When to Charge Sales Tax For Your Services: A Guide (2025)

Navigating sales tax compliance in the US can be challenging. Learn the key factors that determine when to charge sales tax for your business.

If you’re a merchant who sells within the United States, sales tax due dates can be an unwelcome wake-up call, especially if you’re new to the world of US sales tax.

Between the different sales tax rules for each state, the new laws for out-of-state ecommerce sellers, and the penalties of overcharging or failing to remit sales tax, there’s no denying that sales tax compliance has become tricky to navigate.

Luckily, it’s easy to know where and when you may need to collect sales tax, as well as how to collect accurately with product- and location-specific rates, thanks to Shopify Tax. Keep reading to learn more about sales tax for small businesses, including when to charge sales tax for your ecommerce store. 

What is sales tax?

Sales tax is a consumption tax paid to the government on the sales of goods and services. It’s typically paid by the end customer of a product at the point of sale, collected by the seller, and remitted to the government on a regular basis, depending on the seller’s volume, products, and state requirements.

Shopify has a helpful sales tax reference page for learning the sales tax rates, collection rules, and nexus conditions for each state. 

Sales and use tax is collected at the state level in 45 states and the District of Columbia, and at a local level for some towns and municipalities. Currently, only five states don’t collect sales tax at the state level: Alaska, Delaware, Montana, New Hampshire, and Oregon.

When to charge sales tax

The good news is that you’re only required to collect sales tax if you meet the criteria for establishing a significant business presence in the state. This conditional obligation is referred to as the sales tax nexus.

Most products and services are subject to sales tax but some are exempt or subject to a different rate, depending on your state. To determine where your business has nexus, and whether your products are taxable, follow the steps below.

Sales tax obligations for online sellers

In the US, online sellers are obligated to collect sales tax if they have a nexus in a particular state. If you meet the requirements, you need to collect sales tax on eligible online orders. You can accomplish that either by incorporating the sales tax in your product pricing or tacking it on as an additional cost at checkout. 

Both approaches have their pros and cons. Extra costs at checkout are the biggest reason for online cart abandonment. Including sales tax in your product prices avoids these extra costs at checkout, but they make your products more expensive. This can be an issue if you’re mainly competing on price.

If you’re required to collect sales taxes, you’re obligated to keep accurate sales tax records, including the amount you’ve collected, and file your sales tax return with state authorities.

How to charge sales tax

Here’s what you need to be sales tax compliant:

1. Determine where you have nexus
2. Ensure your products are taxable
3. Register for a sales tax permit
4. Set up sales tax collection in Shopify
5. Prepare your sales tax reports
6. File your sales tax return(s)

1. Determine where you have nexus

Nexus is established when you meet the requirements for a business presence in a state. Prior to 2018, this referred to a physical presence, such as having a warehouse.

With the precedent set in South Dakota v. Wayfair, where the Supreme Court ruled in favor of the state’s entitlement to sales tax from the out-of-state seller, many states have updated their definition of nexus to include remote sellers with no physical presence. 

As a result, nexus can now exist based on either a physical or an economic presence in a state. Now, all sellers who have generated enough sales in a given state to qualify must pay state sales taxes in all applicable situations.

Physical nexus

Depending on the state, a physical nexus can be anything from:

• An office
• An employee residing in or traveling to the state
• A warehouse
• A distribution center
• A third-party affiliate
• Stored inventory
• Temporary physical business in a state, such as at a trade show or craft fair

Economic nexus

An economic nexus is triggered when you reach a certain threshold of sales within the state. 

For example, the state of Illinois considers $100,000 in sales or 200 transactions in a 12-month period as the threshold for economic nexus. Texas, on the other hand, deems sales made in the state exceeding $500,000 in the past 12 months an economic presence.

If you suspect you might have a physical or economic presence in a state, check with that state’s taxing authority.

Shopify merchants using Shopify Tax can easily check where they may have nexus through the sales tax insights found in Settings > Taxes and duties > United States > Manage tax liability. You’ll also receive a notification when you may have reached nexus in a state.

