Sales and use tax is a two-part consumption tax: sales tax is the percentage a seller adds at checkout and forwards to the state, and use tax is what the buyer owes directly at the same rate when no sales tax was collected on a taxable purchase. Forty-five states impose some form of sales tax, and combined state-and-local rates run from under 5% to over 10% depending on where the sale takes place.1Tax Foundation. State and Local Sales Tax Rates, 2026
How Sales Tax Works
Sales tax is charged at the point of sale on retail transactions. The seller adds a percentage to the price, collects the combined amount from the buyer, and holds the tax portion until it’s due to the state. That money never belongs to the business. It’s held in trust for the taxing authority, and the seller is personally responsible for turning it over on schedule.
Rates vary widely. Five states charge no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Among the other forty-five, state-level rates generally fall between 2.9% and 7.25%, and most areas stack county and city taxes on top, which can push combined rates above 9%.1Tax Foundation. State and Local Sales Tax Rates, 2026 Alaska is an unusual case: no state tax, but local governments can impose their own, producing an average combined rate just under 2%.
How Use Tax Works
Use tax applies when you buy something and no sales tax was collected, then you store, use, or consume that item in a state that would have taxed the sale. The rate almost always matches the sales tax rate that would have applied. The difference is who pays. Instead of the seller collecting at checkout, the buyer reports and pays directly to the state.
In practice, most people run into use tax enforcement in one place: the DMV. When you buy a vehicle in another state and bring it home to register, your state collects use tax before issuing the title. Because you have to show up in person, that transaction is easy to catch. For everyday purchases, enforcement is much harder, which is why many states now include a use tax line on the annual income tax return where you’re supposed to add up untaxed purchases and pay the difference. Compliance on that line is low, and that gap is a big reason states pushed hard for the economic nexus rules that now require most online sellers to collect tax at checkout.
When a Business Has to Collect: Nexus
Before a state can require a business to collect its sales tax, there has to be a legal connection between the business and the state. That connection is called nexus. For decades it required a physical footprint: an office, a warehouse, employees traveling through, or inventory sitting in a third-party facility. With no physical presence, no state could reach you.
That changed in 2018 with South Dakota v. Wayfair, Inc., 585 U.S. 843. The Supreme Court ruled that states can require sellers with no physical presence to collect and remit sales tax as long as the seller has enough economic activity in the state. The physical-presence rule that had stood since 1992 was overturned.2Congress.gov. State Sales Taxes and Internet Commerce Within a few years, every state with a sales tax adopted some form of economic nexus law.
Economic Nexus Thresholds
The most common threshold is $100,000 in gross sales into a state during a 12-month period. Many states originally also triggered nexus at 200 separate transactions, following South Dakota’s model, but that transaction test is fading. As of mid-2025, at least 15 states had eliminated the 200-transaction trigger and kept only the dollar threshold. A few states set higher dollar thresholds; California, New York, and Texas historically used $500,000. Crossing the line in even one state means you need to register, collect, and remit there, and getting this wrong is one of the most common compliance failures for growing e-commerce businesses.
When the Platform Collects for You
If you sell through Amazon, Etsy, Walmart Marketplace, or a similar site, the platform is likely collecting and remitting sales tax on your behalf. Nearly every state with a sales tax has enacted a marketplace facilitator law that shifts the collection obligation from the individual seller to the platform. The facilitator is treated as the seller for tax purposes and has to charge the correct rate, file returns, and send the money to each state.3Streamlined Sales Tax. Marketplace Facilitator State Guidance
This was a major simplification for small sellers. Before these laws, someone selling handmade goods on Etsy into 30 states would have needed to register, track rates, file, and remit in each one. The catch: sales made through your own website or in person aren’t covered by the facilitator law. On those, you’re still responsible for collecting tax wherever you have nexus.
Which Rate Applies
When a customer in one city buys from a seller in another, which local rate applies depends on whether the state uses origin-based or destination-based sourcing. Most states, along with Washington, D.C., use destination-based rules, meaning the rate is set by where the buyer receives the product. About a dozen states use origin-based sourcing for in-state transactions, where the rate follows the seller’s location.
For remote sellers shipping across state lines, the rule is simpler. Nearly all states apply destination-based sourcing regardless of their in-state rule. If you’re a remote seller, you charge the rate where your customer is, not where you are.
What’s Taxable
The baseline is tangible personal property: physical items you can pick up, wear, or plug in. Electronics, furniture, tools, clothing (in most states), appliances, and building materials are taxable in nearly every jurisdiction. Beyond that, things get complicated.
Digital goods are an expanding category. The majority of states now tax at least some digital products, including downloaded software, streaming subscriptions, e-books, and digital music. The specifics vary. One state might tax downloaded software but exempt software accessed through a browser. Another might tax streaming video but not streaming music. There’s no national standard.
