US Sales Tax vs. Use Tax: What Small Businesses Need to Know

What Is Sales Tax?

Sales tax is a state-imposed tax collected by sellers at the point of sale on taxable goods and services. If your business sells a product or taxable service to a customer in a state with sales tax, you’re generally required to collect the tax from the buyer and remit it to the state’s tax authority.

The United States has no federal sales tax. Instead, 45 states (plus Washington D.C.) each administer their own system — with their own rates, rules, and definitions of what’s taxable. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no statewide sales tax, though some allow local governments to impose their own.

What Is Use Tax?

Use tax is the often-overlooked companion to sales tax. It applies when you purchase taxable goods or services without paying sales tax — typically because you bought from an out-of-state seller who didn’t collect it — and then use or consume those goods in your home state.

In other words: if the seller doesn’t collect sales tax, the buyer is still responsible for paying an equivalent amount directly to the state as use tax. The tax rate is usually identical to the state’s sales tax rate.

Use tax is one of the most frequently overlooked compliance obligations for small businesses. A common scenario: you order office equipment from an online retailer that doesn’t collect your state’s sales tax. You still owe use tax on that purchase — even if no one sends you a bill for it.

Sales Tax vs. Use Tax: Key Differences

Factor	Sales Tax	Use Tax
Who collects it?	The seller	The buyer (self-reported)
When does it apply?	At point of sale in your state	When taxable goods are used/stored in your state without tax paid
How is it paid?	Collected from customer, remitted to state	Reported and remitted directly by the buyer
Who enforces it?	State revenue departments	Same state revenue departments
Common trigger	In-store or taxable online sales	Out-of-state purchases, untaxed online orders

Economic Nexus: The Rule That Changed Everything

For most of the internet era, remote sellers only had to collect sales tax in states where they had a physical presence (an office, warehouse, employee, or inventory). That changed in 2018.

The Supreme Court’s ruling in South Dakota v. Wayfair, Inc. allowed states to require out-of-state sellers to collect sales tax based on economic nexus — meaning the volume of sales into a state, regardless of physical presence.

Today, virtually every state with a sales tax has enacted economic nexus thresholds. The most common trigger: $100,000 in annual sales or 200 transactions in a state. Once you cross those thresholds, you’re required to register, collect, and remit — even if you’ve never set foot in the state.

For small businesses that sell online or ship products across state lines, this is a significant compliance obligation that didn’t exist before 2018.

When Does Your Business Need to Collect Sales Tax?

Your obligation to collect sales tax depends on whether you have nexus in a state — a legal connection that triggers tax obligations. Nexus can arise from:

• Physical nexus: Having an office, warehouse, employees, or inventory in a state
• Economic nexus: Crossing a state’s sales or transaction threshold (usually $100,000/year or 200 transactions)
• Click-through nexus: Referral arrangements with in-state partners (in some states)
• Affiliate nexus: Relationships with in-state affiliates that generate sales

Once you have nexus, you must register with that state’s tax authority before collecting. Collecting without registering — or failing to collect when you should — both carry penalties.

What’s Taxable? It Depends on the State

Sales tax is never one-size-fits-all. What’s taxable in one state can be exempt in another. Common variables include:

• Software as a Service (SaaS): Taxable in some states (New York, Texas), exempt in others (Florida, California for most cases)
• Digital products: Downloads, e-books, and streaming services face inconsistent treatment state to state
• Services: Most states tax goods but only some tax services — and the rules vary widely
• Groceries and clothing: Often exempt or taxed at reduced rates
• Business-to-business (B2B) sales: May qualify for resale or manufacturing exemptions

This complexity is one reason many small business owners inadvertently overpay or underpay sales tax — and why professional tax guidance matters.

How to Stay Compliant: A Practical Checklist

Here’s what sales tax compliance looks like in practice for a small business:

1. Identify where you have nexus. Map your physical locations, remote employees, inventory storage, and annual sales by state.
2. Determine what you sell and whether it’s taxable. Get specific by product/service type and state — don’t assume.
3. Register in each nexus state. You must register before collecting, not after. Most states have online registration portals.
4. Configure your point-of-sale or e-commerce platform. Systems like Shopify, WooCommerce, and QuickBooks can automate collection — but only if configured correctly per state.
5. Track use tax obligations. Review your purchase records for untaxed out-of-state buys and accrue use tax accordingly.
6. File and remit on time. Filing frequencies vary by state (monthly, quarterly, annually) and often depend on your revenue volume.
7. Keep exemption certificates. If you make tax-exempt sales (resale, manufacturing, non-profit buyers), collect and retain valid exemption certificates.

The Real Cost of Non-Compliance

Sales and use tax audits are common, and the exposure can be significant. States typically look back three to four years. Penalties for failure to collect or remit generally run 10–25% of the unpaid tax, plus interest. In cases of willful non-compliance, criminal penalties are possible.

For businesses that have grown rapidly or expanded into new markets, the risk of unaddressed back liabilities is real. A voluntary disclosure agreement (VDA) — where you self-report before the state contacts you — can significantly reduce penalties and lookback periods. This is worth exploring if you suspect you may have uncollected obligations.

How Veris Financials Can Help

Sales and use tax compliance is one of the more time-consuming and error-prone areas of small business accounting — especially for companies selling across state lines or in digital markets. Our taxation services include sales tax nexus analysis, registration support, and ongoing compliance management so you never miss a filing deadline or overlook a use tax obligation.

If you’re unsure whether your business is fully compliant — or you’ve recently crossed a new state’s economic nexus threshold — get in touch for a straightforward assessment.

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Frequently Asked Questions

Do I need to collect sales tax if I sell services, not products?

It depends on the state and the type of service. Most states tax tangible personal property but only selectively tax services. Some states (like Hawaii, New Mexico, and South Dakota) tax most services; others (like California) generally exempt them. You need to check the specific rules for each state where you have nexus.

What’s the difference between sales tax and VAT?

Sales tax (used in the US) is collected only at the final point of sale to the end consumer. Value-added tax (VAT), used in the UK, EU, Canada, and most other countries, is collected at each stage of the supply chain. If your business operates internationally, you may face both — US sales tax obligations domestically and VAT obligations abroad.

How do I handle sales tax for online sales?

Post-Wayfair, if your online sales to a state exceed its economic nexus threshold (typically $100,000 or 200 transactions per year), you must register and collect sales tax there. Most major e-commerce platforms (Shopify, WooCommerce, Amazon) have built-in tools to help — but accurate configuration by state is critical. An error in your tax settings can result in under-collecting (your liability) or over-collecting (a customer service issue).

What is a sales tax exemption certificate?

A sales tax exemption certificate is a document provided by a buyer to a seller that certifies the purchase is exempt from sales tax — for example, because the buyer is purchasing for resale, manufacturing, or is a tax-exempt organization. Sellers must collect and retain these certificates to justify not charging tax on exempt sales. If audited and you can’t produce a valid certificate, you may owe the tax yourself.