Why US Sales Tax Is Uniquely Complex
Unlike VAT systems in Europe, Australia, or India, the United States has no federal sales tax. Each of the 45 states that levies sales tax (plus the District of Columbia) sets its own rates, rules, and filing requirements. Local jurisdictions — counties, cities, special districts — layer additional rates on top. There are over 11,000 sales tax jurisdictions in the US.
Physical vs. Economic Nexus
Before 2018, a business only had to collect sales tax in states where it had physical presence (an office, warehouse, or employees). The 2018 Supreme Court ruling in South Dakota v. Wayfair changed this fundamentally. Now, economic activity alone — selling into a state above a threshold — creates nexus and an obligation to collect and remit sales tax.
Most states set economic nexus thresholds at $100,000 in annual sales or 200 transactions into the state. Once you cross this threshold, you must register, collect, and file in that state.
States with No Sales Tax
Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Note that Alaska allows local municipalities to levy their own taxes.
Origin vs. Destination Sourcing
Most states use destination-based sourcing — tax is collected at the rate of the buyer's location. A handful of states (Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, Virginia) use origin sourcing for in-state sales, meaning the rate is based on where the seller is located.
Taxable vs. Exempt Products
What is taxable varies enormously by state. Groceries are exempt in many states but taxable in others. Clothing is exempt in New York but taxable in most states. Digital products, software, and SaaS have inconsistent treatment across states. Getting product taxability right requires state-specific research.
Filing and Remittance
Filing frequency depends on your sales volume in each state — high-volume sellers typically file monthly, medium-volume quarterly, and low-volume annually. Most states now accept electronic filing. Penalties for late filing range from 5–25% of the tax due plus interest.
Practical Steps for Small Retailers
- Identify which states you have nexus in (physical locations + economic activity)
- Register for a sales tax permit in each nexus state before collecting
- Configure your POS to collect the correct rate for each transaction location
- Set calendar reminders for filing deadlines in each state
- Consider tax automation software once you have nexus in 3+ states
