Sales tax is a pass-through tax that small businesses collect from customers at the point of sale and remit to state and local tax authorities, never keeping the revenue. There is no federal sales tax in the United States. A business must collect sales tax only in states where it has nexus, meaning a physical presence or sufficient economic activity, and the rate depends on where the sale occurs.
Table of Contents
- What exactly is sales tax and who has to collect it?
- What is nexus and how does a small business create it?
- How do I calculate and collect sales tax on each sale?
- Does my business pay sales tax on its own purchases?
- How do I file and pay sales tax as a small business owner?
- What is the difference between sales tax and other taxes I pay as a small business?
- What common sales tax mistakes should a small business avoid?
- Key Takeaways
- References
What exactly is sales tax and who has to collect it?
Sales tax is a pass-through tax imposed by state and local governments, not by the federal government. According to Wolters Kluwer, there is no federal sales tax in the United States. Forty-five states impose a general sales tax, while five states, Alaska, Delaware, Montana, New Hampshire, and Oregon, do not.
State sales tax rates generally run between 4% and 7.5%, but combined state and local rates can total above 10% in some areas, according to Wolters Kluwer. A business must collect sales tax only if it has nexus in the taxing state, meaning a physical presence or economic activity that creates a connection. Thomson Reuters notes that LLCs and sole proprietorships are not exempt from collecting sales tax on taxable products sold in jurisdictions where they operate.
What is nexus and how does a small business create it?
Nexus is the connection between a business and a state that triggers a sales tax collection obligation. According to Avalara, physical presence nexus includes branches, stores, warehouses, drop-shipping facilities, or any real estate or property belonging to the company in that state.
Using a fulfillment service such as Fulfillment by Amazon (FBA) that stores goods in warehouses can trigger nexus in the state where goods are stored, according to Avalara. Economic nexus, following the South Dakota v. Wayfair framework, applies when a seller exceeds thresholds such as more than $100,000 in sales or at least 200 transactions of tangible personal property or services delivered to customers in a state. Shipping goods to customers by a common carrier such as USPS, UPS, or FedEx is unlikely to trigger a sales tax obligation through delivery alone.
How do I calculate and collect sales tax on each sale?
Sales tax is generally calculated on gross receipts, which is the full amount a seller receives from a purchaser, not the seller's net profit, according to Wolters Kluwer. The rate applied is the combined state rate plus any local or special district rate at the point, or destination, of sale, according to Thomson Reuters.
Some services are exempt in certain jurisdictions. Wolters Kluwer gives the example of New York, where haircuts, manicures, tattoos, and massages are exempt from sales tax everywhere in the state except New York City, where they are subject to the city's local sales tax. Excise taxes on specific goods like fuel, alcohol, tobacco, and firearms are separate from sales tax and can apply in addition to regular sales tax. A resale certificate is a signed document indicating a customer's plan to resell goods purchased, and it is typically required in wholesale transactions to make the sale tax-exempt, according to Thomson Reuters.
Does my business pay sales tax on its own purchases?
Businesses generally do not pay sales tax on items purchased for resale. Instead, the business provides a resale certificate to the supplier, which documents that the goods will be resold and makes the transaction tax-exempt, according to Thomson Reuters.
Sales tax paid on deductible business expenses, such as supplies and equipment, is not separately deductible. Thomson Reuters explains that the sales tax paid can be included in the expense itself. Sales tax collected from customers is not deductible because it is not the business's money. Use tax applies when a business buys taxable goods from an out-of-state seller who does not collect sales tax because they lack nexus in the buyer's state, according to Wolters Kluwer. Most states will credit sales tax already paid to another state against use tax liability on the same purchase.
How do I file and pay sales tax as a small business owner?
Filing frequency for sales tax, whether monthly, quarterly, or annually, is set by the state where the business has nexus. According to Thomson Reuters, many states require a "zero return" if a business had no taxable sales during a filing period, and missing a return can lead to penalties or license revocation.
Unlike personal income taxes, which are filed annually, business sales tax returns operate on state-mandated schedules, often quarterly, according to Accounting.com. A sole proprietor must register for a sales tax permit in each state where nexus exists, separate from any federal tax registration. The sales tax collected from customers must be remitted to the appropriate state or local tax authority. Thomson Reuters states that businesses do not keep sales tax revenue.
What is the difference between sales tax and other taxes I pay as a small business?
Small business owners pay personal taxes on income earned through the business and small business taxes on the company's financial activities, according to Accounting.com. Sales tax is a third, separate obligation. Sales tax is a pass-through collected from customers, while income and self-employment taxes are paid from business earnings.
LLC members are considered self-employed for tax purposes and must pay required contributions to programs like Social Security and Medicaid, according to Accounting.com. A sole proprietorship is the default structure if an owner is the only owner and does not register the company under any other structure, and sole proprietors can file business taxes under their personal Social Security number. Spencer Accounting Group can help small business owners manage sales tax registration, filing schedules, and compliance alongside their broader tax obligations; visit spenceraccounting.com for guidance.
What common sales tax mistakes should a small business avoid?
Failing to register for sales tax in a state where nexus has been created is a common mistake. According to Avalara, nexus can be created by out-of-state warehouses, fulfillment services, or regularly attending trade shows where sales are made.
Assuming services are always exempt is another error. Wolters Kluwer notes that service taxation varies widely by state and even by city within a state. Neglecting to file a zero return during inactive periods can trigger penalties or license revocation, according to Thomson Reuters. Confusing sales tax with excise tax, or failing to account for both on the same transaction, is a mistake because excise taxes on fuel, alcohol, and tobacco apply in addition to sales tax. Overlooking use tax obligations on out-of-state purchases where the seller did not collect sales tax is also a common compliance gap.
Key Takeaways
- Sales tax is a pass-through tax; businesses collect it from customers and remit it to state and local authorities, never keeping the revenue.
- There is no federal sales tax in the US; only 45 states impose a general sales tax, with rates typically between 4% and 7.5% before local add-ons.
- Nexus, meaning physical presence or economic activity above state thresholds, determines whether a business must collect sales tax in a given state.
- A resale certificate allows businesses to buy goods tax-free when the items are intended for resale.
- Sales tax paid on deductible business expenses is included in the expense amount itself, not claimed as a separate deduction.
- Many states require a zero return even when no taxable sales occurred; missing a filing can lead to penalties or license revocation.
- Use tax applies to taxable goods bought from out-of-state sellers who do not collect sales tax, and most states credit sales tax already paid elsewhere.
References
- How to pay sales tax for your small business — Thomson Reuters
- Small Business Taxes Overview — Accounting.com, updated 2026-01-27
- What is sales tax? Definition, examples and small business requirements — Wolters Kluwer, 2026-07-06
- Sales tax essentials for small businesses — Avalara