If you’re a merchant selling in the US, few things bring more confusion or urgency than figuring out how to charge sales tax, especially when you sell across state lines. Each state has its own rules, and ecommerce laws keep evolving.
Getting your sales taxes wrong can lead to penalties, missed payments, and unhappy customers. But staying compliant doesn’t have to be overwhelming.
With Shopify Tax, it’s easy to know when and where you need to collect sales tax and how to collect it accurately, with product- and location-specific rates. Shopify Tax will also help you to automatically file and remit what you owe to the relevant authorities.
Read on to learn more about sales tax for small businesses, including when to charge sales tax for your ecommerce store.
What is sales tax?
Sales tax is a consumption tax paid to the government on the purchase price of goods and services. It’s typically paid by the end customer at the point of sale and collected by the seller, who remits it to the government regularly.
Shopify has a helpful sales tax reference page for learning the sales tax rates, collection rules, and nexus conditions for each state.
The District of Columbia and 45 states collect sales and use tax at the state level. In addition to state-level tax, many local jurisdictions, such as cities, counties, and special districts, also impose local sales taxes.
Five states do not collect state-level sales tax:
- Alaska
- Delaware
- Montana
- New Hampshire
- Oregon
However, it’s worth noting that some local jurisdictions in Alaska do levy local sales taxes.
When to charge sales tax
The good news is that you’re required to collect sales tax only if you meet the criteria for establishing a significant business presence in the state. This conditional obligation is referred to as the sales tax nexus.
Most products and services are subject to sales tax, but some are exempt from it or subject to a different rate, depending on the state.
To determine where your business has nexus and whether your products are taxable, follow the steps below.
Sales tax obligations for online sellers
In the US, online sellers are obligated to collect sales tax if they have a nexus in a particular state. If the state (or states) where you sell determines that you meet the requirements, you must collect sales tax on eligible online orders. You can accomplish that by incorporating sales tax into your product pricing or adding it at checkout.
Both approaches have their pros and cons. Extra costs at checkout are the biggest reason for online cart abandonment. Including sales tax in your product prices prevents customer sticker shock at checkout, but makes your products more expensive. This can be an issue if you’re mainly competing on price.
If you’re required to collect sales taxes, you’re also obligated to keep accurate sales tax records, including how much you’ve collected, and to file your sales tax return with state authorities.
Business structure considerations (LLCs and corporations)
Your business structure can shape how you handle sales tax. LLCs and corporations often have different sales tax registration and reporting responsibilities than sole proprietors.
Some states require businesses to register for a sales tax permit under their legal entity name, and you may need to file taxes separately for each entity if you operate in multiple states.
You’ll also want to consider liability. Sales tax errors, like failing to collect or remit, can lead to fines. As a corporation or LLC, you may have some legal protection, but you’re still responsible for keeping your tax records clean and up to date.
Before you register, it’s smart to consult with a tax professional to make sure your business structure aligns with your sales tax responsibilities.
Sales tax for services
If you sell services instead of (or alongside) physical products, your sales tax obligations might look different. While most states tax tangible goods, the taxation rules for services are less consistent and often more complex.
Your obligation to collect sales tax—or not—depends on what you offer and where your customers are located. Some states tax certain types of services, while others don’t tax any.
Four main service categories
Most services fall into one of four buckets, and each is treated differently for tax purposes:
- Professional services (like legal, accounting, or consulting). These are typically exempt from sales tax in most states.
- Personal services (like salon or cleaning services). These may be taxable services, depending on the state.
- Digital services (like streaming or software subscriptions). These are increasingly taxed, especially as digital commerce grows.
- Property services (like repairs and installations). Often taxed, particularly when tied to a physical product.
State-by-state service taxation
Each state sets its own rules when it comes to taxing services. For example:
- In Texas, many services, including telecommunications, data processing, and amusement services, are taxable.
- In California, most services are not taxable unless they involve physical goods or fall into a specific taxable category.
- In New York, services like information processing and certain software-related services are subject to tax.
To stay compliant, check your state’s specific rules or use a sales tax automation tool (like Shopify Tax) to help determine whether the services you sell are taxable.
