Sales tax in the USA

America has no classic VAT like the one we know in Europe. US sales tax is paid by customers at the register and does not have to be shown in the price, in the store or in an online shop. For the customer, that means a chocolate bar priced at 99 cents on the shelf costs more than a dollar at the register.

This lets businesses advertise low prices and stay more competitive. But how exactly does sales tax work? How high is it? And how does it apply to e-commerce? This article answers those questions.

For the basics of the American tax system, see our guide to the US tax system.

1An overview of sales tax

To really understand sales tax, it helps to start with the basics.

Every US state can set its own sales tax; there is no general rule. States with high state sales tax include California (7.25%) and Indiana and Mississippi at 7% each. Colorado, Alabama and Georgia, on the other hand, have a very low sales tax of 2 to 4%. But the state rate is not the end of it: in 38 US states, each county may add its own local sales tax, which can reach up to 7%. Away from home, where you know the rate, you can never be quite sure what you will pay at the register.

This complex mix of local and state sales tax also leads many businesses to avoid high-rate areas and to seek out states that combine low sales tax with other tax advantages. 

Here are the 10 most popular US states for foreign direct investment.

You will find more on the US tax system in our beginner's guide and in our compact introduction to US tax law for European entrepreneurs.

2What are resale documents?

Much like VAT in Europe, sales tax is charged on the sale of a product or service and paid to the state. In the end, though, only the end customer bears it. Intermediaries normally do not pay sales tax. 

That only holds if you can show the right documents. In everyday business, you both buy and sell products. If you can document that you are processing or reselling the products you buy, you do not pay sales tax on them. What matters here is resale documentation.

Keep in mind that every state has its own rules. One form may cover several states, but not all of them. There are two recognized multistate resale documents:

• Multistate Tax Commission’s Uniform Sales & Use Tax Certificate (38 states)
• Streamlined Sales Tax Exemption Certificate (24 states)

As mentioned, not every state accepts these documents. Sellers and intermediaries need to find out in advance exactly which documents they need so they do not owe sales tax in any state. This matters most for online sellers, since orders can come from any state, unlike a store with a fixed location.

3What does nexus mean?

If you run a regular physical store in one state, collecting and paying sales tax is fairly simple, because all your business happens in that one state. It gets more complicated when you run an online shop, work in e-commerce or simply make a lot of sales into other states.

This is where nexus comes in. The word means connection or link, and it is the test of whether a seller has a connection to the state it sells into. So if a local bike shop occasionally ships a bike to another state, it owes no sales tax there. Its sales tax only applies to sales in the state where the shop is located.

So how does this work for online shops? Online shops used to need a physical connection to the state they sold into too, but that rule has changed. The reason is simple: online businesses deliberately moved to sparsely populated states to avoid paying sales tax in big states like California or Florida.

Since 2018, the test is no longer physical presence but economic presence. In its Wayfair ruling, the US Supreme Court held that the old physical-presence rule was outdated in the age of e-commerce. Under the new principle, businesses owe sales tax in the following cases:

• Affiliate nexus: if a US-based business recommends your goods and earns a commission on the sale, you owe sales tax to that state. This applies even if you do not live in that state or in the USA.
• Economic nexus: economic nexus is a threshold of sales or transactions that triggers the duty to collect and pay sales tax. Each state sets its own threshold, so as a seller you need to know exactly which states you ship to. The most common threshold is $100,000 in annual sales; California, Texas and New York are at $500,000, and many states have since dropped the old 200-transaction rule.

Because this can be a lot of work, software can take it off your hands. TaxJar.com, for example, tracks all your sales into each state and alerts you as soon as you cross a state's threshold, now have nexus there and owe sales tax.

For the nexus laws in each state, see our detailed guide to economic nexus laws for US sales tax.

4Sales tax for marketplace sellers

Marketplace sellers have to deal with sales tax too. Whether a marketplace seller must register in a US state usually depends on several criteria: not just physical presence and a local warehouse, but also economic activity and customers in that state. Once a state has both marketplace facilitator laws and economic nexus laws, sellers face the question of registration.

We have a separate page on each state's laws for marketplace sellers. Find all registration requirements and a table of sales tax triggers here.

5What is actually taxable?

Not every product or service is subject to sales tax. And sometimes you simply cannot be sure which category an order falls into and which rate applies.

Say a business renews its IT infrastructure. It needs new computers, but it can also have the whole system set up with servers and extras. It has negotiated one total price with the provider, and that price now has to be taxed. Which tax treatment applies?

