Sales Tax Basics for Small Business Owners
Sales tax is a state and local tax collected from customers on the purchase of taxable goods and services. Whether you need to collect it depends on what you sell, where your customers are, and whether you have "nexus" — a connection to that state significant enough to create a tax obligation. Five states have no sales tax at all. For the rest, you must register for a sales tax permit before collecting — and collecting without a permit is illegal in most states.
What Is Sales Tax and How Does It Work?
Sales tax is imposed by state and local governments (not the federal government) on the final sale of most tangible goods and some services. The business collects it from the customer at the point of sale, holds it, and remits it to the state's tax authority on a regular schedule (monthly, quarterly, or annually depending on your sales volume).
Key mechanics:
- The rate varies by state and often by county and city (combined rates range from 0% to over 10%)
- You collect sales tax FROM your customers — you don't pay it yourself. Your customers pay it; you're the collection agent for the state.
- Not all goods and services are taxable. Most states exempt groceries, prescription drugs, and some services. What's taxable varies significantly by state.
- You're required to have a valid permit before you start collecting
Do You Have Nexus in a State?
Nexus is the connection between your business and a state that creates a legal obligation to collect and remit that state's sales tax. Without nexus, you have no obligation to collect.
There are two types of nexus:
Physical Nexus
You have physical nexus in any state where you have:
- A brick-and-mortar location (store, office, warehouse)
- Employees or contractors working in the state
- Inventory stored in the state (including in Amazon FBA or third-party warehouses)
- A registered agent's address in some states
Most businesses have physical nexus at least in their home state.
Economic Nexus (The Online Seller Rule)
After the Supreme Court's 2018 decision in South Dakota v. Wayfair, Inc., states can require online sellers to collect sales tax even with zero physical presence — based purely on economic activity in the state.
The standard threshold (adopted by most states):
- $100,000 in gross sales into the state in the current or previous calendar year
What this means for you:
- If you're selling products online and shipping to customers in other states, you may have economic nexus in states where your sales exceed $100,000 — even if you've never set foot there
- Once you cross the threshold in a state, you must register, collect, and remit that state's sales tax
- The obligation typically begins immediately upon crossing the threshold (some states give a 30-day grace period)
Most small businesses starting out will only have nexus in their home state. Economic nexus typically only becomes relevant when you're scaling to significant online sales volume across multiple states.
States With No Sales Tax
Five states impose no state-level sales tax:
| State | Note |
|---|---|
| Alaska | No state tax, but local jurisdictions can impose their own (up to 7.5% in some areas) |
| Delaware | No sales tax |
| Montana | No sales tax |
| New Hampshire | No sales tax |
| Oregon | No sales tax |
If your business operates exclusively in one of these states, you generally have no obligation to collect state sales tax. However, if you sell to customers in other states and cross their economic nexus thresholds, you'd still owe those states' sales tax.
How to Get a Sales Tax Permit
You must register for a sales tax permit (also called a seller's permit, certificate of authority, or sales and use tax permit depending on the state) before you begin collecting sales tax. Collecting without a permit is illegal in most states and can result in penalties.
The registration process by state:
| State | What It's Called | Where to Register |
|---|---|---|
| California | Seller's Permit | California Department of Tax and Fee Administration (CDTFA) — cdtfa.ca.gov |
| Texas | Texas Sales and Use Tax Permit | Texas Comptroller — comptroller.texas.gov |
| New York | Certificate of Authority | NY Department of Taxation and Finance — tax.ny.gov |
| Florida | Consumer's Certificate of Exemption / Sales Tax Permit | Florida Department of Revenue — floridarevenue.com |
| All other states | Varies (seller's permit, tax permit, etc.) | Your state's Department of Revenue or Comptroller |
General process:
1. Go to your state's Department of Revenue or Comptroller website
2. Find the business registration or sales tax permit section
3. Provide your business name, EIN, business address, and information about what you sell
4. Permits are typically free or very low cost ($0–50)
5. You'll receive your permit number and your assigned filing frequency
The IRS maintains a directory of all state tax authority websites at irs.gov/businesses/small-businesses-self-employed/state-government-websites.