How to charge sales tax
- Determine where you have nexus
- Ensure your products are taxable
- Understand resale certificates and B2B exemptions
- Register for a sales tax permit
- Set up sales tax collection in Shopify
- Prepare your sales tax reports
- File your sales tax returns
1. Determine where you have nexus
Nexus is established when you meet the requirements for a business presence in a state. Before 2018, this meant a physical presence, such as having a warehouse.
With the precedent set in South Dakota v. Wayfair, where the Supreme Court ruled in favor of the state’s entitlement to sales tax from the out-of-state seller, many states have updated their definition of nexus to include remote sellers with no physical presence.
As a result, nexus can now exist based on either a physical or an economic presence in a state. Now, all sellers who have generated enough sales in a given state to qualify must pay state sales taxes in all applicable situations.
Physical nexus
Depending on the state, a physical nexus can be anything from:
- An office
- An employee residing in or traveling to the state
- A warehouse
- A distribution center
- A third-party affiliate
- Stored inventory
- Temporary physical business in a state, such as at a trade show or craft fair
Economic nexus
If you meet certain economic nexus thresholds in a state, you must register for sales tax, even without a physical presence.
Here’s what’s accurate in 2025:
- In Illinois, the threshold continues to be $100,000 in sales or 200 separate transactions in a 12‑month period. Starting January 1, 2026, only the $100,000 sales threshold will apply.
- In Texas, economic nexus is only triggered when you exceed $500,000 in gross revenue shipped into the state during the past 12 months. There’s no transaction threshold.
If you’re unsure whether you’ve created a physical or economic nexus in a state, consult that state’s tax authority, and use a sales tax tool (like Shopify Tax) that notifies you and tracks nexus thresholds automatically in Settings → Taxes and duties → United States → Manage tax liability.
Tax sourcing rules
Typically, states tax based on destination sourcing (the state where the customer receives the order), not origin sourcing (where the seller processes the order)—but not always.
Here’s the difference between origin and destination tax sourcing:
- Origin-sourced sales are taxed according to your location as the seller. Origin sourcing may apply when property is shipped wholly within a single state. For example, property withdrawn from a Texas warehouse and shipped to a Texas recipient may be taxed at the state rate based on the warehouse location.
- Destination-sourced sales are taxed according to where the buyer takes possession of the item sold. For example, property shipped from outside of Texas into Texas may be taxed at the rate where the recipient of the goods is located.
Most states use destination sourcing, but some states and districts apply mixed sourcing. Always check the tax regulations in the states where you do business.
2. Ensure your products are taxable
While most tangible personal property (like your product line) is subject to sales tax, some property is exempt from sales tax or subject to a different rate.
Nontaxable property can include some or most:
- Services, such as legal or home renovation services
- Digital products, such as music, video games, or software
- Food and groceries
- Prescription and non-prescription drugs
Whether those items are taxable or not depends on the state taxation laws. For example, certain types of clothing are considered nontaxable in states like Minnesota and New York, but this is not the case in every state.
Services and digital products can be especially confusing, as the line between the two is often blurred. Many services today are delivered through digital products, such as advertising or software-as-a-service (SaaS) products.
Shopify Tax helps you sort that out by suggesting categories for each of your products that you can review, revise, and approve. Accurate sales tax rates get applied automatically when you add new items to your store, and those rates are always kept up to date.
If you sell a product you think might be nontaxable, check with state tax authorities or a tax professional to make sure.
3. Understand resale certificates and B2B exemptions
Not every transaction is subject to sales tax, especially when you’re selling to other businesses.
If you sell goods to a reseller or wholesaler, they may give you a resale certificate. This document allows them to purchase items tax-free because they’re planning to resell those goods to their own customers.
As the seller, it’s your job to collect and store these certificates as part of your tax records.
Keep in mind:
- Resale certificates are issued at the state level, so ensure the certificate is valid in the state where the sale takes place.
- If you don’t collect a resale certificate when required, you could be held liable for the sales tax.
Beyond resale, some business-to-business (B2B) sales are exempt from sales tax for other reasons, like sales to government agencies or nonprofits, or transactions involving exempt goods.
If you run a wholesale business or sell to other businesses, it’s worth reviewing your buyers’ exemption status to be sure you’re compliant.
4. Register for a sales tax permit
States where you have nexus require you to secure a sales tax permit before you begin collecting sales tax. To register for a sales tax permit, go to your state revenue authority’s website or give them a call.
