A sales and use tax is a paired system for taxing consumption: sales tax is a percentage added to a purchase and collected by the seller at checkout, while use tax is the matching amount the buyer owes directly to the state when a seller didn’t collect sales tax. The two work together so that goods are taxed based on where they’re used, not where they happen to be bought. Forty-five states and thousands of local governments impose these taxes, with combined rates running from 0% in the five states without a statewide sales tax to over 10% in some Louisiana localities.
How Sales Tax Works at the Register
Sales tax is added to the price of a purchase and collected by the seller on behalf of the government. The customer pays it, but the seller is the one legally responsible for turning it over to the state revenue department. Because that money belongs to the government from the moment it’s collected, sales tax is treated as a “trust fund” tax. In some states, business owners can be held personally liable for collected amounts that aren’t remitted, even when the business is a corporation or LLC.
Before a business can start charging sales tax, it needs a sales tax permit (sometimes called a seller’s permit) from the state’s tax agency. Fees are minimal, and many states charge nothing. Once registered, the business collects the applicable rate on each taxable sale and files periodic returns.
Any single transaction often stacks rates from several layers of government. The state sets a base rate, and counties, cities, or special districts can add their own on top. The population-weighted average combined rate nationwide is 7.53% as of 2026. Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax, though some Alaska localities levy their own.1Tax Foundation. State and Local Sales Tax Rates, 2026
How Use Tax Fills the Gap
Use tax catches purchases that escaped sales tax at the register. If you buy something from an out-of-state seller who doesn’t charge your state’s sales tax, you owe use tax once you store, use, or consume the item at home. The use tax rate matches your local sales tax rate, so buying out of state doesn’t save you the tax — it just shifts the payment obligation from the seller to you.
The point of this design is to keep local retailers competitive. Without a use tax, buying from a seller in a no-tax state would carry a built-in discount, and in-state businesses would be at a permanent price disadvantage.
Use tax applies to individuals and businesses alike. Many states include a use tax line on the individual income tax return so consumers can report and pay in one place. Businesses either file a separate use tax return or report the amount on their regular sales tax filing. One common trigger for businesses is pulling an item out of resale inventory for internal use: if you bought goods tax-free intending to resell them and then start using one yourself, you owe use tax on what you originally paid.
What Gets Taxed and What Doesn’t
Most sales tax systems center on tangible personal property, meaning physical items you can see and touch. That covers a wide range: clothing, electronics, vehicles, office supplies, and so on. Beyond physical goods, two areas need closer attention.
Digital products are increasingly in the tax base. As spending has shifted toward downloads, streaming subscriptions, and cloud services, states have brought music, e-books, software-as-a-service, and similar products into taxation.2National Conference of State Legislatures. Taxation of Digital Products Coverage is uneven from state to state, and it’s still expanding.
Professional services like legal advice, accounting, and consulting are generally not taxed in most states. Services tied to physical goods, such as repair or installation labor, can be taxable depending on the jurisdiction. The line moves considerably from state to state, so a business that mixes products and services needs to check the rules in each state where it operates.
Common Exemptions
Certain purchases are exempt in most jurisdictions, either to prevent taxing the same goods twice or to lighten the burden on essentials:
- Resale purchases. A business buying inventory to resell can purchase tax-free by giving the seller a valid resale certificate. If an item later leaves inventory for the business’s own use, use tax is due.
- Necessities. Many states exempt groceries, prescription medications, and sometimes clothing. Some tax groceries at a reduced rate rather than exempting them.
- Nonprofit organizations. Groups with federal 501(c)(3) status can often buy goods for their charitable mission without paying sales tax, usually after obtaining a separate state-issued exemption certificate.
- Manufacturing equipment. Several states exempt machinery and raw materials used directly in production, generally when the equipment is used more than half the time in the production activity itself.
To claim any exemption, the buyer gives the seller a valid exemption or resale certificate at the time of purchase. Sellers keep those certificates on file, commonly for three to seven years depending on the state. If a certificate can’t be produced during an audit, the seller may end up owing the uncollected tax along with penalties and interest.
When a Business Has to Collect: Nexus
Nexus is the legal connection between a business and a state that triggers the duty to collect and remit sales tax. No nexus, no collection obligation. The rules have expanded sharply in recent years.
Physical Nexus
The traditional trigger is a tangible presence in the state: a storefront, office, or warehouse; employees working there; inventory stored there, including in a third-party fulfillment center; or property and equipment within the state’s borders. Physical nexus applies in every state with a sales tax.
