Why US Sales Tax Can’t Be an Afterthought

Published on:

April 5, 2025

What Is US Sales Tax?

US sales tax is a state-level indirect tax that businesses collect from customers at the point of sale and remit to the state. Unlike VAT systems, sales tax is not applied at every step of the supply chain; it’s charged just once when the end customer makes a purchase.

There’s no federal sales tax. Instead, each state decides:

Whether it imposes sales tax at all
What types of products and services are taxable
What rates apply (including county and city-level add-ons)
Who needs to register and collect

Currently, 46 states and Washington, D.C. impose sales tax. Four states - Delaware, Montana, New Hampshire, and Oregon - do not.

If your business meets the criteria in a given state, you are required to:

Register for a sales tax permit
Collect tax from customers in that state
File regular tax returns with the appropriate tax authority

But this only applies if you have nexus in that state, which we’ll explain next.

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What Is Nexus?

In the US, you're only required to collect sales tax in states where your business has nexus. Nexus is the point where sales tax obligations begin.

In simple terms, nexus means your business has a connection to a state that’s strong enough to require you to collect and remit sales tax there. Until you have nexus, you don’t owe sales tax in that state even if you’re making sales to customers there.

This concept exists because US sales tax is managed at the state level. States can’t require out-of-state businesses to collect tax unless they can establish that kind of connection. Nexus is how they do it.

It’s also the reason why two businesses selling the same product to the same state may have very different tax obligations; one might have nexus and be required to collect tax, while the other may not.

There are two main types of nexus: physical and economic.

i) Physical Nexus

This is created when your business has a physical footprint in a state, even if you’re not making sales there.

You may have a physical nexus if:

You have an office, a coworking space, or a store in the state
You store inventory or use warehouses there (even via third parties like Amazon FBA)
You have full-time or part-time employees working from the state
You regularly attend trade shows or operate pop-ups

Once any of these are in place, sales tax obligations apply regardless of your revenue.

ii) Economic Nexus

Even without a physical presence, you can establish nexus if your sales volume in a state crosses certain thresholds. This is called economic nexus.

Most states follow one or both of these triggers:

Revenue threshold: $100,000 in annual sales to customers in the state
Transaction threshold: 200 separate transactions in a year, regardless of total revenue

A few states set higher limits, like California, which uses $500,000 in annual sales. These thresholds typically reset every calendar year.

If you cross either threshold in a state, you're required to register and begin collecting tax there even if you've never set foot in it.

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Conditions for Sales Tax Collection

Once you establish nexus in a state, either through physical presence or economic activity, you are required to collect sales tax on transactions made with customers in that state.

But not all sales are treated the same. Two key thresholds determine whether the economic nexus applies:

i) Revenue Threshold

Most states define economic nexus using a revenue-based threshold. If your total sales to customers in that state exceed a certain amount in a calendar year, you are considered to have economic nexus.

The most common threshold is $100,000 in gross sales
A few states set higher thresholds (e.g., $500,000 in California)
Thresholds are typically based on gross, not taxable sales

Even if your margins are low or the products are partially exempt, crossing the gross sales threshold triggers a registration requirement.

ii) Transaction Count Threshold

Some states apply a second test: transaction volume.

A typical threshold is 200 separate transactions per year
This applies even if your total revenue is well below $100,000

For example, if you sell a $10 product 250 times to customers in a state, you may need to register even if the total revenue is only $2,500.

Many states use either threshold revenue or transaction count as the trigger. You don’t need to meet both.

As your business scales, these thresholds are easy to cross without realizing it. That’s why ongoing monitoring is essential. In the next section, we’ll walk through what to do once you determine you’ve established nexus.

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What to Do After You Hit Nexus?

Establishing nexus in a state doesn’t automatically mean you’re compliant. Once you’ve crossed the threshold, there’s a clear process you need to follow from registration to tax collection and filing.

Here’s how to move from nexus determination to full compliance:

Step 1: Determine Where You Have Nexus

Start by identifying every state where you’ve crossed a nexus threshold, either physically or economically.