Sales Tax Rates by State
Rates vary by state and often by county and city. Below are the 2024 state base rates — actual rates in your customer's location may be higher with local add-ons:
| State | Base Rate | Local Tax? | State | Base Rate | Local Tax? | |
|---|---|---|---|---|---|---|
| Alabama | 4% | Yes | Nebraska | 5.5% | Yes | |
| Arizona | 5.6% | Yes | Nevada | 6.85% | Yes | |
| Arkansas | 6.5% | Yes | New Jersey | 6.625% | No | |
| California | 7.25% | Yes | New Mexico | 5.125% | Yes | |
| Colorado | 2.9% | Yes | New York | 4% | Yes | |
| Connecticut | 6.35% | No | North Carolina | 4.75% | Yes | |
| Florida | 6% | Yes | North Dakota | 5% | Yes | |
| Georgia | 4% | Yes | Ohio | 5.75% | Yes | |
| Hawaii | 4% | No | Oklahoma | 4.5% | Yes | |
| Idaho | 6% | Yes | Pennsylvania | 6% | Yes | |
| Illinois | 6.25% | Yes | Rhode Island | 7% | No | |
| Indiana | 7% | No | South Carolina | 6% | Yes | |
| Iowa | 6% | Yes | South Dakota | 4.5% | Yes | |
| Kansas | 6.5% | Yes | Tennessee | 7% | Yes | |
| Kentucky | 6% | No | Texas | 6.25% | Yes | |
| Louisiana | 4.45% | Yes | Utah | 6.1% | Yes | |
| Maine | 5.5% | No | Vermont | 6% | Yes | |
| Maryland | 6% | No | Virginia | 5.3% | Yes | |
| Massachusetts | 6.25% | No | Washington | 6.5% | Yes | |
| Michigan | 6% | No | West Virginia | 6% | Yes | |
| Minnesota | 6.875% | Yes | Wisconsin | 5% | Yes | |
| Mississippi | 7% | No | Wyoming | 4% | Yes | |
| Missouri | 4.225% | Yes | DC | 5.75% | No |
Verify current rates for your specific city and county at streamlinedsalestax.org or your state's revenue department.
Filing and Remitting Sales Tax
After you register, your state assigns you a filing frequency based on your expected sales volume:
- Monthly: High-volume sellers
- Quarterly: Mid-volume sellers
- Annually: Low-volume sellers
At each filing period, you:
1. Calculate the total taxable sales in your state for the period
2. Apply the applicable rate(s) for each jurisdiction
3. Remit the collected amount to your state via their online portal
4. File the required return (even if you collected $0 in a period — most states require a "zero return")
Late filing consequences: Penalties typically start at 5–10% of tax due per month late, plus interest. In some states, persistent non-filing triggers an audit.
Sales Tax Exemptions — Resale Certificates
Not all purchases are subject to sales tax. Two common exemptions apply to small businesses:
Resale exemption: If you buy goods to resell (e.g., you're a retailer purchasing inventory), you don't pay sales tax to your supplier on those purchases — you collect it when you sell to the end customer. You provide your supplier with a resale certificate (showing your seller's permit number) to claim this exemption.
Other exemptions: Nonprofits, government agencies, and certain industries may qualify for exemptions on purchases. Each state has its own rules.
If a customer claims an exemption and provides an exemption certificate, keep it on file. If you later discover the exemption was fraudulent, the customer (not you) is generally liable for the tax.
Frequently Asked Questions
I sell services, not products — do I need to collect sales tax?
It depends on the state and the type of service. Most states tax tangible goods and exempt services, but there are many exceptions. Some states (Hawaii, New Mexico, South Dakota) tax most services. Others tax specific services like repair work, landscaping, or digital services. You need to look up whether your specific service is taxable in each state where you have customers and nexus. Your state's Department of Revenue website typically lists taxable service categories.
What's the difference between a seller's permit, sales tax permit, and certificate of authority?
They're the same thing — different states use different names. California calls it a Seller's Permit. New York calls it a Certificate of Authority. Texas calls it a Sales and Use Tax Permit. They all serve the same purpose: authorizing you to collect sales tax in that state.
I'm a new business — when do I need to start collecting sales tax?
You need to register for a permit and start collecting before you make your first taxable sale in a state where you have nexus. Don't start collecting and then register later — collecting sales tax without a permit is the compliance violation to avoid. If you're operating in your home state, register before opening. If you're selling online and approaching the $100,000 economic nexus threshold in another state, register in that state before you cross it.
Do I need to charge sales tax when invoicing clients?
Only if your services are taxable in the state where your client receives the service and you have nexus there. Most B2B professional services (consulting, marketing, design) are not taxable in most states. B2C services (repair, beauty, food service) more often are. Check your state's taxability rules for your specific service. When in doubt, consult a CPA or your state's Department of Revenue.
What if I sell on Etsy, Amazon, or another marketplace?
Most major marketplaces (Amazon, Etsy, eBay, Shopify) are "marketplace facilitators" — they're legally required to collect and remit sales tax on behalf of sellers in most states. If you sell exclusively through these platforms, you may have little or no direct sales tax obligation. However, if you also sell through your own website or directly to customers, those sales may require separate registration and collection. Confirm with each platform what they collect on your behalf.
My accountant handles taxes — does that mean they handle sales tax too?
Not necessarily. Income tax (federal and state) and sales tax are separate. A CPA or tax preparer who handles your annual income tax return may not be managing your ongoing sales tax filings. Ask explicitly. Many small businesses are surprised to discover their accountant doesn't file monthly or quarterly sales tax returns — those are often the owner's responsibility unless specifically arranged.
Need help? For questions about sales tax requirements in your state, contact your state's Department of Revenue directly, or consult a CPA familiar with sales tax compliance. For general business compliance support, contact ZenBusiness.