Economic Nexus After Wayfair
In 2018, the U.S. Supreme Court decided South Dakota v. Wayfair, Inc., overruling the earlier requirement of a physical presence and holding that states can require out-of-state sellers to collect sales tax based on economic activity alone.3Supreme Court of the United States. South Dakota v. Wayfair, Inc., No. 17-494 (2018) A business with no offices, employees, or warehouses in a state can still be required to collect its tax.
The most common threshold is $100,000 in annual sales into a state. South Dakota’s original law also used a 200-transaction alternative trigger, and many states initially adopted both. The trend is away from the transaction count: as of mid-2025, at least 15 states had dropped it and kept only the dollar amount, while about 16 still use the $100,000-or-200-transactions standard. A few set higher dollar thresholds such as $250,000 or $500,000.4Streamlined Sales Tax. Remote Seller State Guidance Online sellers should watch their sales into each state and register once they cross a threshold.
Marketplace Facilitators
Nearly every state with a sales tax now requires marketplace platforms like Amazon, eBay, and Etsy to collect and remit tax on behalf of the third-party sellers using the platform. If you sell through a marketplace that handles tax, you generally don’t collect sales tax separately on those marketplace sales. You still do on sales made through your own website or other direct channels. When a certified platform handles collection, liability for those specific transactions shifts to the platform.
Click-Through and Trailing Nexus
About 15 states have click-through nexus laws aimed at affiliate marketing. If an out-of-state seller pays an in-state resident to refer customers through web links, and those referrals generate sales above a set threshold (commonly $10,000 to $50,000 over 12 months), the seller may be treated as having nexus.
Trailing nexus means the collection duty doesn’t necessarily end the moment you drop below a threshold. Many states require continued collection through the end of the calendar year, or the full year after. Some require it until you formally cancel your sales tax registration. The trailing period varies, so falling below the threshold doesn’t automatically stop the obligation.
Which Rate Applies: Origin vs. Destination
Once you know where you have nexus, you need the right rate. In destination-based states, which are the majority, you charge the rate where the buyer receives the goods. In origin-based states (roughly a dozen), you charge the rate at your business’s location for in-state sales. Interstate sales are nearly always destination-based regardless of the state’s general rule, so remote sellers shipping across state lines use the rate at the buyer’s location.
For sellers reaching many states, this means maintaining rate tables for potentially thousands of jurisdictions. Automated tax calculation software handles most of this work.
Filing, Penalties, and Audits
After registering for a permit, a business files returns on a schedule set by the state, usually based on sales volume: monthly for higher-volume sellers, quarterly or annually for smaller ones. Returns are typically due by the 20th or last day of the month following the reporting period, with exact dates varying.
Late or missing returns carry penalties that commonly run from 5% to 25% of the unpaid tax, with the percentage rising the longer the return stays unfiled. Interest accrues on the unpaid balance at rates that differ by state. Because sales tax is a trust fund tax, the consequences tend to be sharper than for other business taxes, and some states hold owners personally liable for unremitted amounts even when the business is a corporation or LLC.
During an audit, a state may review every transaction or, when the volume makes that impractical, use statistical sampling: the auditor pulls a random sample, calculates the average error per transaction, and projects it across all sales.5Multistate Tax Commission. Statistical Sampling for Sales and Use Tax Audit Thorough records — exemption certificates, resale certificates, copies of returns — are the best defense.
Fixing Missed Obligations
If a business discovers it should have been collecting sales tax in a state but wasn’t, coming forward through a voluntary disclosure agreement (VDA) usually costs less than waiting to be found. In exchange for stepping forward before the state initiates contact, a business typically gets penalties waived and a limited lookback period, so it pays back taxes for a set number of years rather than the full period of non-compliance. The Multistate Tax Commission runs a national program that lets businesses resolve obligations in multiple states through a single process, and the most common lookback for sales tax is 36 months, though some states require 48 or 60.6Multistate Tax Commission. Frequently Asked Questions – Multistate Voluntary Disclosure Program7Multistate Tax Commission. Lookback Periods for States Participating in National Nexus Program Interest still applies on the underlying tax.
Businesses selling into many states can also simplify compliance through the Streamlined Sales and Use Tax Agreement, a multi-state effort with 23 full member states.8Streamlined Sales Tax. Streamlined Sales Tax A single registration through the Streamlined Sales Tax Registration System covers all member states or a selected subset, and sellers can access Certified Service Providers that handle tax calculation, filing, and remittance, often at no cost to the seller in qualifying states. Some states offer amnesty for past obligations when a business registers through the Streamlined system.9Streamlined Sales Tax. Registration FAQ