Frequently asked questions
What is sales tax and why do I have to pay it?
Sales tax is a tax you have to pay when you buy most goods and some services. Businesses collect it from customers and send it to the state or local government.
You have to collect sales tax if your business has a physical presence in a state (like a store or office) or if you sell a lot of products there (even online). This is why knowledge of physical presence and economic nexus is important.
How do I figure out which states I need to collect sales tax in?
You need to collect sales tax in a state if you have nexus there. Nexus just means a connection to the state that makes you responsible for collecting sales tax. Generally, there are two main types:
- Physical Nexus – If you have a store, office, warehouse, or employees in a state, you likely must collect sales tax there.
- Economic Nexus – Even if you don’t have a physical presence, you might have to collect sales tax if you sell a lot of products or make a certain number of sales in that state. Most states have different rules for this.
While less popular, Trailing Nexus, in some states, say you still must collect sales tax for a while even after you stop doing business there.
What is a sales tax nexus and how do I know if I have one?
You can establish nexus in several ways: Physical, Economic, Affiliate, Click-Through, Marketplace, Inventory, Trade Show, Software, and Trailing nexus are some of the most common paths.
I have been making sales in various different states for the last couple of years, do I have to pay taxes on those sales?
It depends on whether you had nexus in that state when you made the sales. If you met the state’s nexus rules like having a physical presence or meeting the state’s sales or transaction thresholds then you likely should have been collecting and remitting sales tax. If you didn’t, you might owe back taxes, penalties, and interest. In cases like these, we recommend Voluntary Disclosure Agreements (VDA) since it allows you to report past taxes without facing full penalties, if you qualify.
How do I register for a sales tax permit?
It depends on the state because each state has different rules and processes for registering. Some states let you register online through their Department of Revenue website, while others require paperwork or extra details like business licenses or tax IDs. This can be time consuming to figure out alone and it can be overwhelming for new businesses.
What are the filing deadlines for sales tax returns?
Filing deadlines vary by state and locality, but most returns are due on the 15th, 20th, 25th, or last day of the month. Some states have quarterly or annual filing deadlines, depending on your sales volume.
Keeping track of all these deadlines can be tricky, since you would need a tax calendar, a way to track your filing schedule, and make sure your returns are filed on time.
Do I need to file a return even if I didn’t make any sales this month?
Yes, in most states you still have to file a zero return even if you didn’t make any sales. Once you’re registered for sales tax, the state expects you to file regularly, even if you owe nothing, and this is until you officially close the account.
If you don’t file, you could face penalties or lose good standing with the state or locality.
How do I calculate how much sales tax I owe?
To calculate sales tax, you need to:
- Figure out the tax rate – This includes the state rate plus any local rates (like city or county). Rates can vary by location, even within the same state.
- Multiply by your taxable sales – Take your total taxable sales for the period and multiply it by the combined tax rate.
Example: If you sold $10,000 in goods and the total tax rate is 7%, you’d owe $700 in sales tax ($10,000 × 0.07).
- Account for exemptions and discounts – Subtract any non-taxable sales or state-provided discounts (some states offer a small discount for filing on time).
Important note: Sales tax rates change often. It is important stay up to date on the tax rate to report your sales and use tax accurately.
What happens if I make a mistake on my sales tax return?
If you make a mistake on your sales tax return, a few things can happen:
Overpayment – If you overpay, you might be able to amend the return or request a refund — but some states have strict deadlines for refunds.
Underpayment – If you underpay, the state will likely charge you penalties and interest on the unpaid amount until you fix it.
Filing Error – If you enter the wrong info (like reporting the wrong sales amount or tax rate), the state may adjust your return or contact you to correct it.
Most states let you fix mistakes by filing an amended return.
Do I have to collect sales tax on shipping and handling?
It depends on the state. Some states treat shipping and handling as part of the sale and require you to charge sales tax on it, while others don’t. Here’s the general rule:
If the state taxes shipping – You have to charge sales tax on the total price, including shipping and handling.
If the state doesn’t tax shipping – You don’t have to charge sales tax on shipping, but handling fees might still be taxable depending on the state’s rules.
What’s the best way to track sales tax for different states?
The best way to track sales tax across multiple states is to use a centralized system that keeps up with state rules and rates. Here’s what works best:
Sales Tax Software – Tools like Avalara and TaxJar automatically track rates, nexus, and filing deadlines.
Detailed Reporting – Keep track of your taxable and non-taxable sales by state and locality.
Custom Tax Calendar – Track filing deadlines and payment dates to avoid late fees.
Monitor Nexus – Regularly check if your sales activity triggers nexus in new states.
Are there any exemptions for certain products or customers?
Yes, many states offer sales tax exemptions for certain products or customers. The most common exemptions include:
Product-Based Exemptions – Some states exempt essential items like groceries, prescription drugs, and medical devices.
Customer-Based Exemptions – Sales to nonprofits, government agencies, or resellers may be exempt if the buyer provides a valid exemption certificate.
Use-Based Exemptions – If a product is purchased for resale or manufacturing, it may qualify for a sales tax exemption.
What is the difference between sales tax and use tax?
Sales tax is charged when you sell something to a customer, and you (the seller) are responsible for collecting and sending it to the state.
Use tax applies when you buy something without paying sales tax, usually for out-of-state or online purchases. In that case, you’re responsible for reporting and paying the tax directly to the state.
Example:
If you sell a product in California and charge sales tax, that’s sales tax.
If you buy office supplies online from a state with no sales tax and use them in California, you owe use tax to California.
Do I need to collect sales tax from customers in states with no sales tax?
States without a statewide sales tax are known as the NOMAD states:
N – New Hampshire
O – Oregon
M – Montana
A – Alaska
D – Delaware
Even though these states don’t have a state-level sales tax, some localities (especially in Alaska and Montana) can still impose their own local sales taxes. For example, Anchorage and Juneau in Alaska have local sales taxes, even though the state itself does not.
If you have nexus in a city or locality within one of these states, you might still need to collect and file local sales tax even though the state doesn’t have one.