Sales tax is a type of indirect tax levied on the majority of goods and services in the US, and it is managed at the state and sometimes city level. Each state has a specific sales tax rate and different product taxability rules. With these variations, it can be difficult to determine when you need to charge customers sales tax. Below, we'll outline when you need to charge sales tax to customers in the US.
Note that this is general sales tax information, and you should consult an expert for advice specific to your business.
What's in this article?
- Do I need to charge sales tax in the US?
- How do I know whether what I'm selling is taxable?
- How to register for a US sales tax permit
Do I need to charge sales tax in the US?
In the US, businesses are required to collect sales tax from customers when they exceed certain thresholds. These thresholds are referred to as economic nexus thresholds, and they are revenue based, transaction based or both. Because sales tax is governed at the state level, these thresholds vary across the country.
For example, in Ohio, businesses only need to collect sales tax from customers if they have exceeded US$100,000 in revenue or 200 transactions from customers in Ohio. Certain US states only have revenue thresholds, while others require businesses to exceed the revenue and transaction thresholds before collecting sales tax.
Businesses can also meet sales tax obligations by having a physical presence or physical nexus in a state. Examples of business activities that can create physical nexus include:
Location: An office, warehouse, shop or other physical place of business. Storing inventory often creates physical nexus.
Employees: Having an employee, contractor, salesperson, installer or other person doing work for your business in a state.
Events: Selling products at a trade show or other event.
How do I know whether what I'm selling is taxable?
Just because you have met a nexus threshold in a US state does not mean that you are required to collect sales tax in that state. Not all goods and services are taxable. If the items that you are selling are not taxable, then you are not required to collect sales tax on those items. However, you may still have an obligation to register. Here are some items that are commonly tax exempt, depending on the state:
- Grocery food
- Clothing
- Certain books (textbooks, religious books, etc.)
- Prescription and non-prescription medicine
- Professional services
That is not a complete list, and some states may exempt other items. To avoid double taxation, many business-to-business (B2B) purchases are tax exempt. If a business purchases an item to resell it, it can use a resale certificate to avoid paying sales tax on the item because the retail business will charge sales tax to the end customer. Learn more about resale certificates here.
How to register for a sales tax permit
If your business has met a physical or economic nexus in a state and your product or service is taxable, you must register for a sales tax permit and begin collecting sales tax from your customers in that state.
Typically, these are the steps to register with a state to collect sales tax:
Gather business and contact information.
Visit your state's department of revenue website.
Go to the "Sales and Use Tax" section of the website to register your business.
You must register individually to collect sales tax in each state where you have met the tax registration requirements. To register for a sales tax permit, go to the state tax authority website. You can find the link for each state here.
There is an exemption for states participating in the Streamlined Sales and Use Tax Agreement (SSUTA). This agreement was created to simplify the sales tax registration process with the Streamlined Sales Tax Registration System (SSTRS).
Twenty-four states have passed legislation to conform with the SSUTA: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, New Jersey, North Carolina, North Dakota, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Washington, West Virginia, Wisconsin and Wyoming.
Sellers can register for the SSTRS here. Once they have registered, users will need to set up accounts with each state individually and also register separately if they have sales tax obligations in any state that does not conform with the SSUTA.
If you've met the tax registration requirement in a state but have not yet registered, you have a few options. If a few months have passed since you exceeded the tax registration requirement, consult sales tax experts to determine the best way forward for your business. Most states have a voluntary disclosure programme to help sellers resolve sales tax liabilities, and you might be eligible to participate in a state's amnesty programme to come into compliance. Do not begin collecting tax until you have properly registered with the state or local tax authority.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.
