Key takeaways
- US sales tax varies by state and locality, with different rules, rates, and registration requirements depending on where your customers are.
- Economic nexus laws mean you may owe tax even without physical presence, especially if you sell online and meet certain thresholds in a state.
- Staying compliant requires accurate registration, timely filing, and up-to-date tracking, often best handled with sales tax automation tools.
In short: US sales tax is a consumption tax set by states and local areas and charged once, at the final sale to the consumer. Rates and rules vary by state. Under economic nexus rules, foreign online sellers may need to register, collect and file sales tax in a state even without a physical presence.
Expanding your business across borders can be an exciting opportunity, especially in the huge US consumer market. But if you are a foreign business entering the US, you need to understand and follow its complex sales tax rules. US sales tax can seem daunting at first. With the right knowledge, though, you can stay compliant and avoid costly mistakes. Here's our quick guide to US sales tax to get you started.
What is sales tax?
US sales tax is a consumption tax on the sale of goods and services, set at state and local level in the United States. Unlike Value Added Tax (VAT), which is also a consumption tax, US sales tax is usually not included in the displayed price. Instead, it is added at the point of sale.
VAT is widely used outside the United States, and it works quite differently from US sales tax. US sales tax is usually charged only on the final sale to the end consumer. VAT, by contrast, is charged at each stage of production and distribution. Every business in the supply chain pays tax on the value it adds. It can usually claim a credit for the VAT it paid on its own purchases.
For example, in the European Union, standard VAT rates range from 17% to 27%. VAT applies to most goods and services at every step, from manufacturer to retailer. In contrast, US sales tax rates generally range from 0% to 10%. The tax is charged only once, when the final consumer buys. So VAT is collected bit by bit along the supply chain, while US sales tax is collected in a single transaction.
If you operate internationally, you need to understand these differences. They affect your compliance, your pricing and how you manage tax in different places. Knowing how VAT and US sales tax are charged helps you avoid costly mistakes and meet all your tax requirements.
How does state sales tax work?
State sales tax is a tax that each US state sets for itself, with its own rates and rules. Most US states charge a statewide sales tax, so it is a common source of revenue. State sales tax rates range from zero to just over 7%, depending on the state.
For example, five states (Alaska, Delaware, Montana, New Hampshire and Oregon) have no statewide sales tax. In California, Indiana and Rhode Island, the state sales tax rate is 7% or higher. Washington has one of the highest combined state and local sales tax rates in the country. By comparison, Colorado has a fairly low state sales tax rate of 2.9%. Read more in our guide: Which U.S. States Have the Highest and Lowest Sales Tax Rates?.
How does local sales tax work?
Local sales tax is an extra sales tax that counties, cities and districts may charge on top of state sales tax. Together, the state and local sales taxes make up the total sales tax rate for an area. In some places, state and local sales taxes apply at the same rate to all taxable sales, which keeps things consistent. Related reading: Sales and Use Tax Defined and Explained; a Guide for CPAs.
You need to know both state and local tax rates to work out the sales tax you owe. Combined, they can reach over 10%.
What is economic nexus?
‘Economic nexus' is the link between a business and a state that requires the business to collect and pay sales tax there. If you have a physical presence in a state, such as a store, office or warehouse, you generally must collect sales tax from customers there. However, with the growth of e-commerce, economic nexus rules have become more complex. You may now have economic nexus in a state even without a physical presence.
How does sales tax apply to online sales?
US sales tax applies to online sales when an online seller meets a state's economic nexus rules. Because of the rise in e-commerce, online sales tax now matters much more for businesses. In 2018, the US Supreme Court ruling in South Dakota v. Wayfair let states collect sales tax from online retailers with no physical presence there.
As a result, many states now have economic nexus laws. Online sellers must collect and pay sales tax once they pass set thresholds for sales volume or number of transactions.
How do you register for sales tax?
To register for US sales tax, you apply for a sales tax permit in each state where you have economic nexus. This applies to foreign businesses too. You submit an application, provide the business details asked for and get a unique tax registration number. Once your application is approved, you receive a notice. You can then start filing and paying sales tax under that state's rules.
You are responsible for keeping your registration complete and up to date in each relevant state. The US sales tax registration process and each state's specific requirements can vary. So research them carefully.
Which goods and services are taxable?
Which goods and services are taxable for US sales tax varies from state to state. Some states tax a broad range of items. Others may exempt certain goods or services from sales tax, such as groceries, prescription medicines or medical devices.
Also note that not every US state with a sales tax applies it to digital services. The taxability of digital services varies widely by state. These include streaming subscriptions, SaaS, downloadable content and cloud storage.
Check with each state's Department of Revenue or ask a tax professional whether your products or services are subject to US sales tax.
How do you collect and file US sales tax?
You collect US sales tax from customers at the point of sale and then pay it to the right tax authorities. Depending on the state, you may need to file sales tax returns monthly, quarterly or annually. Keep accurate records of your sales and track the US sales tax you collect to make reporting easier. For a closer look, see Sales Tax and Dropshipping - What Sellers Need to Know.
Late or incorrect filings can lead to penalties and interest charges. So stay organized and meet every filing deadline. That's why we recommend using automated sales tax software to keep your data and calculations accurate.
Conclusion
Expanding your business into the United States can be rewarding, but you need a solid grasp of US sales tax rules. Learn the key ideas, such as economic nexus, taxability rules, registration and filing requirements. Then your e-commerce business can handle US sales tax compliance with confidence.
To find out more about how our automated sales tax software can help your e-commerce business succeed in the US, head over to the LumaTax website. Alternatively, you can book a free call with one of our sales tax experts to find bespoke solutions for your business, optimize your tax costs, and reach millions of new potential customers.
How Taxually handles this
Taxually’s LumaTax runs a nexus analysis on your sales, helps you register in the states where you must collect, and prepares and files multi-state sales tax returns, including Canadian GST/HST. LumaTax is currently available to enterprises and accounting firms. For the full workflow, read how to automate US sales tax filing in every state.
Related guides
Frequently asked questions
Do I need to register for US sales tax if I don’t have a physical presence in the US?
Yes. Under economic nexus rules, you may be required to register if your sales exceed certain thresholds in a state, even without a physical presence.
How do I know which states I need to register in?
You’ll need to track your sales volume and/or transaction count in each state. If you meet or exceed a state’s economic nexus threshold, you must register there.
Are all products and services subject to sales tax in the US?
No. Taxability varies by state. Some items—like groceries, medications, or digital goods—may be exempt or taxed at a reduced rate in certain jurisdictions.
How often do I need to file sales tax returns?
Filing frequency depends on the state and your sales volume. It can be monthly, quarterly, or annually.
What’s the difference between VAT and US sales tax?
VAT is collected at every stage of the supply chain and allows input tax credits. US sales tax is only charged at the final point of sale to the end consumer.
Can I automate US sales tax compliance?
Yes. Many businesses use sales tax software to track nexus, calculate tax, manage exemptions, and file returns accurately across multiple states.