States use sales tax funds to pay for things like schools, roads, and public safety, so it matters to them that merchants with nexus in their state collect and remit sales tax.
Sales tax permits are free in most states, while others cost a small fee, ranging from $10 to $100. Do a web search for “apply for sales tax permit” and the name of the state to get more information.
Once you’ve registered, your state will tell you when and how often to file sales taxes. This is generally monthly, quarterly, or annually, with most annual due dates falling in January.
Don’t skip this step, as it’s generally unlawful to collect sales tax without a permit. Here’s a sample sales tax permit application from the state of Florida to give you a sense of what to expect from this process.
5. Set up sales tax collection in Shopify
Once you’ve registered in the states where you have a sales tax nexus, it’s time to enable tax collection for your online store and other sales channels.
If you use Shopify, you can get started by going to Settings > Taxes and duties > United States. From there, choose your preferred tax service: Shopify Tax or Manual Tax. When you choose Shopify Tax, you’ll automatically collect sales tax at checkout using hyper-accurate product- and location-specific rates.
“We no longer need to manually update sales tax information, saving us countless hours and reducing the risk of errors,” says Ailee Fei, who uses Shopify Tax for her business, Daily Charme. “It’s been a game-changer for our small business.”
Merchants choosing Manual Tax will need to take additional steps to configure their tax settings correctly. A complete overview of your options is available in the Shopify Help Center.
Once you’ve determined your preferred tax service, select the state where you’d like to activate tax collection and select Collecting taxes > Collect sales tax. Tax is now activated for that state and will be automatically collected from buyers in that state.
If you sell on multiple channels, you must enable them all to collect sales tax from buyers in states where they have a sales tax nexus. Again, this is fairly easy if you only have a sales tax nexus in one state. If you have a sales tax nexus in multiple states, check with every platform you sell on to make sure you’re collecting tax from the correct buyers.
6. Prepare your sales tax reports
If you prepare your own sales tax reports, take some time ahead of your filing deadline to figure out how much sales tax you’ve collected from buyers in every state where you have nexus.
The level of accounting reporting detail required varies from state to state. The majority of states want to know the amount of sales tax you collect from in-state buyers, broken down by county, city, or district.
If you file with Shopify Tax, your sales tax returns will automatically be generated for you according to each jurisdiction’s requirements. You can also use its sales tax report tool to demonstrate net sales and taxable sales, each broken down by state, county, and local jurisdictions, along with the exact reporting codes, and to filter and configure reports.
7. File your sales tax returns
Now comes the part where you report the sales tax you’ve collected from buyers to the states where you have a sales tax nexus.
If you’re preparing a report yourself, check with individual states on when and how to file and mark those sales tax due dates in your calendar.
If you didn’t collect any sales tax over a taxable period, many states still require you to file what is known as a “zero return.” A zero return lets states know that, while you didn’t collect sales tax during this period, you’re still in business. If you forget to file a zero return, you can be charged a penalty.
It literally pays to file your sales tax returns on time: Many states realize sales tax is a burden and will award merchants a sales tax discount for paying early or on time. Don’t leave that money on the table.
If you use Shopify Tax automated filing, you don’t have to worry about navigating different government websites and processes, since it automatically submits your filings and tracks deadlines. It also ensures that any applicable on-time filing discounts are included in your tax return so that the savings are yours to keep.
Understanding sales tax rates by state
Overview of state sales tax rates
Sales tax rates vary by state and typically range between 2.9% and 7.25%. Here’s a breakdown of the rates by state, as of 2025.
| State sales tax rate (2025) | States |
|---|---|
| 7.25% | California |
| 7.00% | Indiana, Mississippi, Rhode Island, Tennessee |
| 6.875% | Minnesota |
| 6.85% | Nevada |
| 6.63% | New Jersey |
| 6.50% | Kansas, Washington |
| 6.25% | Illinois, Massachusetts, Texas |
| 6.00% | Florida, Kentucky, Maryland, Michigan, Pennsylvania, South Carolina, Iowa, West Virginia |
| 5.75% | Ohio |
| 5.60% | Arizona |
| 5.50% | Maine, Nebraska |
| 5.30% | Virginia (4.30% state base) |
| 5.00% | North Dakota, Wisconsin (rounded from other data), Louisiana (state cut) |
| 4.70% to 8.7% | Utah (4.7% state base) |
| 4.45% | Louisiana (see note below) |
| 4.00% | New York, Hawaii, Alabama, Wyoming, Georgia |
| 2.90% | Colorado |
| 0% (no state sales tax) | Alaska, Delaware, Montana, New Hampshire, Oregon |
Variations in local sales taxes
It’s not just state-wide sales tax you’ll need to consider; some states have a “local option” that lets certain cities and counties add an additional tax rate onto the state sales tax.
