfillment center to fill your own direct orders can still create physical nexus, even if the marketplace handles tax on its own platform sales.
What’s Taxable and What Isn’t
Most physical products are taxable. Clothing, electronics, furniture, and office supplies sold to consumers will carry sales tax in nearly every state that imposes one. The exceptions are where mistakes tend to happen.
Common Exemptions
Most states exempt groceries (unprepared food) and prescription medications. Some also exempt over-the-counter drugs, clothing, or agricultural supplies. The distinctions can be granular: a bottled smoothie might be taxable while a carton of milk is not, depending on how the state defines “prepared food.” If you sell anything in these categories, check the specific rules in each state where you collect tax.
Digital Products and SaaS
Digital goods are one of the fastest-changing areas. About 25 states now tax some form of Software as a Service, and many tax digital downloads such as eBooks, music, and streaming subscriptions. Classification matters. Some states treat downloaded software as taxable tangible property while exempting SaaS accessed through a browser. Others tax both. Custom-built software is often exempt where off-the-shelf software is taxable. State-specific guidance is worth the effort here, because the rules are inconsistent and change often.
Services
Professional services like consulting, accounting, and legal work are exempt from sales tax in most states. An increasing number of states tax labor-based services like landscaping, cleaning, or repair work. The trend is toward taxing more services, so a service that’s currently exempt may not stay that way.
Resale Certificates
When you buy inventory to resell, you shouldn’t pay sales tax on that purchase. Instead, you give your supplier a resale certificate, which moves the tax obligation to your eventual sale to the end customer. The tax is meant to be collected once, at final consumption. Keep copies of every resale certificate you receive from buyers claiming the exemption. If you’re audited, those certificates are how you prove the tax-free sales were legitimate.
Which Rate Do You Charge?
Once you know you have to collect, you need to know which rate applies. This is called sourcing.
About a dozen states use origin-based sourcing: you charge tax based on your business location. That’s simpler because you only track one rate for in-state sales. Most states use destination-based sourcing, where the rate is set by the buyer’s location. For an online seller shipping across a state with hundreds of local jurisdictions, that can mean thousands of possible rates. When you sell into a state where you have economic nexus but no physical presence, destination-based sourcing applies regardless of your home state’s rules.
Use Tax: The Flip Side
Use tax catches many small business owners off guard. When you buy something for your business and the seller doesn’t charge you sales tax (say, equipment from an out-of-state vendor with no nexus in your state), you generally owe use tax on that purchase directly to your state. The rate is the same as sales tax; the difference is who pays it and how.
Most states have you self-report and pay use tax on the same return you use for sales tax. If you regularly buy supplies or equipment online from sellers that don’t charge your state’s tax, track those purchases and include the use tax on your filings. Auditors look for this, and the unpaid amounts add up faster than owners expect.
Registering for a Sales Tax Permit
You cannot legally collect sales tax without first registering for a permit in each state where you have nexus. Collecting tax without a permit is itself a violation in many states, so register before your first taxable sale, not after.
Registration goes through each state’s department of revenue, usually via an online portal. You’ll need your business’s legal name, federal Employer Identification Number (or Social Security Number if you’re a sole proprietor without an EIN), your business structure, and often your industry classification code. Some states ask for projected sales figures to assign a filing frequency. Once approved, you’ll receive a sales tax permit or ID number, which some states require you to display at your place of business. Operating without a permit can bring fines, and in some states criminal penalties.
If you owe in multiple states, the Streamlined Sales Tax Registration System lets you register in all 24 participating member states through one portal, which saves considerable time compared to filing separately in each state.2Streamlined Sales Tax. Streamlined Sales Tax
Filing Returns and Paying
After you register, the state assigns a filing frequency (monthly, quarterly, or annually) based on your sales volume. Higher-volume sellers file monthly; smaller operations may file once a year. You’re required to file a return for every period, even if you collected zero tax. Skipping a filing because you had no sales that quarter is one of the most common small business mistakes, and it triggers penalties in most states.
Returns are filed through each state’s online portal. You report gross sales, deduct exempt or non-taxable sales, and calculate what’s owed. Payment is usually made by electronic funds transfer at the same time. Interest on late payments accrues daily in most states, with annual rates generally between 7% and 15%.
On-Time Filing Discounts
About 27 states offer a small financial incentive for filing on time and paying in full. These vendor discounts or collection allowances let you keep a percentage of the tax you collected, typically 0.25% to 5%, often capped per filing period. The amounts are modest but add up over a year, and they can offset the administrative cost of compliance. You forfeit the discount entirely if your return is even one day late.
If You Discover You’ve Been Behind
If you realize you should have been collecting in a state but weren’t, don’t ignore it. Most states offer voluntary disclosure agreements: you come forward, register, and pay back taxes in exchange for a limited lookback period (often three to four years instead of the full statute of limitations) and a waiver of penalties.3Multistate Tax Commission. FAQ You only qualify if the state hasn’t already contacted you about the liability, so the option closes once an audit letter arrives. The Multistate Tax Commission runs a centralized voluntary disclosure program that coordinates with participating states, which helps when you owe in several jurisdictions at once.
Collecting sales tax from customers and keeping the money instead of remitting it is treated far more seriously than a late filing. That’s where criminal penalties come in, including potential jail time and permanent loss of your business license. The distance between “I didn’t know I had to file” and “I collected tax and pocketed it” is large in how states respond.
Records You Need to Keep
Keep every sales receipt, invoice, exemption certificate, and resale certificate for at least four years from the date you filed the return. Some states require only three, but four covers nearly every jurisdiction. If you never filed a return for a period when you should have, no statute of limitations is running, meaning the state can go back as far as it wants. That’s another reason to stay current on filings even in periods with no tax due.
Tools for Multi-State Sellers
If you sell in more than a handful of states, tracking rates, deadlines, and exemptions by hand becomes impractical fast. Sales tax automation software integrates with your checkout to calculate the correct rate at the point of sale, apply exemptions, and generate the data for returns. Some services, known as Certified Service Providers under the Streamlined Sales Tax Agreement, go further: they file your returns, handle audit inquiries, and take on liability for errors caused by incorrect state-provided data.4Streamlined Sales Tax. FAQs – About Certified Service Providers Sellers using a Certified Service Provider in Streamlined member states don’t pay filing fees; the state compensates the provider directly.
Automation isn’t free, but weigh it against the penalty exposure of one missed filing in one state, then multiply by every state where you have nexus. For a business with real multi-state activity, the arithmetic usually favors the software.