Tax sourcing rules

Be aware of tax sourcing rules for each state—that is, which state has the right to tax a transaction. This sales tax rule can be particularly puzzling for new online businesses: Which state should be collecting taxes—where the customer will receive the order, or where the seller has processed the order? 

Typically, states tax based on destination sourcing (the state where the customer receives the order), not origin sourcing (where the seller processes the order)—but not always. 

Here’s the difference between origin and destination tax sourcing: 

• Origin-sourced sales are taxed according to where you, the seller, are located. Origin sourcing may apply when property is shipped wholly within a single state. For example, property withdrawn from a Texas warehouse and shipped to a Texas recipient may be taxed at the rate where the warehouse is located.
• Destination-sourced sales are taxed according to where the buyer takes possession of the item sold. For example, property shipped from outside of Texas into Texas may be taxed at the rate where the recipient of the goods is located.

Luckily, most states use destination sourcing, but some states and districts use mixed sourcing. Always check the tax regulations in the states where you do business. 

2. Ensure your products are taxable

While most tangible personal property (like your product line) is subject to sales tax, some property is exempt from sales tax or subject to a different rate.

Nontaxable property can include some or most:

• Services, such as legal or home renovation services
• Digital products, such as music, video games, or software
• Food and groceries
• Prescription and non-prescription drugs

Whether those items are taxable or not depends on the individual state taxation laws. For example, certain types of clothing are considered nontaxable in states like Minnesota and New York, but the same is not true in every state—or even for every type of clothing in those states.

Services and digital products can be especially confusing, as the line between the two is often blurred. Many services today are delivered through digital products, such as advertising or software-as-a-service (SaaS) products.

Shopify Tax helps you sort that out by suggesting categories for each of your products that you can review, revise, and approve. Accurate sales tax rates are then applied automatically when you add new items to your store, and those rates are always kept up to date.

If you sell a product you think might be nontaxable, check with state tax authorities or a tax professional to make sure. 

3. Register for a sales tax permit

States where you have nexus require you to secure a sales tax permit before you begin collecting sales tax. To register for a sales tax permit, go to your state revenue authority’s website or give them a call.

States use sales tax funds to pay for things like schools, roads, and public safety, so they are invested in any merchants with nexus in their state collecting and remitting sales tax.

Sales tax permits are free in most states, while others cost a small fee, ranging from $10 to $100. Do a web search for “apply for sales tax permit” and the name of the state to get more information.

Once you’ve registered, your state will tell you when and how often it wants you to file sales taxes. This is generally monthly, quarterly, or annually, with most annual due dates falling in January.

Don’t skip this step! States generally consider it unlawful to collect sales tax without a permit. Here’s a sample sales tax permit application from the state of Florida to give you a sense of what to expect from this process.

4. Set up sales tax collection in Shopify

Once you’ve registered in the states where you have a sales tax nexus, it’s time to set up the ability to collect sales tax in your online storeand any other sales channels. 

If you use Shopify, you can get started by going to Settings > Taxes and duties > United States. From there, choose your preferred tax service: Shopify Tax, Basic Tax, or Manual Tax. When you choose Shopify Tax, you’ll automatically collect sales tax at checkout using hyper-accurate product- and location-specific rates. 

“We no longer need to manually update sales tax information, saving us countless hours and reducing the risk of errors,” says Ailee Fei, who uses Shopify Tax for her business, Daily Charme. “It’s been a game-changer for our small business.”

Merchants choosing Basic or Manual Tax will need to take some additional steps to configure their tax settings. A complete overview of your options is available in the Shopify Help Center.

Once you’ve determined your preferred tax service, select the state where you’d like to activate tax collection and select Collecting taxes > Collect sales tax. Tax is now activated for that state and will be automatically collected from buyers in that state.

If you sell on multiple channels, you must collect sales tax from buyers in states where they have sales tax nexus on every channel you sell on. Again, this is fairly easy if you only have sales tax nexus in one state. If you have a sales tax nexus in multiple states, check with every platform on which you sell to make sure you’re collecting sales tax from the correct buyers.

