Sales and use tax is a pair of state-level consumption taxes that work together: sales tax is the percentage a seller adds to a taxable purchase and forwards to the state, and use tax is the same rate you owe directly when you buy something and the seller didn’t collect it. Forty-five states and the District of Columbia impose some version of these taxes. Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax.
The two taxes exist as a pair for a reason. Without use tax, buyers could dodge sales tax simply by ordering from out-of-state sellers, and local businesses would sit at a permanent price disadvantage. Together, sales tax and use tax try to make sure purchases consumed inside a state contribute to that state’s revenue, no matter where the transaction happened.
How Sales Tax Works
When you buy a taxable item from a store or a website that collects tax, the seller adds the applicable percentage to your total and keeps that money separate until it’s time to send it to the state. The seller never owns those funds. Tax agencies treat collected sales tax as “trust fund” money because the business is holding it on behalf of the government, not earning it as revenue.
That distinction has real teeth. If a business spends the sales tax it collected instead of remitting it, the people running the business can be held personally responsible for the missing amount, even if the business is a corporation or LLC. Personal liability isn’t limited to the owner. Most states look at any individual who had authority over tax payments or financial decisions, which can include corporate officers, managing members, and bookkeepers or controllers with signing authority. The standard is whether the person knew taxes were due, had the power to pay them, and chose not to. Holding a title without actual control over finances typically isn’t enough on its own.
How Use Tax Works
Use tax fills the gap sales tax leaves behind. If you order furniture from a retailer that doesn’t collect your state’s tax, or you drive across a state line to buy equipment and bring it home, you owe the equivalent tax on those items. The rate is the same as your local sales tax rate, so neither type of purchase gets a price advantage.
Paying use tax is the buyer’s responsibility. Most states let individuals report it on their annual income tax return, either on a dedicated line or through a separate use tax form. A handful of states offer a simplified lookup table based on income, so you don’t have to track every small online purchase. Large items like vehicles, appliances, and business equipment should always be reported individually. Businesses that owe use tax on equipment, office supplies, or other non-inventory purchases usually report it on their regular sales tax return.
Compliance among individual consumers has historically been very low. Most people either don’t know use tax exists or don’t bother reporting small purchases. States have grown more aggressive by cross-referencing vehicle registrations, customs records, and shipping data to identify unreported purchases. Getting caught means paying the original tax plus penalties and interest that can significantly exceed what you would have owed in the first place.
What Gets Taxed and What’s Exempt
The default rule in most states is that sales of tangible personal property (physical items you can touch, move, or weigh) are taxable. That covers clothing, electronics, building materials, auto parts, and most of what you’d buy at a retail store. Services have traditionally been exempt, but this is changing. States are increasingly taxing categories like data processing, landscaping, and repair work, though professional services such as legal advice, accounting, and healthcare remain exempt in the vast majority of states.
Digital products are the fastest-moving area of sales tax law. Most states now tax at least some category of digital goods, including downloaded music, e-books, streaming subscriptions, and software. The specifics vary widely: some states tax downloads but not streaming, others tax both, and a few still exempt all digital products. Tax codes written for a physical-goods economy are being rewritten piece by piece.
Several categories of tangible goods enjoy broad exemptions across most states:
- Groceries. Many states exempt unprepared food purchased at a grocery store, though prepared meals and restaurant food are almost always taxable.
- Prescription medicine. Drugs prescribed by a doctor are exempt in nearly every state. Over-the-counter medications get more varied treatment.
- Manufacturing equipment. Machinery and raw materials used directly in manufacturing are commonly exempt.
- Agricultural supplies. Farm equipment, seed, feed, and fertilizer used in commercial farming are exempt in most states.
Nonprofit organizations recognized under Section 501(c)(3) and government agencies can typically buy goods tax-free by presenting an exemption certificate to the seller. The exemption applies only to purchases made for the organization’s exempt purpose, not to personal purchases by employees or volunteers, even if those are later reimbursed.
Businesses that buy inventory for resale also skip sales tax at the wholesale level. Instead, the end consumer pays tax when the item is eventually sold at retail. To make a tax-free purchase, the buyer presents a resale certificate to the supplier identifying the business, its sales tax permit number, and the items being bought for resale. Using a resale certificate to avoid tax on items you actually plan to use in your business, such as office supplies or fixtures, is illegal and carries penalties in every state.