Services are even more inconsistent. Some states take a broad approach and tax most services unless specifically exempted. Others tax only services that appear on a specific list. Repair work is a common example of the split: some jurisdictions tax the full invoice including labor, while others only tax the parts. If your business provides services in multiple states, check each one individually.
Common Exemptions
Not everything sold at retail is taxable, and not every buyer pays. Exemptions fall into two broad categories: what’s being bought, and who’s buying.
Product Exemptions
Groceries are the most widespread product exemption. A majority of states fully exempt unprepared food purchased for home consumption, though the definition of “unprepared” varies. Prepared food, restaurant meals, and snack items often remain taxable even in states that exempt groceries. Clothing is exempt in a handful of states, sometimes with a per-item price cap. Prescription medications and medical devices are exempt in nearly every state.
Buyer Exemptions
The most commercially significant exemption is the resale exemption. If you’re buying inventory that you’ll resell to customers, you don’t pay sales tax on the purchase because the end consumer will pay it. To claim it, you give the seller a resale certificate. The seller keeps that certificate on file, and if the state audits, it’s what protects the seller from liability for the uncollected tax.
Nonprofits with federal 501(c)(3) tax-exempt status and government agencies also qualify for exemptions in most states. These buyers typically present an exemption certificate or state-issued identification number at checkout. The exemption isn’t automatic just because an organization is a nonprofit; it usually requires a separate state-level application.
Handling Exemption Certificates
This is where most audit problems start. If you accept a resale or exemption certificate and it turns out to be invalid, expired, or incomplete, the tax liability falls back on you as the seller. Many states offer online verification tools to confirm a buyer’s certificate status before completing a tax-free sale. Using those tools doesn’t replace the requirement to keep a copy of the certificate on file, but it adds a layer of protection. If you can’t produce the certificate during an audit, you’ll pay as though the exemption never existed.
Registering to Collect
Once you determine you have nexus in a state, you need a sales tax permit before you start collecting. Collecting without a valid permit is illegal in most states. Registration is free in the vast majority of them. A small number charge modest fees, generally between $4 and $50, and some require a refundable security deposit instead of a flat fee.
Most states allow online registration and the process typically takes a few minutes. If you need to register in many states at once, the Streamlined Sales Tax Registration System lets you submit a single application that covers the states participating in the Streamlined Sales and Use Tax Agreement. For non-member states, you register directly through each state’s tax agency.
Records and Audits
Sales tax audits aren’t random. States target businesses based on specific red flags: reported numbers that don’t match data the state receives from payment processors or marketplace platforms, missing or expired exemption certificates, large gaps between reported revenue and industry averages, and past audit findings that suggest recurring problems. Mergers and acquisitions also draw scrutiny because they create gaps in reporting.
Most states have a three-year statute of limitations for auditing businesses that file on time. That window can extend to six years if the state finds you underreported liability by more than 25%. If you never filed a return at all, there’s often no time limit. The IRS recommends keeping business records for at least three years, and employment tax records for at least four.4Internal Revenue Service. Taking Care of Business: Recordkeeping for Small Businesses For sales tax, keeping records for at least four years gives you a reasonable buffer against extended audit periods. That includes invoices, exemption certificates, returns, and documentation of tax-exempt sales.
Penalties and Personal Liability
Failing to file and failing to pay collected tax are two different problems, and the second is far more serious. Late-filing penalties across states commonly start at 5% to 10% of the tax due per period, with interest accruing monthly. State interest rates on delinquent sales tax run from roughly 3% to 18% annually.
Knowingly collecting sales tax from customers and then keeping it instead of remitting is treated as theft in many jurisdictions. Because the collected tax is legally held in trust for the state, it was never the business’s money to spend. That trust-fund treatment has a critical consequence: it can pierce the liability protection that corporate structures and LLCs normally provide. States can and do pursue individual owners, officers, and other “responsible persons” for unremitted sales tax, even when the business itself is insolvent. Sole proprietorships and partnerships have no structural protection at all. Owners of corporations and LLCs have more protection in theory, but it erodes quickly when the state can show a specific person controlled the finances and chose not to pay.
Coming Into Compliance After the Fact
If a business has been selling into a state for years without collecting tax, a voluntary disclosure agreement is usually the least expensive path to compliance. Through a VDA, a business approaches the state, often anonymously through a tax advisor, and negotiates terms to get current. The typical deal limits the lookback period to three or four years of back taxes, so a decade of noncompliance may only result in liability for the most recent few years. States also waive penalties in most VDA arrangements, though interest on the unpaid tax still applies.5Multistate Tax Commission. Multistate Voluntary Disclosure Program
The Multistate Tax Commission runs a centralized voluntary disclosure program that covers participating states, and many states also accept applications directly. The window closes the moment a state contacts you about an audit or assessment. At that point, voluntary disclosure is off the table, and the state will assess the full liability with all penalties attached. The financial difference between a VDA and a full audit can be enormous, so a business that discovers a nexus problem should move quickly.