An indirect tax compliance checklist walks a business through every recurring obligation tied to sales tax, use tax, and federal excise tax: figuring out where you owe, registering before you collect, handling exemption certificates, calculating the right tax on the right base, filing and paying on schedule, tracking your own untaxed purchases, keeping records long enough to survive an audit, and cleaning up past mistakes before a state finds them first. Each stage carries its own penalty if you skip it, and the penalties often exceed the tax that was originally at stake.
Where Do You Owe? Determining Nexus
Nexus is the legal connection between your business and a state that triggers a tax collection obligation. Before 2018, nexus required physical presence: an office, warehouse, employee, or inventory in the state. The Supreme Court changed that in South Dakota v. Wayfair, Inc., ruling that states can require out-of-state sellers to collect sales tax based purely on economic activity within the state.1Justia Law. South Dakota v. Wayfair, Inc., 585 U.S. (2018)
South Dakota’s threshold — $100,000 in annual sales or 200 separate transactions delivered into the state — became the template most states adopted.1Justia Law. South Dakota v. Wayfair, Inc., 585 U.S. (2018) Some states set a dollar-only threshold, often $100,000 or $200,000. Others keep both the dollar and transaction-count triggers, and a handful have lowered the bar further. If you sell into multiple states, evaluate nexus in each one individually, and revisit that evaluation as your sales volumes shift and states adjust their thresholds.
Register Before You Collect
Once you have nexus in a state, register for a sales tax permit before you start collecting. Collecting sales tax without a valid permit is illegal in every state that imposes the tax, and it draws enforcement attention quickly. Most states charge nothing for the permit itself, though a few require a small fee or a refundable deposit.
If you have nexus in several states, registering with each one separately is tedious. The Streamlined Sales Tax Registration System offers a single online portal covering its 24 full-member states and one associate-member state.2Streamlined Sales Tax Governing Board. Sales Tax Registration SSTRS Registration is free. States outside the compact require you to go through each revenue department separately. Either way, keep your permit current; letting it lapse while you continue to collect creates a compliance gap auditors will find.
Collect and Track Exemption Certificates
Not every sale is taxable. When a buyer claims an exemption — because they’re reselling the goods, they’re a tax-exempt organization, or the purchase qualifies under a specific statutory exemption — collect a valid exemption certificate and keep it on file. Without that certificate, you owe the uncollected tax if an auditor questions the transaction.
Expiration rules vary widely. Roughly half of states set no expiration at all. Others require renewal after one, three, four, five, or ten years. Some states that technically don’t expire certificates still require at least one purchase within the previous 12 months for the certificate to remain valid. Re-verify certificates on a regular cycle regardless of whether the state technically requires it, because states change their rules more often than most businesses track.
Drop-shipping arrangements complicate the paperwork. When a retailer directs a third-party supplier to ship directly to the end customer, the retailer needs to provide a resale certificate for the state where the goods are delivered. If the retailer isn’t registered in that state, many states accept the retailer’s home-state certificate or a multi-state exemption form like the one published by the Multistate Tax Commission. About ten states are stricter and require their own state-specific form with a local registration number.
Calculate Tax on the Right Base at the Right Rate
Start with your gross sales for the reporting period, subtract everything that qualifies as exempt or non-taxable, and apply the correct rate to what remains. The exemptions are where most errors happen.
Common exemptions include groceries, prescription drugs, and certain clothing items, but which items qualify and to what extent varies enormously. Some states exempt all food purchased for home consumption. Others exempt only unprepared food. A few tax everything. Prescription drugs are exempt in nearly every state; over-the-counter medications often aren’t. Each product line needs to be mapped to the correct taxability rules in every state where you collect.
After determining the taxable amount, apply the combined rate for the buyer’s location. In many states that means a state rate, a county rate, and sometimes a city or special-district rate layered on top. Getting the rate wrong by a fraction of a percent compounds across thousands of transactions.
