When do I need to collect sales tax in the US?

Sales tax in the United States is one of the most complex compliance areas for small businesses, particularly those selling across state lines. Unlike most countries with a single national sales tax, the US has no federal sales tax — instead, there are 50 states with different rules, rates, and thresholds, plus thousands of local jurisdictions. The 2018 Supreme Court decision in South Dakota v. Wayfair fundamentally changed when businesses must collect sales tax.

Physical nexus (traditional standard)

Before 2018, businesses only needed to collect sales tax in states where they had a physical presence (nexus). Physical nexus triggers include: - An office, store, or warehouse - Employees or sales representatives - Inventory stored in a fulfillment center (including Amazon FBA warehouses) - Attending trade shows or making deliveries using your own vehicles

Physical nexus still applies. If you have any of these in a state, you must register and collect sales tax there.

Economic nexus (post-Wayfair, 2018)

After Wayfair, states can require out-of-state sellers to collect sales tax based on economic activity in the state alone, without physical presence. All 45 states with a sales tax (plus Washington D.C.) now have economic nexus laws.

The most common threshold: $100,000 in sales OR 200 separate transactions in the previous or current calendar year. This is the South Dakota standard adopted by most states. However, thresholds vary: - Some states use $100,000 only (no transaction count) - California: $500,000 in sales only - Kansas: $1 in sales (no threshold — any sale creates nexus)

Once you exceed the threshold in a state, you must register with that state's revenue department and begin collecting and remitting sales tax.

What is taxable?

Sales tax applies to tangible personal property in most states. Services are often exempt, but there are major exceptions (digital services, repairs, some professional services). Many states have expanded their tax base to include digital products and software-as-a-service (SaaS) since 2018.

Exempt categories commonly include: - Groceries (most states) - Prescription drugs - Medical devices - Clothing (some states, notably New York and Pennsylvania)

Marketplace facilitators

If you sell through Amazon, eBay, Etsy, or similar platforms, the platform (marketplace facilitator) is typically responsible for collecting and remitting sales tax on your behalf in most states. This simplifies compliance for sellers using third-party platforms, but you should verify whether the platform is collecting in all states or whether you have remaining obligations.

Multi-state compliance: practical steps

• Identify all states where you have physical nexus (employees, offices, warehouses)
• Monitor your sales by state to identify when you approach economic nexus thresholds
• Register for sales tax permits in each state where you have nexus (free in most states)
• Configure your sales platform to collect the correct rate at checkout (state + local rates can vary)
• File and remit sales tax returns for each state on the required frequency (monthly, quarterly, or annually depending on the state and your volume)

Sales tax software

For businesses selling in multiple states, sales tax automation software (TaxJar, Avalara, Vertex) integrates with e-commerce platforms, calculates rates at the point of sale, prepares returns, and files with each state. For businesses with significant multistate sales, the cost of software is typically far less than manual compliance or penalties for non-compliance.

Penalties for non-compliance

States can audit businesses for sales tax non-compliance up to 3-7 years back (depending on the state). Penalties for failure to collect and remit include: - The unpaid sales tax itself (now due from your own pocket since you failed to collect it) - Penalties of 25-100% of unpaid tax - Interest on unpaid amounts - Personal liability for officers of corporations in some states