Sales and use tax are two sides of the same system. Sales tax is a percentage added to retail purchases of goods and certain services, collected by the seller at checkout and sent to the state. Use tax is what you owe directly to your state when you buy something taxable and the seller didn’t collect sales tax, usually because they sit out of state. The rate is the same either way, so shopping across a border doesn’t save you the tax. Forty-five states and Washington, D.C. impose these taxes; Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales tax. The population-weighted average combined state and local rate is 7.53 percent as of 2026, with individual rates ranging from zero to over 10 percent.1Tax Foundation. State and Local Sales Tax Rates, 2026
How Sales Tax Works at Checkout
When you buy something at a store or online, the seller adds sales tax as a percentage of the price and collects it from you. A $500 item in a jurisdiction with a 7 percent rate costs you $535: the price plus $35 in tax. The seller doesn’t keep the $35. The business holds it and sends it to the state on a regular filing schedule, acting as a collection agent for the government. The same rules apply at a physical register and at an online checkout.
Not everything is taxable. States decide which goods and services are subject to tax, and the lists vary widely. Most states tax tangible items like furniture, electronics, and clothing, then carve out exemptions for necessities and certain services.
How Use Tax Works
Use tax fills the gap when sales tax wasn’t charged. The most common scenario is an out-of-state seller who has no obligation to collect tax in your state. You still owe the tax, at the same rate you would have paid locally. The point is to keep residents from dodging local rates by ordering from lower-tax jurisdictions.
Use tax applies to individuals and businesses alike. A company that orders equipment from an out-of-state vendor who didn’t charge tax owes use tax on that purchase, and so does a consumer who buys electronics the same way.
Most people report and pay use tax on their annual state income tax return, which typically has a line item for untaxed purchases. Some states offer a lookup table tied to your income so you can estimate a reasonable amount without keeping every receipt. For large individual purchases like furniture or appliances, you should report the actual amounts. Skipping the line entirely can lead to back-tax assessments plus interest and penalties if the state later audits your return.
What Rate Applies to Your Purchase
The rate you see at checkout is rarely just the state rate. Counties, cities, and special districts often add their own sales taxes on top, producing a combined rate. Louisiana has the highest average combined rate at 10.11 percent, while Alaska, Delaware, Montana, New Hampshire, and Oregon sit at zero.1Tax Foundation. State and Local Sales Tax Rates, 2026 State-level rates go up to 7.25 percent before local additions.
Which jurisdiction’s rate applies depends on sourcing rules. Most states use destination-based sourcing: the rate is set by where the buyer receives the goods, meaning your shipping address for online orders or the store location for in-person purchases. A smaller group uses origin-based sourcing, keyed to where the seller is located. For interstate sales, destination-based rules almost always apply, so you pay your local rate regardless of where the seller sits.
When a Business Has to Collect Sales Tax
A business only has to collect sales tax in states where it has a sufficient connection, called nexus. Without nexus, a state cannot force an out-of-state seller to act as its tax collector. Nexus can be established in more than one way.
Physical Nexus
Physical nexus comes from a tangible presence in the state. That covers the obvious cases, like a storefront, warehouse, or office, and less obvious ones too. Storing inventory in a third-party fulfillment center creates physical nexus in the state where that warehouse sits, even though the seller doesn’t own the building. This catches many sellers using services like Amazon FBA. Employees, sales representatives, or independent contractors working in a state can also trigger a collection duty. A business using fulfillment centers in multiple states may have physical nexus in every one of them.
Economic Nexus After Wayfair
Before 2018, a business with no physical presence in a state generally had no obligation to collect that state’s sales tax. The U.S. Supreme Court changed this in South Dakota v. Wayfair, Inc., holding that a state can require tax collection based on economic activity alone, even when the seller has no office, warehouse, or employees there.2Supreme Court of the United States. South Dakota v. Wayfair, Inc. (06/21/2018) The Court found that the previous physical-presence rule was outdated.
Every state with a sales tax now has an economic nexus law. The most common threshold is $100,000 in annual sales into the state. South Dakota’s original law also used an alternative trigger of 200 or more separate transactions, and some states adopted that second threshold too.2Supreme Court of the United States. South Dakota v. Wayfair, Inc. (06/21/2018) A growing number of states have since dropped the transaction count and rely only on the dollar amount. If you sell across state lines, monitor revenue in each state you ship to, because crossing the threshold triggers a registration and collection obligation.