Track sales by state on a monthly or quarterly basis
Monitor both revenue and transaction counts
Set alerts for key thresholds (e.g., $100,000 or 200 transactions)
Don’t forget about physical triggers like employees, inventory, or office space

Note: Four states - Delaware, Oregon, New Hampshire, and Montana - don’t impose sales tax. You don’t need to register there, even if you have customers.

Step 2: Register With the State

Before you begin collecting tax, you must register with each state’s tax authority and receive a sales tax permit.

Registration is done state-by-state. There’s no centralized federal system
You'll need to provide business and contact information
Approvals typically take 1–2 weeks
Once approved, you’ll be assigned a filing frequency and access to the state’s tax portal

Registration creates the legal right to begin collecting tax and sets your compliance clock in motion.

Step 3: Start Collecting Sales Tax

Once registered, you must begin adding sales tax to customer invoices for taxable goods and services sold into that state.

Tax rates depend on:

Customer location (state, county, city)
Product or service category (some are exempt or taxed differently)
Sourcing rules (origin-based vs. destination-based states)

Rates can vary significantly even within the same state, so make sure your invoicing system calculates the correct total per order.

As a seller, you're acting as a tax collector on behalf of the state. The funds you collect are not revenue; they must be remitted.

Step 4: File and Remit on Time

Filing and remittance are based on volume. Each state sets its own filing schedule based on how much sales tax you owe.

Filing frequencies typically look like this:

Tax Collected Monthly	Filing Frequency
Over $20,000	Monthly
$5,000–$20,000	Quarterly
Less than $50	Annually

Even if you don’t owe any tax during a given period, you’re still required to file. These are called $0 returns and are just as important for staying compliant. Skipping them can trigger late notices, penalties, or account suspensions even if your business had no sales activity.

After you’re assigned a filing frequency, you’re expected to stick to it unless the state notifies you of a change. Most filings are submitted online through the state’s tax portal and are due on a consistent monthly, quarterly, or annual cadence.

Once you’ve completed this cycle - nexus check, registration, collection, and filing, you’re compliant in that state. But there’s more to know about exemptions, tax rates, and how to handle international sales. Let’s look at that next.

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What Types of Transactions Are Exempt from Sales Tax?

Just because you’ve registered and started collecting sales tax doesn’t mean you need to apply it to every transaction. Some sales are exempt by law, either because of what you're selling or who you're selling to.

Here are some common exemptions to be aware of:

i) R&D Sales (State-Specific)

Some states offer exemptions for items or services used in research and development. This applies especially to early-stage tech or biotech companies purchasing lab equipment, prototyping tools, or specialized services. Please note that:-

Not every state offers this exemption
You may need to fill out additional documentation

ii) Resale Transactions

A business that plans to resell the product rather than use it usually doesn’t need to collect sales tax. Here are the conditions:-

The buyer must provide a resale certificate
You must keep that certificate on file
Applies mostly to physical goods, but some states extend this to software or licenses

SaaS and Software: Depends on the State

Some states tax SaaS; others don’t. A few tax only the download version of a product, but exempt cloud-based versions.

New York, Texas, and Washington often tax SaaS
California generally does not tax cloud-based SaaS
Some states exempt B2B software but not B2C

If you sell SaaS, you need to review taxability state by state. You can’t assume the rules are consistent.

Bottom line: Exemptions don’t mean you skip documentation. You still need to maintain the correct forms and proof in case of an audit.

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How Is Sales Tax Calculated?

Unlike countries with a flat national tax, the US system combines tax rates from multiple layers of government. The final rate you charge depends on a mix of factors, primarily where the buyer is, what you're selling, and in some cases, where you’re based.

Here are the three key variables behind every sales tax calculation:

1. Buyer’s Address (Destination-Based)

Most states use destination-based sourcing, which means the sales tax rate is based on where the customer is located, not your business.

So if you’re a California company selling to a customer in New York City, you must apply the rate that applies to that NYC zip code.

