Founders who have worked through income tax and concluded, correctly, that they owe nothing often assume the tax question is closed. Sales tax is a separate system with separate rules, separate authorities and a separate set of thresholds, and it can apply to a company whose owner has never entered the country.
It is also the area where general advice is least useful, because there is no national rule. What follows is the structure of the problem and the parts that actually decide the answer for a small online business.
Why this is a different system entirely
US income tax is federal. There is one set of rules, one agency, one filing deadline.
Sales tax is not federal at all. It is imposed by states, and in many states by counties and cities on top. Forty-five states plus the District of Columbia levy it. Each sets its own rate, its own definition of what is taxable, its own registration process and its own filing calendar.
So the correct mental model is not "does the US charge sales tax on this". It is "does each of these particular states charge sales tax on this, and have I crossed their threshold". That is a different question asked many times.
State sales tax nexus, the word everything hangs on
Nexus means a connection with a state sufficient for that state to impose obligations on you. There are two kinds and the second is the one that catches remote sellers.
Physical nexus is the traditional kind: an office, staff, a warehouse, inventory, sometimes even attending trade shows. For a company operated entirely from abroad, physical nexus usually does not exist.
Economic nexus is newer and is based purely on sales volume. Cross a state's threshold and you have nexus there, whether or not anyone from the company has ever set foot in it. This arose from a 2018 Supreme Court decision that removed the physical presence requirement, and every state with a sales tax has since adopted some version of it.
Economic nexus is the reason a small business in Morocco can owe a filing obligation to a state in the American Midwest.
The thresholds, and what actually counts
A common pattern is $100,000 in sales or 200 separate transactions into the state in a twelve-month period. That pattern is widespread and it is not universal.
| Variation | What it means for you |
|---|---|
| Some states use sales only, no transaction count | A high volume of small orders may not trigger it |
| Some use $500,000 rather than $100,000 | The largest states are often the hardest to reach |
| Some count gross sales, some only taxable sales | Exempt products may or may not count towards the threshold |
| Measurement periods differ | Calendar year, rolling twelve months or previous year |
| Marketplace sales may or may not count | This can change the answer substantially |
The row that causes the most confusion is the last one. If most of your volume goes through a marketplace that collects on your behalf, whether those sales count towards your own threshold on your own website differs by state.
Is what you sell even taxable?
Before worrying about thresholds, establish whether your product is taxed at all. Physical goods are taxable in most states as a baseline. Everything else is far less consistent.
- Software as a service is taxable in some states and not in others, and a few distinguish between business and consumer customers.
- Digital downloads are treated differently from subscriptions in several states.
- Professional services — consulting, design, development — are frequently not taxable, though the exceptions are real.
- Mixed offerings, such as software bundled with support, may need separating on the invoice to be treated correctly.
For a great many readers of this article, selling consulting or development services from abroad, the honest answer is that services are commonly outside the sales tax net and the whole question is less pressing than it first appears. That does not make it worth ignoring, because product lines change.
What an obligation actually involves
Crossing a threshold is not the end of the matter, it is the beginning of an administrative process in that state.
- Register with the state's revenue department for a sales tax permit. Collecting without registering is itself a problem.
- Charge the right rate at checkout. In many states this is the rate at the buyer's address including local additions, not a single statewide figure.
- File returns on the state's schedule — monthly, quarterly or annually depending on volume.
- Remit what you collected, on time.
- File even when you collected nothing. Most states require a zero return once you are registered, and missing those accrues penalties for a business making no sales.
That last point is worth dwelling on. Registering in a state you are unlikely to sell into again creates a permanent filing obligation. Registering early "to be safe" is not the cautious choice it appears to be.
The mistake that costs the most
By a distance: collecting sales tax from customers and not remitting it.
Money collected as tax is not revenue. It is money held on behalf of a state. Treating it as cash flow, spending it and finding it missing at filing time converts an administrative matter into something far more serious, and in many states responsibility for unremitted tax can reach the individuals behind the company personally.
If you collect it, keep it separate. A second account used for nothing else is the simplest protection there is.
Marketplaces do most of the work
Marketplace facilitator laws now shift the collection duty onto the marketplace in most states. If you sell through a large marketplace, it generally calculates, collects and remits for those sales.
Two qualifications. It covers only sales made through that marketplace — your own website is yours to handle. And whether marketplace sales count towards your own economic nexus threshold varies, which means a seller who is entirely covered on the marketplace can still cross a threshold on the strength of that volume.
