What Is Sales Tax?

Sales tax is a consumption tax added to the price of certain goods and services at the point of sale. The seller collects it from the customer and passes it to the tax authority. It is not part of the seller's income, even though it passes through the seller's hands.

How it works in the United States

The US has no national sales tax. Most states, and many cities and counties, set their own rates, and each decides what is taxable. Physical goods are often taxable, while the treatment of digital goods, food and services varies. Tax is usually charged once, at the final sale, unlike VAT, which is charged at each stage.

Who must collect it

A seller must collect sales tax in a state where it has nexus, which is a taxable connection to the state. Physical presence creates nexus. Many states also set economic nexus thresholds, based on sales into the state, above which a remote seller must register and collect. In many states, marketplaces collect on sales they facilitate.

Common mistakes

Beginners often spend the tax they collected, ignore thresholds or assume a platform handles everything. Keep collected tax apart from income, track sales by state and read each platform's tax terms.

An example

A seller based in one state ships to customers in several others. When the seller's sales into one of those states pass its threshold, the seller must register there and begin collecting that state's tax.

Related terms

See sales tax nexus, value added tax and payment processor. For a wider overview, read our guide to sales tax and VAT for online sellers.