5. Prepare your sales tax reports

As your sales tax filing date approaches, figure out how much sales tax you’ve collected from buyers in every state where you have nexus.

The level of accounting reporting detail required varies from state to state. The majority of states want to know the amount of sales tax you collect from in-state buyers, broken down by county, city, or district.

With Shopify Tax’s sales tax report tool, you have all you need to prepare for filing sales tax. This report provides both net sales and taxable sales, each broken down by state, county, and local jurisdictions, along with the exact reporting codes. You can also customize the report to your exact needs. For example, hide columns, filter by destination or time period, or view complete transaction data for reference or auditing purposes.

6. File your sales tax returns

Now comes the part where you report the sales tax you’ve collected from buyers to the states where you have sales tax nexus.

Check with individual states on when and how to file. Most states make it easy to file online. In fact, some states require you file online or pay a penalty.

If you didn’t collect any sales tax over a taxable period, many states still require you to file what is known as a “zero return.” A zero return lets states know that, while you didn’t collect sales tax during this period, you’re still in business. If you forget to file a zero return, you can be charged with a penalty.

It literally pays to file your sales tax returns on time: Many states realize sales tax is a burden and will award merchants a sales tax discount for paying early or on time. Don’t leave that money on the table.

Look up and mark those sales tax due dates in your calendar. If you use Shopify Tax, you’ll receive smart notifications that inform you when and where you need to file your returns, saving you the trouble.

Understanding sales tax rates by state

Overview of state sales tax rates

Sales tax rates vary by state and typically range between 2.9% and 7.25%. Here’s a breakdown of the rates by state, as of 2024.

State Sales Tax Rate	States
7.25%	California
7%	Indiana, Mississippi, Rhode Island, Tennessee
6.875%	Minnesota
6.85%	Nevada
6.625%	New Jersey
6.5%	Kansas, Washington
6.25%	Illinois, Massachusetts, Texas
6%	Florida, Kentucky, Maryland, Michigan, Pennsylvania, South Carolina, Iowa, West Virginia
5.75%	Ohio
5.6%	Arizona
5.5%	Maine, Nebraska
5.3%	Virginia
5%	North Dakota, Wisconsin
4.85%	Utah
4.5%	Oklahoma
4.45%	Louisiana
4.2%	South Dakota
4%	New York, Hawaii, Alabama, Wyoming, Georgia
2.9%	Colorado
No state sales tax	Montana, Delaware, New Hampshire, Oregon, Alaska

Variations in local sales taxes

It’s not just state-wide sales tax you’ll need to consider—some states have a “local option” that lets certain cities and counties add an additional tax rate onto the state sales tax. 

In the state of Louisiana, for example, the state sales tax rate is 4.45%. The New Orleans parish charges an additional 5% in local taxes, making the total sales tax rate 9.45% if you have a nexus in the district. The New Orleans parish keeps the extra percentage, while the state sales tax is passed onto Louisiana state. 

Exemptions and exceptions to sales tax

Common exemptions for nonprofits and charities

While specific rules vary by state, some online sellers are exempt from sales tax if they sell to nonprofits and charities. 

These exemptions can include:

• Donations to nonprofits
• Purchases made for charitable purposes
• Products bought for official use by government or educational institutions

Exemptions for certain types of products

The majority of products are taxed at the default sales tax rate determined by state and local governments. However, certain products may be taxed at lower rates or exempt depending on local rules and regulations. 

Online retailers selling the following products tend to be exempt from charging sales tax on those items:

• Non-prepared food
• Medical equipment and prescription medications
• Educational materials (e.g., college textbooks)

Professional services also tend to be exempt from sales taxes. If you’re hiring independent contractors to design your website or working with a business consultant, for example, these transactions tend to be exempt from state sales tax.

Shipping is a little less straightforward. In most states, shipping charges are not taxable if they’re separately stated on the invoice and not marked up. However, some states consider shipping charges part of the sale price and therefore taxable.