Sales Through a Marketplace Facilitator
If you sell through a platform like Amazon, eBay, Etsy, or Walmart Marketplace, the platform itself is likely responsible for collecting and remitting sales tax on your behalf. Nearly all states with a sales tax have enacted marketplace facilitator laws that shift the collection burden from individual sellers to the platform.
This doesn’t mean sellers can ignore sales tax entirely. The facilitator only handles tax on sales processed through its platform. If you also sell through your own website, at trade shows, or through any other direct channel, you remain responsible for collecting and remitting tax on those transactions. Many states also require sellers to maintain a current sales tax permit even when a facilitator handles collection, and some require filing a zero-dollar return for periods where all sales went through a facilitator.
File Returns and Remit Payment on Time
How often you file depends on how much tax you collect. States assign filing frequencies — monthly, quarterly, or annually — based on volume. Businesses collecting larger amounts file monthly; smaller collectors file quarterly or annually. Those assignments aren’t permanent. If your sales grow past the threshold for more frequent filing, the state will bump you up, sometimes with little advance notice.
Federal tax returns, including excise tax returns, follow the same general principle: anyone liable for a tax must file a return with the information the IRS prescribes.3Office of the Law Revision Counsel. 26 U.S. Code 6011 – General Requirement of Return, Statement, or List Most jurisdictions now require or strongly prefer electronic filing, with a digital signature or PIN serving as your legal verification.4Internal Revenue Service. Frequently Asked Questions for IRS e-file Signature Authorization Save the confirmation receipt with its timestamp as proof of timely filing.
Payment usually happens at the same time through electronic funds transfer or ACH debit. Confirm your bank account has sufficient funds before the transfer processes; a bounced payment creates both a bank fee and a tax penalty. Keep the transaction ID linking the payment to your filed return.
One incentive worth claiming: close to 30 states offer a vendor discount for filing and paying on time. The discount is a small percentage of the tax collected, ranging from about 0.25% to 5% depending on the state, which you keep as compensation for acting as the state’s unpaid tax collector. Claiming it is as simple as completing the right line on your return.
Federal Excise Tax on Form 720
Federal excise taxes are a separate category that catches businesses off guard. If you sell fuel, provide air transportation, offer indoor tanning services, manufacture tires or firearms, produce alcohol or tobacco products, or provide local telephone service, you likely owe federal excise taxes reported on IRS Form 720.5Internal Revenue Service. Instructions for Form 720
Form 720 is filed quarterly, with deadlines on the last day of the month following each quarter: April 30, July 31, October 31, and January 31. Rates vary by category — communications tax at 3% of amounts paid for local telephone service, air transportation of persons at 7.5% of the ticket price, indoor tanning at 10%, and fuel taxes assessed per gallon at fuel-specific rates (gasoline at $0.184 per gallon, diesel at $0.244 per gallon).5Internal Revenue Service. Instructions for Form 720
If your net excise tax liability exceeds $2,500 in a quarter, you must make semimonthly deposits rather than paying with the return. Businesses that owe $2,500 or less per quarter can submit payment when they file. Failing to deposit on time triggers its own penalty layer on top of the underlying tax.
Don’t Forget Use Tax on Your Own Purchases
Use tax is the mirror image of sales tax, and it’s the obligation businesses most often overlook. When you buy goods or equipment from an out-of-state vendor who doesn’t collect your state’s sales tax — an online purchase, a supply order from another state, equipment bought at a trade show — you owe use tax on that purchase at the rate your state’s sales tax would have applied.
If you hold a sales tax permit, report use tax on your regular sales and use tax return, usually on a dedicated line for “purchases subject to use tax.” Businesses that don’t hold a permit but make substantial untaxed purchases may need to register and file, or they can report use tax on their state income tax return in jurisdictions that offer that option.
This is where a lot of businesses quietly fall out of compliance. The office furniture bought from an out-of-state website or the software subscription from a company with no nexus in your state still carries a tax obligation, only now you owe it directly to the state.