• Products: Normally all products are taxable, meaning sales tax must be charged and paid to the authorities. There are a few exceptions, such as food, which is exempt in most states. The same goes for prescription drugs.
• Digital products: Digital products come in many forms: visual products like films or videos, audio products like music and albums, or e-books. Most states treat digital products differently, so businesses should always check in advance whether they owe sales tax to the relevant authorities.
• Services: Services used to be exempt from sales tax, but that has changed. Today, sales tax is due on most types of services. How services are taxed varies from state to state. Most professional services, such as those of doctors or lawyers, are usually not subject to sales tax. Services connected with selling or manufacturing goods, on the other hand, are generally taxed. Where a job combines a service with materials (construction, for example), the two parts may have to be looked at separately. The work of the company or service provider is often free of sales tax, while the materials used can be taxable for the company itself or for the client, depending on the state's rules. The distinctions vary widely. Most states look at what the main purpose of the work is.

It is important to understand that sales tax only applies to the products or services sold. Where your profits are taxed is a separate question. This page covers sales tax only. Where your profits are ultimately taxed is something you need to look at on its own.

Our beginner's guide to US tax gives you a full overview of the US tax system.

6When do you have to pay the sales tax?

Collecting sales tax from customers in an online store is fairly easy. Passing it on to each state's tax authority is more complicated. Watch these points closely when you file your sales tax return:

1. Find the due date: in most states, it is the 20th of the following month. Taxes collected in April, for example, are due on May 20. The rule is not the same everywhere, though, so check beforehand.
2. Payment frequency: sometimes you will not have to pay sales tax every month, only once a year or every quarter. This depends heavily on your revenue: the higher your sales in a state, the more often you will likely have to pay.
3. Prepare the sales tax return: this may sound simple, but it isn't always. Some states have simple rules for the return and only ask for the exact amount of sales tax collected.

Other states, however, require a detailed report listing customer addresses and the local sales tax. It gets harder still when your revenue comes from several sources, each with its own sales tax due.

4. Submit the sales tax return: probably the easiest step is filing the return with the relevant authority. Most authorities let you simply upload or submit it online.

Here, too, we recommend TaxJar.com, software that helps you keep track of the jumble of different sales taxes and tax rules and handles many steps automatically.

7Import and export

As a business owner, you also need to keep import and export rules in mind, since they can involve not only taxes but also customs duties.

The US charges import duty on almost all goods. With dropshipping, it is paid not by the end customer but by the importer, meaning the seller. For a long time the duty was usually only around 3% of the value of the goods; since the tariff rounds starting in 2025, however, US trade policy has been in flux, so check the current rate for each product and country of origin.

Exporting is of course a good deal more complicated and depends above all on the destination country. Exporting to the EU, for example, has involved more work since mid-2021. Under the EU e-commerce VAT package, which took effect on July 1, 2021, overseas businesses must pay VAT when they export products to the EU. The rate depends on the destination country.

Both importing and exporting goods may require a special license. You can ask US Customs and Border Protection whether you need one.

8What US sales tax means for you

US sales tax can be confusing for consumers, and visitors in particular often don't understand why they pay more at the register than the shelf price. Yet the system offers huge advantages for business owners, especially dropshippers. Prices can be kept artificially low because the tax doesn't have to be included. With the right software for paying sales tax and the necessary resale documents, the rest is no great effort either, and it certainly beats the tax rules in the EU.

If you are thinking about selling in the US, setting up a company there may well be the smart move. To find out more, don't hesitate to get in touch with us.

You'll find more on the US tax system in our beginner's guide and in our compact introduction to US tax law for European entrepreneurs. Everything about the tax-free exempt LLC is here. Our Tax hub brings all tax topics together; ongoing sales tax support is handled by Mount Bonnell Advisors.

The key terms and facts about US health insurance are here.

In short

• Each state sets its own sales tax, and many add local surcharges. It is charged at the register and doesn't have to be included in the price.
• Resellers generally pay no sales tax if they can show the required resale documents.
• Since the 2018 Wayfair ruling, economic presence counts as well as physical presence. Each state sets its own sales threshold.
• Each state has its own rules on whether a product or service is taxable and when the tax must be paid.

How we help you

• Sales taxRegistration and returns in the states where you have nexus.
• Apply for an EINYour company's US tax ID, applied for by us.
• Corporation tax returnForm 1120 and Form 5472 for your US corporation.
• US Tax ConsultationYour US tax question, answered by people who know both sides.