In the state of Louisiana, for example, the state sales tax rate is 4.45%. The New Orleans parish charges an additional 5% in local taxes, making the total sales tax rate 9.45% if you have a nexus in the district. The New Orleans parish keeps the extra percentage, while the state sales tax is passed on to Louisiana state.
Exemptions and exceptions to sales tax
Common exemptions for nonprofits and charities
While specific rules vary by state, some online sellers are exempt from sales tax if they sell to nonprofits and charities.
These exemptions can include:
- Donations to nonprofits
- Purchases made for charitable purposes
- Products bought for official use by government or educational institutions
Exemptions for certain types of products
The majority of products are taxed at the default sales tax rate determined by state and local governments. However, certain products may be taxed at lower rates or exempt depending on local rules and regulations.
Online retailers selling the following products tend to be exempt from charging sales tax on those items:
- Non-prepared food
- Medical equipment and prescription medications
- Educational materials (e.g., college textbooks)
Shipping is a little less straightforward. In most states, shipping charges are not taxable if they’re separately stated on the invoice and not marked up. However, some states consider shipping charges part of the sale price and, therefore, taxable.
State-specific exemptions
Not everything you sell is automatically taxable, and whether or not you charge sales tax can depend on what you’re selling and where your customer is buying.
Each state maintains a list of sales tax exemptions, which means an item could be taxable in one state and completely tax-free in another.
Common product-based exemptions
Many states exempt certain categories of goods, especially those considered essential. Examples include:
- Grocery stores. Often tax-exempt or taxed at a reduced rate (e.g., California and Texas exempt most unprepared food).
- Clothing. Some states, like Pennsylvania and New Jersey, exempt most clothing items, while others tax them fully or partially.
- Prescription medicine and medical devices. Usually exempt nationwide, though some over-the-counter items may be taxed.
- Digital goods. Tax rules vary widely. For example, ebooks may be taxed in one state but exempt in another.
Buyer-based exemptions
Certain types of buyers, like nonprofits, government entities, or resellers, may also be exempt from sales tax. In these cases, you’ll need to collect the correct exemption documentation, such as a resale certificate or tax exemption form, and keep it on file.
If you don’t know whether your products are taxable in a specific state, Shopify Tax can help you determine taxability by product category and location, so you charge the right rate every time.
How to apply for sales tax exemptions
If you’re eligible, you can apply for a sales tax exemption certification from the US Department of State online portal. You’ll need to provide this certificate to remove the sales tax on exempt purchases when buying items from a business that charges sales tax.
Common sales tax compliance mistakes
Sales tax can be tricky to get right, especially when you’re selling across state lines or scaling quickly. Even seasoned merchants make mistakes that can lead to penalties, back payments, or customer confusion.
Here are some of the most common compliance errors, and how to avoid them.
1. Not registering in states where you have a nexus
Mistake: Overlooking states where you’re required to collect sales tax.
Fix: Use tools like Shopify Tax to monitor which states you might have economic or physical nexus in, and register as soon as you cross the threshold.
2. Charging sales tax on non-taxable items
Mistake: Collecting tax on products that are exempt in certain states (like groceries or clothing).
Fix: Review state-specific tax rules and categorize your products accurately in Shopify to apply the correct rate.
3. Failing to collect resale or exemption certificates
Mistake: Not requesting documentation from wholesale or tax-exempt buyers.
Fix: Always collect and store valid resale or exemption certificates before making tax-free sales.
4. Using outdated tax rates
Mistake: Manually entering rates and forgetting to update them when laws change.
Fix: Automate your tax calculations with a tool that pulls current, location-specific rates. Shopify Tax does this for you.
