Sales tax is a government levy imposed on the sale of goods and services (either at the state or local tax level) that businesses are required to collect from customers when they sell taxable goods or services. Essentially, it's an additional amount of money that consumers pay when making purchases, which businesses collect and then pass onto the government.

Instead of the business paying the tax itself, the business acts as a collector on behalf of the state, adding the tax to the customer’s purchase price and then remitting those funds to the appropriate tax authority.

Here’s the key breakdown:

• Who imposes it: States, counties, and cities (not the federal government).
• Who pays it: The customer, not the business.
• Who collects and remits it: The business, which is legally responsible for charging the correct rate and sending those funds to the state.
• What it applies to: Typically, physical goods, some digital products, and certain services; rules vary by state.

Why it matters: Businesses must track nexus (where they have tax obligations), collect the right rate, file returns on time, and stay compliant to avoid penalties.

The exact rules for sales tax vary widely by country and even within regions of the same country. In the US, for example, sales tax rates and regulations are primarily set at the state level, so a business might need to manage different sales tax requirements in different states. It's important for businesses to understand their sales tax obligations to avoid penalties and audits. E-commerce businesses should be particularly mindful of sales tax, as selling to customers in different states or countries can complicate their tax obligations.

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Frequently Asked Questions on Sales Tax:

Which states do not have a statewide sales tax?

Five states do not charge a statewide sales tax:
Delaware, Montana, New Hampshire, Oregon, and Alaska
(Alaska has no state sales tax, but many local jurisdictions charge their own, typically between 1%–7%.)

Which states have the highest sales tax rates?

These states consistently rank among the highest when combining state + local rates:

• Tennessee: typically 9%–10%+
• Louisiana: generally 9%–10%
• Arkansas: around 9%–10%
• Washington: around 8%–10%
• Alabama: usually 8%–10%, depending heavily on local add-ons

Rates vary by city and county, so some areas exceed these ranges.

Which states have the lowest sales tax rates (among states that charge it)?

These states tend to have comparatively low overall sales tax burdens:

• Hawaii: roughly 4%–4.5% (technically a GET, but functions similarly)
• Wyoming: generally 4%–6%
• Wisconsin: typically 5%–5.5%
• Maine: around 5.5%–6%
• Virginia: generally 5%–7%, depending on region

These states either have low base rates or limited local add-on taxes.

Is there a federal sales tax?

No. The United States does not have a federal sales tax.Sales tax is imposed only by states, counties, cities, and local jurisdictions. The federal government does not collect sales tax on retail purchases, and there is no national sales tax rate.
However, the IRS does tax business income and wages, which are separate from sales tax obligations.

How does sales tax affect business taxes and bookkeeping?

Sales tax isn't income, but it affects compliance and cash flow. Businesses must:

• Track where they have nexus
• Apply the correct rate for each customer location
• Keep sales tax collected separate from revenue
• File and remit returns on time (often monthly or quarterly)
• Maintain accurate records to avoid penalties

High-sales-tax states often mean more complex filings and higher audit exposure. Low-tax or no-tax states reduce administrative burden but may still require reporting.

Do all businesses need to collect sales tax?

Only businesses with nexus—a physical presence, employee presence, or sufficient sales activity—are required to collect sales tax.

Are services taxed?

It depends on the state. Some tax only tangible goods, while others tax digital products, SaaS, labor, or professional services.

What happens if a business collects the wrong amount of sales tax?

Under-collecting means the business must pay the difference to the state. Over-collecting may require refunds to customers or corrective filings. Accurate calculations and bookkeeping are essential.

Do you charge sales tax on a service?

Whether you charge sales tax on a service depends entirely on the state you operate in, because each state sets its own rules for taxing services. In states with no sales tax—like Alaska, Delaware, Montana, New Hampshire, and Oregon—businesses generally don’t need to charge sales tax on services at all, though some may have local-level taxes or alternative fees.

In states with sales tax, the rules vary widely. Some states tax only specific types of services, such as repair, installation, or certain professional services. Others impose tax on nearly all services unless a specific exemption applies. Because the definition of a “taxable service” can differ significantly between states, businesses must understand their state's regulations to stay compliant.

From a strategic perspective, whether a service is taxed affects your pricing, invoicing, and bookkeeping. If your state requires sales tax on a service, you’ll need to collect and remit it properly—failure to do so can result in penalties. If your service is exempt from tax, you may gain a slight pricing advantage, since customers only pay the service price without an added percentage.

Ultimately, the safest approach is to check your state’s Department of Revenue guidance or consult a tax professional to ensure you’re charging sales tax correctly and protecting your business from compliance issues.

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