Sales tax is one of the most misunderstood tax obligations for small business owners and freelancers. Unlike income tax, which is relatively straightforward in concept, sales tax involves state-by-state rules, product and service exemptions, and complex nexus requirements that have evolved significantly in recent years. This guide explains how sales tax works, when you need to collect it, and how to stay compliant without getting overwhelmed.
What Is Sales Tax and Who Administers It?
Sales tax is a consumption tax imposed by state and local governments on the sale of goods and certain services. Unlike federal income tax, which is administered by the IRS for the entire country, sales tax is administered separately by each state. As of 2026, 45 US states plus the District of Columbia impose sales tax, with rates varying widely by state and locality. Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a state sales tax, though some local jurisdictions in Alaska do.
The seller — that is, you as the business owner — is responsible for collecting sales tax from the buyer at the time of sale, holding it in trust, and remitting it to the appropriate state tax authority on a scheduled basis. Sales tax is not your money: it is the government's money that you are collecting on their behalf. Failing to remit it properly is a serious compliance issue.
Understanding Sales Tax Nexus
You are only required to collect sales tax in states where your business has nexus — a legal connection sufficient to create a tax collection obligation. There are two types of nexus. Physical nexus exists when you have a physical presence in a state: an office, store, warehouse, employees, or even attending trade shows in that state can create physical nexus.
Economic nexus is more recent and far-reaching. Following the 2018 US Supreme Court decision in South Dakota v. Wayfair, most states now impose economic nexus on businesses that exceed a certain sales volume in the state — typically $100,000 in annual sales or 200 separate transactions with customers in that state. This means an online business with no physical presence in a state may still be required to collect that state's sales tax once it crosses the threshold.
What Products and Services Are Taxable?
Physical goods are taxable in virtually all sales tax jurisdictions, with some exemptions for necessities like groceries (in many states) and prescription medications. The rules for services are much more varied. Most traditional services — haircuts, legal advice, accounting — are not taxable in most states. However, digital services, software as a service (SaaS), streaming services, and repair services are increasingly taxable as states update their tax codes to capture the modern digital economy.
As a freelancer or small business providing services, you need to determine whether your specific services are taxable in each state where you have clients and nexus. The same service can be taxable in one state and exempt in another. For example, web design services are taxable in some states but not others. Checking each state's Department of Revenue website or consulting a tax professional is the safest approach.
💡 Pro Tip: Use the Streamlined Sales Tax Project
The Streamlined Sales Tax Governing Board (SSTGB) provides simplified registration and filing for member states. If you sell to customers in multiple states, registering through the Streamlined Sales Tax Registration System (SSTRS) allows you to register in all 24 member states simultaneously with a single application. This is particularly useful for e-commerce businesses with customers in many states.
Registering to Collect Sales Tax
Once you determine you have nexus in a state, you must register for a sales tax permit or seller's permit with that state's Department of Revenue before you begin collecting tax. Operating without registration — collecting tax but not remitting it, or not collecting tax you are required to — exposes you to penalties and back-tax assessments.
Registration is typically free and can usually be completed online. You will need your business name and address, federal employer identification number (EIN) or Social Security number, a description of what you sell, and your expected monthly sales volume in that state. Upon approval, you will receive a permit number and instructions on your filing schedule and remittance deadlines.
Collecting Sales Tax from Customers
Once registered, you must collect the correct rate of sales tax on taxable transactions with customers in states where you have nexus. Sales tax rates vary by state and often by county, city, or special district within a state. The combined rate in some localities can exceed 10%. Using a tax rate lookup tool or sales tax automation software ensures you apply the correct rate.
Sales tax should be a separate line item on your invoices — clearly labeled as sales tax with the applicable rate. Never absorb sales tax into your price without showing it separately, as this creates accounting complications. The amount you collect belongs to the state; it should be tracked separately from your revenue and held until you remit it.
Filing and Remitting Sales Tax
Filing frequency depends on your sales volume in each state. High-volume sellers typically file monthly. Lower-volume sellers may file quarterly or annually. Each state sets its own filing schedule when you register. Missing a filing deadline results in penalties and interest, even if no tax was due for that period — many states charge a minimum late filing penalty regardless of the amount owed.
Remit the exact amount you collected in tax during the period. Keep detailed records of all taxable transactions, the tax rate applied, and the amount collected from each customer. These records are essential if you are ever audited. Many states conduct regular audits of registered businesses, and your records must support the amounts reported on your returns.
Handling Exempt Sales
Some customers are exempt from sales tax: resellers who will resell the goods (and collect tax from their customers), non-profit organizations, government entities, and certain industries. To document an exempt sale, obtain a valid exemption certificate from the customer before completing the transaction. Keep these certificates on file — if you are audited and cannot produce certificates for sales you treated as exempt, you may owe the tax plus penalties.
Never accept a verbal claim of exemption. Require written documentation for every exempt sale. The format and requirements for exemption certificates vary by state, so verify that the certificate you receive is valid for the state where the sale is sourced.
Sales Tax for Online and Remote Sales
If you sell products or digital services online to customers in multiple states, your sales tax obligations can become complex quickly. E-commerce businesses must track sales by state, monitor nexus thresholds in each state, register when thresholds are crossed, and file returns in each state where they are registered. Sales tax automation software integrates with e-commerce platforms, automatically calculates the correct tax rate, and generates reports for filing — a significant time saver for businesses with sales in multiple states.
Staying current on economic nexus laws is essential because states continue to update their thresholds and rules. A business that was not required to collect sales tax in a state two years ago may be required to do so today based on sales growth. Review your nexus exposure annually and whenever your business enters new markets or increases sales volume significantly in any state.
Frequently Asked Questions
Do freelancers need to charge sales tax?
It depends on what services you provide and where your clients are located. In the US, many services are not subject to sales tax, but digital services, software, and some professional services are taxable in an increasing number of states. Physical product sales are almost always taxable. Check the rules for each state where you have clients, and consult a tax professional if you are unsure about your specific service type.
What is sales tax nexus?
Nexus is a legal connection between your business and a state that requires you to collect and remit that state's sales tax. Physical nexus exists when you have a physical presence in a state — an office, employees, or inventory. Economic nexus is triggered when your sales to customers in a state exceed a certain threshold, usually $100,000 in sales or 200 transactions per year. After the 2018 South Dakota v. Wayfair Supreme Court decision, economic nexus applies in most US states.
How do I register to collect sales tax?
Each state where you have sales tax nexus requires a separate registration. Visit the state's Department of Revenue website to register for a seller's permit or sales tax license. Registration is usually free. Once registered, you will receive instructions on your filing frequency (monthly, quarterly, or annually, depending on your sales volume) and remittance deadlines.
What happens if I fail to collect or remit sales tax?
Failure to collect and remit required sales tax can result in significant penalties, interest charges, and back taxes assessed by the state. In serious cases, states can pursue legal action. If you discover you have not been collecting required sales tax, it is better to self-report and address the issue proactively than to wait for an audit. A tax professional can help you navigate voluntary disclosure programs that may reduce penalties.
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