Keep Records Long Enough to Defend Them
Federal law requires anyone liable for a tax to keep records sufficient to support every item on their return.6Office of the Law Revision Counsel. 26 U.S. Code 6001 – Notice or Regulations Requiring Records, Statements, and Special Returns In practice, that means copies of filed returns, all sales records, purchase invoices, and every exemption certificate you collected. The federal regulation implementing that requirement calls for permanent books or records sufficient to establish your gross income, deductions, credits, and any other items reported.7eCFR. 26 CFR 1.6001-1 – Records
The standard retention period is three years from the date you filed the return. If you claimed a deduction for bad debt or worthless securities, keep those records for seven years. If you filed a fraudulent return or failed to file at all, there is no time limit; the assessment window stays open indefinitely.8Internal Revenue Service. Topic No. 305, Recordkeeping State retention requirements typically mirror the federal three-to-seven-year range, though some states set longer minimums.
When an auditor requests records you can’t produce, your claimed exemptions and deductions get disallowed, the tax owed increases, and penalties get added. During a sales tax audit, if a complete review of every transaction isn’t practical, auditors use statistical sampling: they select a representative subset of your records, identify errors in that sample, and project those errors across your entire filing period. Sloppy recordkeeping means the auditor’s extrapolation from a bad sample can inflate your liability well beyond what you actually owe.
Fixing Past Non-Compliance
If you discover you should have been collecting sales tax in a state but weren’t, a voluntary disclosure agreement is usually the least painful path back to compliance. Most states offer these programs, and the Multistate Tax Commission runs a centralized program that lets you file through a single process for multiple participating states.9Multistate Tax Commission. Multistate Voluntary Disclosure Program
The main benefit is a limited look-back period. Without a voluntary disclosure agreement, your liability can stretch back eight to ten years or more, because most states have no statute of limitations for businesses that never registered. Under a voluntary disclosure agreement, the look-back is typically limited to three or four prior years. You file returns and pay the tax owed for those years plus interest, but the state waives penalties and doesn’t pursue liability for earlier periods.9Multistate Tax Commission. Multistate Voluntary Disclosure Program
Eligibility has firm boundaries. You can’t use voluntary disclosure if the state has already contacted you about the tax, if you’re already under audit, or if you’ve previously filed a return for that tax type in the state. The MTC program also requires a good-faith estimate of at least $500 in tax due.9Multistate Tax Commission. Multistate Voluntary Disclosure Program The window closes the moment a state reaches out to you, so the earlier you act, the more leverage you have.
What Getting It Wrong Costs
The penalty structure works on two tracks — late filing and late payment — with fraud on a separate tier.
At the federal level, the failure-to-file penalty is 5% of the unpaid tax for each month or partial month the return is late, up to a maximum of 25%. The failure-to-pay penalty runs at 0.5% per month, also capping at 25%.10Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax If a return is more than 60 days late, the minimum penalty is $525 or 100% of the tax owed, whichever is less.11Internal Revenue Service. Failure to File Penalty State sales tax penalties follow a similar structure, though exact percentages and minimums vary; some states impose flat minimum penalties of $50 to $100 even when no tax is due.
Interest compounds the problem. Federal law charges interest on any unpaid tax from the original due date until the balance is paid in full, and that interest accrues daily.12Office of the Law Revision Counsel. 26 U.S. Code 6601 – Interest on Underpayment, Nonpayment, or Extensions of Time for Payment, of Tax Interest also runs on top of penalties, not just the original tax.13Internal Revenue Service. Interest
Fraud takes the consequences into criminal territory. Filing a return you know contains false information is a felony carrying a fine of up to $100,000 ($500,000 for a corporation) and up to three years in prison.14Office of the Law Revision Counsel. 26 U.S. Code 7206 – Fraud and False Statements Helping someone else prepare a fraudulent return carries the same penalties. Revenue agencies cross-reference filed returns against other financial data, so discrepancies surface more often than businesses expect.