The US Sales Tax Landscape
There is no federal sales tax in the United States. Zero. Sales tax is imposed at the state and local level, with each state writing its own rules. The result is a patchwork of over 11,000 tax jurisdictions, each with different rates, rules, and definitions of what's taxable.
45 states plus DC impose a state-level sales tax. Five states — Alaska, Delaware, Montana, New Hampshire, and Oregon — do not, though some Alaska localities charge their own.
State rates range from 2.9% (Colorado) to 7.25% (California). But local taxes stack on top: the combined rate in Chicago is 10.25%, and parts of Louisiana and Alabama exceed 11%. The rate you charge depends on where the buyer is located (in most states), not where you are.
Nexus: When Sales Tax Becomes Your Problem
You only need to collect sales tax in states where you have "nexus" — a legal connection that triggers a tax obligation. There are two types:
Physical nexus: you have a tangible presence in the state. An office, a warehouse, an employee working remotely, inventory in a fulfilment centre — any of these create physical nexus.
Economic nexus: you exceed a sales threshold in the state even without physical presence. Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, most states set this at $100,000 in annual sales or 200 transactions, though thresholds vary by state and some have dropped the 200-transaction test entirely. Cross the threshold and you're obligated to register, collect, and remit.
If you have nexus in a state and sell taxable goods or services there, you must register for a sales tax permit, collect tax from buyers at the point of sale, and file returns with the state on the assigned schedule (monthly, quarterly, or annually).
| Description | Qty | Rate | Amount |
|---|---|---|---|
Project Discovery & Scoping per hours | 8 | $85.00 | $680.00 |
Design / Development Work per hours | 32 | $85.00 | $2,720.00 |
Revisions & Feedback Rounds per rounds | 2 | $400.00 | $800.00 |
Final Delivery & Handover per flat fee | 1 | $750.00 | $750.00 |
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Products vs Services: What's Actually Taxable?
Tangible products are taxable in virtually every state that has a sales tax. If you sell physical goods, you almost certainly need to charge sales tax where you have nexus.
Services are where it gets messy. Most states exempt most services from sales tax. But the exceptions are significant and state-specific:
| Service Category | Generally Taxable In | Generally Exempt In |
|---|---|---|
| Professional services (legal, consulting, accounting) | HI, NM, SD, WV | Most other states |
| Landscaping, pest control | TX, FL, CT, NJ + others | Most states |
| Telecommunications | Nearly all states | Very few |
| Digital products / SaaS | 30+ states and growing | CA, MO, and shrinking list |
| Personal care (salon, spa) | Many states | Many states |
| Cleaning services | TX, FL, NJ, CT + others | Many states |
The safest approach: check your specific state's department of revenue website for a list of taxable services, or consult a tax professional. Getting this wrong in either direction creates problems — undercharging means you owe the state; overcharging means unhappy customers and potential legal issues.
Displaying Sales Tax on Your Invoice
When you do charge sales tax, show it as a separate line item. Never bury tax inside your product prices without disclosure. Here's the standard format:
Subtotal: $1,000.00
Sales Tax (8.875%): $88.75
Total: $1,088.75
Show the tax rate in parentheses so the client can verify the calculation. If multiple jurisdictions apply (state + county + city), you can either break them out individually or combine them into a single "Sales Tax" line with the combined rate.
Some states require your sales tax permit number on the invoice. Even where it's not required, including it is good practice — it signals legitimacy and can prevent questions from the buyer's AP team.
Our US invoice template includes a dedicated tax field with the rate displayed.
Exemptions You Should Know About
Not every sale is taxable, even in states where you have nexus. Common exemptions:
Resale: if the buyer is purchasing goods for resale (not personal use), they provide a resale certificate and you don't charge tax. Keep these certificates on file — if you're audited without them, you're liable for the uncollected tax plus penalties.
Non-profits: qualified 501(c)(3) organisations are exempt in most states. They should provide an exemption certificate.
Government: federal and state government agencies are generally exempt.
Manufacturing: many states exempt raw materials and equipment used directly in manufacturing processes.
Interstate sales: if you ship goods to a state where you have no nexus (physical or economic), you generally don't collect tax. But with economic nexus rules expanding, this exemption has narrowed significantly since Wayfair.
Registration and Filing
If you've determined you have nexus and sell taxable goods or services, here's the process: register for a sales tax permit through the state's department of revenue website (never collect without a permit — it's illegal in most states). Collect tax at the correct rate based on the delivery address (most states use destination-based sourcing). File returns on the schedule the state assigns you. Remit the collected tax.
For businesses selling in multiple states, the administrative burden adds up fast. Services like Avalara, TaxJar, or state-provided tools can automate rate calculation, collection, and filing. They're worth the cost if you sell in more than 3-4 states.
Mistakes That Trigger Audits
- Wrong rate — using your home state's rate instead of the buyer's location rate. This is the #1 audit trigger.
- Missing economic nexus — not realising you've crossed the threshold in a new state. Monitor your state-by-state sales totals.
- Taxing exempt items — overcharging tax on exempt products or to exempt buyers creates refund obligations.
- Not separating tax — bundling tax into the price without itemising it violates most state requirements.
- Ignoring local taxes — forgetting the city or county rate that stacks on top of the state rate.
Create invoices with a proper tax field using our invoice generator.