How sales tax works for US businesses
US sales tax rules depend on where a business has nexus, with separate state rates, permits, returns, use tax and asset rules.
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US businesses collect sales or use tax where a state requires it, based on physical or economic nexus, then file and pay under that state’s rules. Rates, registration duties, and filing schedules vary by state and can include local tax.
| Area | Rule or figure |
|---|---|
| Texas rate | 6.25% state rate, plus local tax of up to 2%, for a maximum of 8.25%. |
| California rate | 7.25% statewide rate, with district taxes commonly adding 0.10% to 2.00%. |
| Indiana rate | 7% statewide rate. |
| Tennessee rate | 7% general state rate, plus local tax of up to 2.75%. |
| California remote seller test | Collection applies after California delivery sales pass $500,000 during either the current calendar year or the one before. |
| Texas remote seller test | A permit and tax collection apply after Texas revenue reaches $500,000 during the preceding 12 calendar months. |
| Texas late return | $50 for a late report, plus a 5% or 10% late-payment penalty. |
Who sets the tax and what it covers
Texas charges a 6.25% state sales and use tax rate on most goods and taxable services. Local Texas units can add as much as 2%, making 8.25% the highest combined rate.
California’s statewide rate is 7.25%. District taxes generally add from 0.10% to 2.00%, and more than one district tax may apply at an address. The California Department of Tax and Fee Administration says retail sales of tangible personal property are generally taxable, including items such as furniture, clothing, and toys.
Indiana uses a single 7% rate across the state. Tennessee’s general state rate is 7% on most tangible goods and taxable services, while counties and cities can add up to 2.75%. Oregon and Montana have no general sales tax, while Delaware has neither sales tax nor use tax, though it has other business taxes.
For a Texas transaction, tax equals the taxable price multiplied by the state rate plus the local rate. See how to calculate US sales tax on a sale for the basic calculation method.
Where a business must collect tax
In a state that imposes sales tax, physical presence requires a seller to register regardless of its sales volume. California treats an office or inventory in the state as physical presence.
Texas regards a business as engaged in the state when an employee or representative sells, delivers, or takes orders there.
Economic nexus can also require collection. In South Dakota v. Wayfair, decided June 21, 2018, the US Supreme Court allowed states to require collection on deliveries into their state without physical presence. The Streamlined Sales Tax Governing Board describes the rule as applying where economic nexus exists.
States build economic nexus tests differently. Many measure sales or transactions, while some require both. For California, an out-of-state retailer has to register and collect use tax if its combined deliveries into the state pass $500,000 during either the current calendar year or the one before it.
Texas applies its $500,000 test to Texas revenue in the preceding 12 calendar months. The Streamlined Sales Tax chart dated January 11, 2023 lists New York’s test as gross receipts above $500,000 and more than 100 sales during the preceding four sales tax quarters. Nexus and state threshold tests determine when a US business must charge sales tax.
Registration, returns, and payment
Registration happens before collection starts. California issues a seller’s permit without a fee, although the CDTFA can request a security deposit. Texas issues a Texas sales and use tax permit without a fee, but may require a security bond.
New York requires a seller of taxable goods or services to register with the New York State Department of Taxation and Finance before beginning business. Its permit is called a Certificate of Authority. A business can use sales tax registration and filing steps to organize the process.
The Texas Comptroller of Public Accounts sends each holder a letter assigning a monthly or quarterly filing frequency. Monthly reports are due on the 20th day of the following month. Quarterly reports are due April 20, July 20, October 20, and January 20 for the prior quarter.
Texas puts state and local sales and use taxes on the same Texas Sales and Use Tax Return. For quarterly Tennessee filers, January 20, April 20, July 20, and October 20 are the filing dates. California’s quarterly return for July through September is due October 31.
A Texas taxpayer can claim a 0.5% discount for tax reported and paid on time. Prepayment can add a further 1.25% discount.
Texas charges $50 for each report filed after its due date. Tax paid from 1 to 30 days late carries a 5% penalty. Payment made more than 30 days late carries a 10% penalty.
Use tax and business purchases
Texas charges use tax on taxable goods or services stored, used, or consumed in the state.