How to apply for sales tax exemptions

If you’re eligible for a sales tax exemption, you can apply for a sales tax exemption certification from the US Department of State online portal. You’ll need to provide this certificate to remove the sales tax on exempt purchases when buying items from a business that charges sales tax.

How to keep track of sales tax collected

If you’re selling on Amazon, eBay, Etsy, or another marketplace platform, these companies are now obligated to collect and remit taxes on behalf of their sellers in states with marketplace facilitator laws. You should still confirm the marketplace is collecting and remitting tax on your sales made through their platform.

Shopify makes it easy to track sales tax collected with Shopify Tax. You can track your obligations in each state, and automatically collect tax at checkout with product and location accuracy. 

With Shopify Tax, there’s no need to complete manual state tax returns, either. Shopify Tax supports automated filing enrollment, so you can get notified when your tax returns are ready and automate submissions to avoid late penalties.

“Previously, to sort through all the data, I had created a custom spreadsheet and formulas to spit out the data that the state of Illinois needs,” says Caleb Benoit, founder of Connect Roasters, about using Shopify Tax. “With this report, that’s no longer necessary. I just pull up the Illinois Department of Revenue site in a new browser tab and copy the numbers. Takes 15 minutes max.”

Manage your sales tax from Shopify

Shopify Tax puts sales tax insights and collection in your control, and makes everything manageable from your Shopify admin.

Explore Shopify Tax

What happens if you don’t collect sales tax?

Skipping out on local sales tax can have serious consequences for your business. If you don’t collect it, you’re still liable for the uncollected amount and will have to pay out of pocket. You may face penalties and interest charges, too, which can quickly add up. 

In the worst-case scenario, state tax authorities may impose hefty fines, revoke your sales tax permit, or even file criminal charges. Some states might also place liens on your business assets or personal property to recover the owed taxes. 

It’s way easier (and cheaper) to just collect the tax and stay on the right side of the law.

Is sales tax complicated?

Yes. Are you alone? No.

Once you’ve run through these steps, you should have a basic handle on how to charge sales tax. Still feel overwhelmed? That’s why many business owners consult a tax professional to ensure they’re compliant with sales tax laws.

If your business is powered by Shopify, consider the benefits of using Shopify Tax. Built to help business owners manage their tax liability in the United States, Shopify Tax automates a lot of sales tax processes for you and provides guidance on how to register and remit sales taxes with the relevant authorities.

When to charge sales tax FAQ

How do you know if you need to charge sales tax?

Check the conditions for establishing a physical or economic nexus in the states you’re selling in. If you meet the conditions in a given state, customers should pay sales tax. Consult a tax professional if you’re unsure about how to proceed.

How do you calculate sales tax?

Sales tax is calculated by multiplying an item’s selling price against the state’s tax rate (e.g., $20 x 7%). The exact rate varies by the state, taxing jurisdiction, product category, and other factors.

How are specific products taxed?

If you use Shopify Tax and categorize your products, Shopify automatically applies product-specific rates on your behalf. If you use another tax service, you can manually exclude or override the default sales tax rate for specific products. If you manually adjust product-specific rates, it’s important to keep up with rules and rate changes, so your products are taxed accurately.

What is the difference between sales tax and VAT?

Sales tax and value-added tax (VAT) are both consumption taxes. However, where sales tax is only applied at the final point of sale, VAT is applied at each stage of the supply chain process where the goods are bought and sold. The US does not have a VAT.

Should I add tax to my invoice?

Whether you should add sales tax to an invoice depends on what you’re selling and whether you have nexus in a particular state.

Do I need to charge sales tax for online sales?

Generally speaking, you’ll need to collect sales tax if you have a physical nexus (e.g., a retail store, office, or warehouse) in a state that charges sales tax. You may also need to charge sales tax if you exceed the economic threshold for a particular state.

How often do I need to report sales tax?

Each state has its own regulations on how often sellers need to report sales tax. It can be monthly, quarterly, bi-annually, or once per year.