2. Seller’s Address (Origin-Based)

A few states use origin-based sourcing for in-state sales. In those cases, the tax rate is determined by your business location, not the buyer’s.

Origin-based states include Texas, Pennsylvania, and Arizona, though only for intra-state transactions.

For interstate sales, destination-based rules almost always apply.

3. Product Type

Some goods and services are taxed differently or not at all.

SaaS and digital goods: Taxable in some states, exempt in others
Professional services: Often exempt, unless bundled with tangible goods
Physical products: Almost always taxable, but with exceptions for food, medicine, books, etc.

To get the rate right, you need to know whether your product is taxable, and if so, whether it qualifies for any exemptions in that state.

Because of this variation, the combined tax rate for a sale can include:

A state tax (e.g., 4–7%)
A county tax (e.g., 1–2%)
A city or district tax (e.g., 0.5–2%)

In high-tax cities like Chicago or Seattle, this can push the total rate above 10%.

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How Do Tax Rates Vary by Location?

In the US, sales tax rates don’t stop at the state level. Most states allow counties, cities, and even special tax districts to add their own rates on top of the state rate. That means two customers in the same state can face different total tax amounts based on where exactly they live.

How the Layers Stack Up

Let’s say your business sells to a customer in Los Angeles, California. Here’s how the rate could break down:

California state tax: 7.25%
Los Angeles County tax: 1%
City or special district tax: 1.5%

Total tax collected: 9.75%

This variation happens within the same state and is one of the reasons US sales tax can’t be applied with a single flat rate. The system requires tools or processes that can look up and apply the correct rate for each transaction.

Special Tax Districts

Some areas charge additional sales tax to fund local projects like transportation, education, or stadiums. These are called special tax districts and can apply even within the same zip code.

You won’t know these exist just by glancing at the buyer’s state or city. You need precise address-level detail to apply the correct total rate.

Even if you’re only selling into a few states, getting tax rates wrong can lead to under-collection, overcharging customers, or compliance issues. Here’s why this location-level complexity matters:

You can’t rely on default state rates for invoicing
You’ll need tax software that pulls accurate rates based on the shipping address
Misapplied rates can lead to underpayment penalties or refund requests from customers

In short: Location matters more than you think. Even if you're only selling into a few states, the city and county-level variations mean your tax logic needs to go deeper than just checking a dropdown.

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How International Sales Tax Works (EU, UK, Canada)

Unlike the US system, where the seller must calculate, collect, and remit sales tax based on where the buyer is located, many international tax systems shift the responsibility to the buyer, especially in B2B transactions.

This model is called the Reverse Charge Mechanism, and it’s widely used in the EU, UK, and Canada for cross-border transactions.

What Is Reverse Charge and How Does It Work?

In a reverse charge setup, the seller doesn’t collect tax at all. Instead, the buyer self-assesses and pays the tax directly to their government.

Let’s say a US-based company sells software to a VAT-registered business in Germany:

The US seller doesn’t charge tax on the invoice
The German buyer calculates the applicable VAT, reports it, and pays it locally
The seller must state clearly on the invoice that the reverse charge applies

This makes B2B international sales more manageable, especially for companies that don’t want to register for VAT/GST in every country they sell to.

Responsibilities: Seller vs. Buyer

Here’s how the seller’s role in international B2B sales compares to US sales tax obligations:

Responsibility	US Sales Tax	EU/UK/Canada Reverse Charge
Who collects the tax?	Seller	Buyer
Who remits to the government?	Seller	Buyer
Registration required?	Yes, after Nexus	Not required for most B2B sales
Invoice requirement	Tax rate and amount shown	Reverse charge note only
Buyer tax ID verification	Not applicable	Required (e.g., VAT ID)

This difference in structure is why many US-based SaaS and service companies don’t need to register for tax in international markets, at least for B2B.

That said, sellers still have a few responsibilities under the reverse charge model. You must verify that the buyer is tax-registered (for example, by collecting a valid VAT ID in the EU), include a clear reverse charge statement on the invoice, and maintain proper documentation in case of an audit. While you're not collecting or remitting tax, you're still expected to prove that the transaction qualifies for reverse charge treatment.