5. Missing filing deadlines
Mistake: Forgetting to file sales tax returns on time, which can result in fines or interest charges.
Fix: Set reminders based on each state’s filing frequency, or use automated filing where available.
6. Applying tax based on your location and not the buyer’s
Mistake: Charging your local tax rate instead of the correct destination-based rate (required in most states).
Fix: Use destination-based tax settings to ensure accurate calculations for each customer.
7. Ignoring local sales tax layers
Mistake: Only accounting for the state rate and forgetting local (city, county, or district) taxes.
Fix: Use tax software that calculates total combined rates based on ZIP code and product type.
How to keep track of sales tax collected
Suppose you’re selling on Amazon, eBay, Etsy, or another marketplace platform. In that case, these companies are now obligated to collect and remit taxes on behalf of their sellers in states with marketplace facilitator laws. You should still confirm the marketplace is collecting and remitting tax on your sales made through their platform.
Shopify makes it easy to track sales tax collected with Shopify Tax. You can track your obligations in each state, and automatically collect tax at checkout with product and location accuracy.
With Shopify Tax, there’s no need to complete manual state tax returns, either. Shopify Tax supports automated filing enrollment, so you can get notified when your tax returns are ready and automate submissions to avoid late penalties.
What happens if you don’t collect sales tax?
Skipping out on local sales tax can have serious consequences for your business. If you don’t collect it, you’re still liable for the uncollected amount and will have to pay out of pocket. You may face penalties and interest charges, too, which can quickly add up.
In the worst-case scenario, state tax authorities may impose hefty fines, revoke your sales tax license, or even file criminal charges. Some states might also place liens on your business assets or personal property to recover the owed taxes.
It’s easier (and cheaper) to just pay tax and stay on the right side of the law.
Is sales tax complicated?
Yes. Are you alone? No.
Once you’ve run through these steps, you should have a basic handle on how to charge sales tax. Still feel overwhelmed? That’s why many business owners consult a tax professional to ensure they’re compliant with sales tax laws.
If your business is powered by Shopify, consider the benefits of using Shopify Tax. Built to help business owners manage their tax liability in the United States, Shopify Tax automates a lot of sales tax processes for you, and provides guidance on how to register and remit sales taxes with the relevant authorities.
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When to charge sales tax FAQ
How do you know if you need to charge sales tax?
Check the conditions for establishing a physical or economic nexus in the states you’re selling in. If you meet the conditions in a given state, you should collect sales tax from customers. Consult a tax professional if you’re unsure about how to proceed.
How do you properly calculate sales tax?
Sales tax is calculated by multiplying an item’s selling price by the state’s tax rate (e.g., $20 x 7%). The exact rate varies by the state, taxing jurisdiction, product category, and other factors.
How are specific products taxed?
If you use Shopify Tax and categorize your products, Shopify automatically applies product-specific rates on your behalf. If you use another tax service, you can manually exclude or override the default sales tax rate for specific products. If you manually adjust product-specific rates, it’s important to keep up with rules and rate changes, so your products are taxed accurately.
What is the difference between sales tax and VAT?
Sales tax and value-added tax (VAT) are both consumption taxes. However, where sales tax is only applied at the final point of sale, VAT is applied at each stage of the supply chain process where the goods are bought and sold. The US does not have a VAT.
Should I add tax to my invoice?
Whether you should add sales tax to an invoice depends on what you’re selling and whether you have nexus in a particular state.
Do I need to charge sales tax for online sales?
Generally speaking, you’ll need to collect sales tax if you have a physical nexus (e.g., a retail store, office, or warehouse) in a state that charges sales tax. You may also need to charge sales tax if you exceed the economic threshold for a particular state.
How often do I need to report sales tax?
Each state has its own regulations. Sales tax reporting can be monthly, quarterly, biannual, or annual.
How do you charge someone sales tax?
You add the correct sales tax rate to the customer’s total at checkout, based on their shipping address and what they’re buying. Most ecommerce platforms, like Shopify, can calculate this automatically using up-to-date state and local tax rates.
What if a business does not charge sales tax?
If a business is required to charge sales tax and doesn’t, it may still owe that tax to the state, plus penalties or interest. It’s important to know where you have sales tax obligations and to collect taxes correctly to stay compliant.
