What Is Sales Tax? A Complete Guide for Businesses

Sales tax is a consumption-based tax applied to the sale of goods and services and serves as a vital source of revenue for state and local governments across the United States. While the basic idea—adding a percentage to the final price—is simple, its application is far more complex: each state and locality sets its own tax rates, certain products and services are exempt, and a business’s nexus determines when it must begin collecting it.

In this guide (over 1,100 words), you’ll learn:

• What sales tax is and why it exists
• How it varies by state and locality
• Common exemptions and reduced rates
• What nexus is and how it affects your tax obligations
• How sales tax compares to other indirect taxes
• How to calculate it in practice
• The collection and filing process
• Best practices to stay compliant

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1. What Is Sales Tax?

Sales tax is an indirect tax charged to the final consumer at the point of sale for taxable goods and services. Practically speaking, the seller adds the applicable sales tax to the product’s price and collects it at checkout. The collected amount is later remitted to the relevant tax authority—either state or local.

Sales tax helps fund essential government services such as healthcare, education, transportation, and infrastructure. Unlike income tax, sales tax is only applied to spending, which means everyone contributes in proportion to their consumption.

2. How Sales Tax Varies by Location

Each U.S. state sets its own base sales tax rate, and many localities (cities and counties) add additional surcharges.

• California: The state rate is 7.25%, but in cities like Los Angeles, additional surcharges bring it to 9.5%.
• Texas: State tax is 6.25%, with local surcharges of up to 2%, reaching a maximum of 8.25%.
• New York: The state tax is 4%, and New York City adds 4.5%, for a combined rate of 8.5%.

There are five states with no general state sales tax: Delaware, Montana, New Hampshire, Oregon, and Alaska. However, Alaska permits local municipalities to impose their own sales taxes—so businesses must check each jurisdiction.

3. Exemptions and Reduced Sales Tax Rates

To reduce the financial burden of essential goods and protect low-income consumers, many states either exempt or apply reduced sales tax rates to specific categories, such as:

• Basic groceries for home consumption
• Prescription medications
• Medical and hospital services
• Residential utilities (water, electricity, gas)
• Agricultural equipment and primary production goods

However, what’s considered “essential” varies by state. A food item exempt in one state might be partially taxable in another, so businesses must check local regulations for each product category.

4. Nexus and Its Impact on Sales Tax Obligations

Nexus is the connection that obligates a business to collect sales tax in a specific jurisdiction. There are two main types:

4.1 Physical Nexus

A business creates physical nexus when it:

• Maintains an office, warehouse, or retail location in the state
• Employs local staff or agents
• Participates in trade shows, exhibitions, or in-person demos

Even temporary presence—such as a salesperson attending a conference—can trigger a sales tax obligation.

4.2 Economic Nexus

After the South Dakota v. Wayfair Supreme Court ruling in 2018, many states adopted economic nexus thresholds. A business must collect sales tax if it exceeds:

• $100,000 in annual sales in that state, or
• 200 or more transactions per year

So, even without physical presence, an online store with significant sales may be required to collect sales tax.

5. Sales Tax vs. Other Indirect Taxes

Tax TypeTrigger EventWho Collects?Jurisdiction LevelSales TaxSale to final consumerSellerState and localUse TaxWhen sales tax wasn't chargedBuyerComplementary to sales taxValue Added Tax (VAT)Each stage of supply chainEach participantNot used federally in U.S.Excise TaxSpecific goods (e.g., alcohol, gas)Manufacturer/importerFederal, state, local

Use tax is often applied to out-of-state or online purchases where sales tax wasn’t charged. VAT, used widely outside the U.S., is applied at every stage of production. Excise taxes are applied to specific goods and are usually baked into the retail price.

6. How to Calculate Sales Tax

To calculate sales tax, multiply the net price by the combined state and local rate.

Example:

• Laptop price: $800
• State tax: 6%
• Local tax: 2.5%
• Total tax rate: 8.5%
• Sales Tax: $800 × 0.085 = $68
• Customer pays: $800 + $68 = $868

When selling bundled goods or services, each component should be taxed according to its specific classification and applicable rate.

7. Sales Tax Collection and Filing Process

Register with the Tax Authority

Obtain a sales tax permit in each state where your business has nexus.

Charge Customers

Apply the correct tax rate at the point of sale and include it in the invoice or receipt.

File Returns

Submit returns monthly, quarterly, or annually depending on your sales volume and state requirements.

Remit Payment

Send the collected tax to the appropriate authority by the due date.

Keep Records

Maintain invoices, exemption certificates, and documentation for 3–5 years in case of audit.

8. Best Practices for Managing Sales Tax

• Use updated tax software that integrates current local and state rates
• Request and store resale certificates for tax-exempt purchases
• Monitor your economic nexus thresholds by tracking sales per state
• Work with a tax advisor specializing in sales tax
• Train your sales and finance teams to ensure correct invoicing and compliance

9. Impact and Final Thoughts

Sales tax plays a crucial role in your pricing strategy and business operations if you sell goods or services in the U.S. Due to its complexity—variable rates, exemptions, and nexus rules—businesses must manage sales tax carefully and often need automated tools or expert guidance.

At Openbiz, we offer consulting services to analyze your sales footprint, determine your sales tax obligations, implement automated calculation systems, and streamline compliance. This way, you can minimize tax risks and focus on growing your business.

Frequently Asked Questions (FAQs)

Do I need to collect sales tax from customers in other states?
Only if you meet the economic nexus thresholds or have a physical presence there.

How can I find out which products and services are exempt?
Each state publishes detailed lists of taxable and exempt items on their official websites.

How often do I need to file sales tax returns?
Depending on your sales volume and the state’s regulations, it may be monthly, quarterly, or annually.

What if a customer gives me a resale certificate?
Verify its validity, keep it on file, and don’t charge sales tax for that transaction.

What are the penalties for failing to comply with sales tax laws?
Penalties may include fines up to 25% of the unpaid tax, interest charges, and legal action in severe cases.

Need help managing your sales tax obligations?
We’re here to make compliance simple and effective. Contact Openbiz today and let’s streamline your tax processes together.

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