How Rates Are Determined
The rate on your receipt is rarely just the state rate. Most purchases are taxed at a combined rate that stacks a base state percentage with additional local rates imposed by counties, cities, transit districts, and other special jurisdictions. A state might set its rate at 4% to 7%, while local layers add another fraction of a percent to 2% or more on top. In some metropolitan areas, combined rates reach 10% or higher.
Which rate applies depends on the state’s sourcing rules. Two models are in use:
- Origin-based sourcing. The rate is based on where the seller is located. A shop in a city with an 8% combined rate ships every sale at that rate, regardless of where the buyer lives.
- Destination-based sourcing. The rate is based on where the buyer receives the goods, typically the shipping address. This is the more common model for online and interstate sales.
Destination-based sourcing creates real compliance work because the United States has thousands of distinct tax jurisdictions, each with its own rate and rules. A business shipping nationwide can face more rates than it has products, and most sellers handle this through automated tax software that maps every address to its correct jurisdiction in real time.
When a Business Has to Collect
A business’s obligation to collect sales tax depends on whether it has “nexus” with a state, the legal term for a sufficient connection to the taxing jurisdiction. Before 2018, that connection generally required a physical presence such as a store, warehouse, or employee inside the state. The Supreme Court changed that in South Dakota v. Wayfair, Inc., holding that a state can require tax collection from sellers with no physical presence at all, as long as the seller has enough economic activity in the state.1Supreme Court of the United States. South Dakota v. Wayfair, Inc.
The economic nexus threshold set by South Dakota’s law, and adopted in some form by nearly every state with a sales tax, triggers a collection obligation once a seller exceeds $100,000 in sales into the state during a 12-month period. The original law also included an alternative trigger of 200 or more separate transactions, but that transaction-count threshold has been dropped by a growing number of states. As of early 2026, at least 14 states have eliminated the transaction threshold entirely, leaving only the dollar-amount test.1Supreme Court of the United States. South Dakota v. Wayfair, Inc. A business doing $40,000 in sales spread across hundreds of low-dollar transactions might have owed tax under the old 200-transaction rule but no longer does in states that repealed it.
If you sell through a platform like Amazon, Etsy, or eBay, you may not need to collect sales tax yourself. Every state that imposes a sales tax now has a marketplace facilitator law requiring the platform to collect and remit tax on behalf of its third-party sellers. The platform is treated as the retailer for tax purposes and bears the collection obligation once its total sales into a state cross the nexus threshold. For small sellers, this replaces registering in dozens of states with a single arrangement, though direct sales through your own website or a physical location remain your own responsibility.
Filing, Records, and Penalties
How often a business files sales tax returns depends on how much tax it collects. States assign filing frequencies (annual, quarterly, monthly, or accelerated) based on the seller’s average monthly tax liability, and they reassess as sales grow or shrink. Record retention requirements vary, but most states require businesses to keep sales records, invoices, exemption certificates, and returns for at least three to four years from the filing or due date.
Late or missing payments draw penalties that vary by state but follow a common pattern: a percentage-based penalty on the unpaid tax (often 5% to 10% for the first month, increasing over time), plus interest that accrues until the balance is paid. Some states also impose flat-fee penalties for late-filed returns regardless of the amount due.
The consequences escalate sharply for willful non-compliance. Intentionally collecting sales tax from customers and keeping the money is treated as theft of government funds. States can and do pursue criminal charges, which may result in felony or misdemeanor convictions depending on the amount involved and the jurisdiction. Criminal liability is separate from the civil obligation to pay, so a business owner could face prosecution, pay fines, and still owe the full tax plus penalties and interest. The “responsible person” assessment described earlier survives bankruptcy of the business and can follow an individual for years.
Fixing Past Non-Compliance
Businesses that realize they should have been collecting sales tax but weren’t have better options than waiting to be caught. Most states offer voluntary disclosure agreements that let a business come forward, register, and settle its past-due liability on more favorable terms than an audit would produce. Typical benefits include waiver of penalties and a limited lookback period of three to four years, so the state only assesses recent years rather than the entire period of non-compliance.2Multistate Tax Commission. Multistate Voluntary Disclosure Program
For businesses with exposure in multiple states, the Multistate Tax Commission runs a centralized voluntary disclosure program that coordinates the process across participating states through a single application, avoiding separate negotiations with each state agency.2Multistate Tax Commission. Multistate Voluntary Disclosure Program Some states also run time-limited amnesty programs with even more generous terms, sometimes waiving all penalties and a portion of interest for taxes paid during a specific window. Once an amnesty window closes, states often increase enforcement against taxpayers who didn’t participate.