A Texas permit holder reports its taxable purchases in Item 3, Taxable Purchases, on its normal return. California seller’s permit holders pay use tax through their sales and use tax return. In Tennessee, tax is due from a business on taxable goods it brings or has shipped into the state if the seller left sales tax off the transaction.
For example, a Texas business buys a taxable item for $1,000, uses it in a place with the maximum 8.25% combined rate, and the seller did not charge Texas sales tax. The use tax calculation is $1,000 multiplied by 8.25%, which equals $82.50. The item cost plus use tax is $1,082.50.
Resale is different from buying items for the business’s own use. Tennessee retailers receive the Tennessee Sales and Use Tax Certificate of Resale when they register. The retailer can give that resale certificate to a supplier when buying stock it will resell.
Other exemptions may exist for reasons such as manufacturing use or an exempt buyer.
How federal tax treatment differs
The IRS Instructions for Schedule C (Form 1040) (2025) apply to sole proprietors. Sales tax imposed on the seller can be deducted on Schedule C line 23. If the seller collected that amount from customers, it must also enter the collected amount in gross receipts on line 1.
Tax imposed on the buyer that the business collects and turns over to the state is different. It does not count as gross receipts and is not a deductible expense. If a state permits the business to keep part of the tax it collected, that retained amount counts as income on line 6.
For sole proprietors using the IRS Schedule C instructions, sales tax on business property is included in the property’s cost rather than deducted as tax. Depreciation, section 179, or bonus depreciation may recover that cost under the applicable rules.
For qualified property bought and put into use after January 19, 2025, the IRS allows 100% bonus depreciation. For certain property purchased in 2025, a business may elect a section 179 expense deduction for some or all of its cost.
Common questions
Do all states charge sales tax?
No. Oregon and Montana have no general sales tax. Delaware has no sales or use tax, though it has other business taxes.
Does a remote seller need a physical location to collect tax?
No. Economic nexus can require collection without physical presence. The threshold and measurement period differ by state.
When does Texas use tax apply?
Texas use tax is due on taxable items used in Texas if the seller did not collect Texas sales tax. State and local use tax can both apply.
Can a sole proprietor deduct sales tax paid on equipment?
The IRS Schedule C instructions for sole proprietors treat sales tax on business property as part of the property’s cost. Depreciation, section 179, or bonus depreciation may recover that cost under the applicable rules.
Sources
- Texas Comptroller of Public Accounts: Sales and Use Tax
- California Department of Tax and Fee Administration: California City & County Sales & Use Tax Rate Information
- California Department of Tax and Fee Administration: Obtaining a Seller's Permit
- Indiana Department of Revenue: County Tax Rates:
- Tennessee Department of Revenue: Due Dates and Tax Rates
- Tennessee Department of Revenue: Local Sales Tax
- Oregon Department of Revenue: Oregon Department of Revenue : Sales Tax in Oregon : Businesses : State of Oregon
- revenue.mt.gov: Sales Tax Guidance for Montana Business and Residents
- Streamlined Sales Tax Governing Board: Remote Seller State Guidance
- Streamlined Sales Tax Governing Board: SCOTUS Ruling - South Dakota v Wayfair
- Streamlined Sales Tax Governing Board: FAQs - Information About Streamlined
- California Department of Tax and Fee Administration: Use Tax Collection Requirements Based on Sales into California Due to the Wayfair Decision
- Texas Comptroller of Public Accounts: Texas Sales and Use Tax Frequently Asked Questions
- Texas Comptroller of Public Accounts: Local Sales and Use Tax Collection - A Guide for Sellers
- New York State Department of Taxation and Finance: Register as a sales tax vendor
- California Department of Tax and Fee Administration: Filing Dates for Sales & Use Tax Returns
- Texas Comptroller of Public Accounts: Use Tax
- California Department of Tax and Fee Administration: Paying Use Tax - Publication 110, California Use Tax Basics
- Tennessee Department of Revenue: Sales and Use Tax
- Tennessee Department of Revenue: Resale Certificate
- Streamlined Sales Tax Governing Board: Remote Seller Thresholds Terms
- IRS: Instructions for Schedule C (Form 1040) (2025)