For a business whose sales run almost entirely through marketplaces, this is genuinely reassuring. For a business running its own checkout, it changes very little.
When to act, and when not to
Registering in forty-five states before you have crossed a single threshold is a common overreaction, and it creates dozens of permanent filing obligations in exchange for nothing.
A proportionate approach:
- Establish whether your product is taxable at all. If you sell services that are broadly untaxed, monitor and move on.
- Track sales by destination state from the beginning. This costs nothing at the start and is painful to reconstruct later.
- Set an internal review point at roughly half of the common threshold, so you see a state approaching rather than discovering it crossed.
- Take advice before registering anywhere. The first registration is the point at which this becomes an ongoing obligation.
- Reassess when the product changes. Adding a physical product to a services business can change the analysis entirely.
What software does and does not solve
Several services calculate rates, monitor thresholds and file returns. For a business with genuine multi-state exposure they are worth their cost, and attempting the same work manually across a dozen states is a poor use of anyone's time.
What they do not do is decide whether your particular product is taxable in a particular state. That classification is a judgement, it depends on how your offering is actually structured, and getting it wrong in the software produces confidently incorrect output at scale. Set the classification with advice, then let the software handle the arithmetic.
How this interacts with income tax
These are independent systems and neither answers the other.
A company can have no US income tax exposure at all and still have a sales tax obligation in several states, because the sales tax test is about where customers are while the income tax test is about where the business operates. Those point in opposite directions for a remote seller.
The income tax side is covered in effectively connected income explained and in do non-resident LLC owners owe US tax. Neither of those addresses sales tax, and a conclusion reached there does not carry across.
Getting it wrong, and fixing it
Businesses do discover that they crossed a threshold two years ago. This is recoverable and the response matters.
Most states operate voluntary disclosure arrangements: approach them before they approach you, and the look-back period is typically limited and penalties often reduced or waived. Wait to be found, and the assessment can reach back further with penalties intact.
The practical sequence is to quantify the exposure with a specialist first, then approach the state through the disclosure process rather than simply registering and hoping the past is not examined. Registering without addressing the history is the move that most often turns a manageable problem into an audit.
Exemption certificates and business customers
One category is frequently overlooked by sellers who assume every sale is taxable in a state where they have nexus. Sales to customers who will resell the goods, and sales to certain exempt organisations, may not attract tax at all.
The mechanism is the exemption certificate. The buyer provides documentation asserting the exemption, and the seller keeps it on file. The critical point is that the burden sits with the seller. In an audit, a sale treated as exempt without a valid certificate on file is usually reassessed as taxable, with the seller liable for tax that was never collected from a customer who may have moved on years ago.
So the discipline is simple and non-negotiable where it applies. Collect the certificate before treating a sale as exempt, not afterwards. Check it is complete and signed. Note when it expires, because several states require periodic renewal. And store it somewhere retrievable years later rather than in an email thread.
For a business selling services to other businesses this rarely arises. For anyone selling physical goods to trade buyers, it is one of the larger avoidable exposures in the whole area.
Rates change more often than people expect
A point worth internalising before building anything yourself: rates are not stable. States adjust them, and local jurisdictions layer their own on top and adjust those independently. In states with local add-ons the applicable rate is determined by the buyer's precise address, and there can be several thousand distinct rate combinations across the country at any one time.
This is why a hard-coded rate table in a checkout is a liability rather than a saving. It is correct on the day it is written and quietly wrong thereafter, and the errors accumulate invisibly until somebody reconciles a return.
It is also why a sales tax obligation is genuinely more work than an income tax one for a small business. Income tax is an annual event. Sales tax is a continuous process of charging correctly on every transaction, in every jurisdiction where you are registered, with rates you do not control. Understanding that difference in advance usually changes how enthusiastically a founder registers somewhere new.
The short version
Sales tax is a state matter, not a federal one. It can apply without any physical presence once sales into a state cross that state's threshold. Whether your product is taxable at all varies by state and is the first thing to establish. Marketplaces usually handle their own sales and not yours. And the one genuinely dangerous mistake is collecting tax and not remitting it.
Track sales by destination from day one, review at half the common threshold, and take advice before the first registration. What records to keep is covered in what records to keep and for how long, and if you would rather have the company set up with this in view from the start, it is part of our formation service.
If you would rather have this handled for you, our US LLC formation service covers it end to end. For the official position, see U.S. Small Business Administration: taxes.