Marketplace Facilitator Laws
If you sell through Amazon, eBay, Etsy, or Walmart Marketplace, the platform is probably handling sales tax for those transactions. Nearly all states with a sales tax now require marketplace facilitators to collect and remit tax on sales made through their platforms on behalf of third-party sellers. The facilitator calculates the rate, adds it at checkout, and sends the money to the state.
This has simplified compliance for small online sellers, but the facilitator’s responsibility only covers transactions processed through its platform. If you also sell through your own website or at craft fairs, you still have to collect and remit on those sales in any state where you have nexus.
Common Exemptions
States carve out exemptions for certain goods, services, and buyers to keep essentials affordable and to avoid taxing the same item multiple times as it moves through the supply chain.
Groceries, Medicine, and Medical Devices
The majority of states exempt unprepared groceries from sales tax. Prescription medications are also exempt in most states, and medical devices like prosthetics and hearing aids receive similar treatment in many places. Specifics vary: some states tax groceries at a reduced rate, and a handful tax them at the full rate, so check your own state’s rules.
Nonprofits and Government Agencies
Government entities and qualifying nonprofits, including charities, religious organizations, and educational institutions, can often buy goods without paying sales tax. The organization gives the seller an exemption certificate at the time of purchase, and the seller keeps it on file to justify why no tax was collected.
Resale Certificates
Businesses buying inventory to resell don’t pay sales tax on those purchases. They give the supplier a resale certificate, which shifts the tax down the chain to the final retail buyer. This keeps the same item from being taxed at both the wholesale and retail levels. The end consumer pays the tax once.
Manufacturing and Agricultural Inputs
Many states exempt raw materials, machinery, and equipment used directly in manufacturing or production. Agricultural supplies, commercial feed, seeds, and farm equipment usually receive similar treatment. The exemption typically requires the item to be used directly in the production process, so office furniture for a factory’s administrative building wouldn’t qualify.
Digital Goods and Services
Whether you owe sales tax on digital purchases, including software subscriptions, streaming services, e-books, and downloaded music, depends heavily on where you live. State approaches vary widely.3National Conference of State Legislatures. Taxation of Digital Products
Some states broadly tax anything delivered electronically, treating downloads, subscriptions, and cloud-based software the same as physical goods. Others tax digital products only if their laws specifically list them. States that are members of the Streamlined Sales and Use Tax Agreement follow a product-by-product approach: they must pass legislation expressly imposing tax on each category of digital product rather than lumping them under tangible personal property.3National Conference of State Legislatures. Taxation of Digital Products
The trend is toward expanding taxation of digital goods and services. Several states have recently broadened their tax base to include software-as-a-service, digital advertising, and cloud computing. If you sell digital products, research each state’s current rules because what’s taxable in one state may be fully exempt next door.
Registering, Filing, and Penalties
Before collecting sales tax from customers, a business has to register with each state where it has nexus and obtain a sales tax permit. Most states issue permits for free, though a few charge a small fee or require a refundable deposit. Register before you start collecting. Waiting until after you’ve been selling can trigger penalties.
Filing frequency depends on your sales volume. High-revenue businesses usually file monthly, mid-size businesses quarterly, and small sellers may file annually. States assign your frequency at registration and may adjust it as your sales change. Returns go through the state’s online portal, where you report total sales, taxable sales, exempt sales, and the tax collected for the period.
Close to 30 states offer a small vendor discount, a percentage of the tax collected that the business keeps to offset the cost of collecting and remitting. These allowances typically range from 0.25 percent to 5 percent of the tax due and only apply when the return is filed and paid on time.
Missing a filing deadline triggers penalties in every state. Common structures include a flat dollar penalty for each late return, a percentage-based penalty on the unpaid tax that grows the longer you wait, and daily interest on the outstanding balance. Some states impose all three, so even a short delay can become expensive for a business with high monthly collections.
Records and Audits for Businesses
Businesses that collect sales tax should keep detailed records for at least four years from the filing date, and longer if the state requires it. Some states mandate six or seven years. If you never filed a required return, the statute of limitations may never start running, so you may need to keep those records indefinitely.
The core documents to preserve are sales records showing total sales and tax collected by jurisdiction, exemption certificates for every customer from whom you didn’t collect tax, filed returns and payment confirmations, marketplace facilitator reports showing tax collected on your behalf, and a general ledger that reconciles with your tax filings.
States pick businesses for audit based on several triggers: reported numbers that don’t match data from payment processors or marketplace platforms, missing or expired exemption certificates, large gaps between reported revenue and industry norms, and a history of prior audit issues. Misclassifying taxable items as exempt is one of the most frequent findings. If an auditor decides you accepted an invalid exemption certificate, the unpaid tax falls on your business, not on the customer who gave you the bad certificate.