The rules change if you're selling to individual consumers or operating with a physical presence abroad. But for most cross-border B2B setups, reverse charge keeps things simple and low-friction.

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How Inkle Helps With Calculating US Sales Tax

Once you cross nexus thresholds, compliance isn’t just about knowing what to do - it’s about being able to do it consistently across states, systems, and filing deadlines. That’s where Inkle steps in.

We help simplify US sales tax obligations by combining automation, alerts, and human support in one workflow.

i) Nexus Tracking and Alerts

Inkle tracks your revenue and transaction volumes across states to monitor when you’re nearing or crossing economic nexus thresholds.

Get real-time alerts when you're approaching key state thresholds
Stay ahead of registration requirements
Avoid late filings or missed compliance windows

ii) One Dashboard, All States (Coming Soon)

We’re building a centralized dashboard that gives you a clear view of:

States where you currently have nexus
Where you’re registered
Upcoming deadlines for filing or renewals
Nexus conditions, you’re close to triggering

Instead of juggling multiple state portals, you’ll be able to monitor everything in one place.

iii) Registration and Filing - Handled for You

Inkle partners with a specialized tax team to handle:

State-by-state registration ($200 per state)
Recurring sales tax filings ($75 per filing)
Portal setup and ongoing compliance management

You don’t need to manage forms, deadlines, or local nuances on your own—we’ll coordinate everything with tax experts.

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Automation Inkle is Building for Sales Tax

Sales tax compliance tends to get messier with scale. As you expand into more states, the number of invoices, filings, and deadlines increases. To manage this, Inkle is building automation that simplifies the entire process - from tracking thresholds to submitting returns.

i) API Connections to State Portals

We’re building integrations that connect directly with state tax systems. This will allow Inkle to submit sales tax filings without requiring you to log into each portal separately. It reduces manual errors and saves hours of administrative work every month.

ii) Auto-Calculation of Tax Rates

Sales tax rates vary not just by state but by city, county, and even product category. Our calculation engine will determine the correct rate automatically, factoring in the buyer’s location and what you're selling. No need to look up tax tables or patch together logic in spreadsheets.

iii) Smart Invoice Sync

Right now, invoice uploads are manual. We’re building integrations with tools like QuickBooks, Stripe, and Shopify so that Inkle can fetch invoice data directly. This will support real-time tracking of economic nexus and help prepare filings automatically.

This automation is designed for startups and growth-stage businesses that want to stay compliant without building a tax ops team. It reduces manual work, increases accuracy, and gives you one less thing to worry about.

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Stay Compliant Without Slowing Down

Sales tax can feel overwhelming, especially when every state plays by its own rules. But it doesn’t have to be a blocker.

Inkle helps you track where you’re exposed, file where required, and stay ahead of changing thresholds without building a finance team just to manage tax. Whether you’ve just crossed your first nexus trigger or are filing in ten states, we’ve got you covered.

Talk to us, and we’ll walk you through your next steps.

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Frequently Asked Questions

1. Do I need to register in every state where I have customers?

No. You only need to register in states where you have nexus either physical or economic. Just having customers in a state isn’t enough on its own.

2. How often do I need to file returns?

That depends on your sales volume in each state. High-volume states may require monthly filings, while others assign quarterly or annual schedules. Once assigned, the frequency must be maintained even if no sales occur.

3. What happens if I fail to collect sales tax?

You may still owe the tax out of pocket, along with interest and penalties. Failing to collect doesn’t eliminate your obligation it only shifts the burden from the customer to the business.

4. Are SaaS products taxable in every state?

No. Some states tax SaaS and digital goods, others don’t. Taxability also varies based on whether the buyer is a business or a consumer. You must check the rules state by state.

5. What should I do about international customers?

For B2B sales to the EU, UK, or Canada, reverse charge rules typically apply. You don’t collect tax, but you must confirm the buyer’s registration and note it on the invoice. Consumer sales may trigger registration depending on volume.