Running a retail business involves more than stocking shelves and making sales—it also means staying compliant with a range of tax obligations. One of the most critical (and often confusing) areas is sales tax.
Sales tax laws vary by state, and with the rise of e-commerce, they’ve become even more complex. Whether you operate a brick-and-mortar store, sell online, or both, understanding your sales tax responsibilities is essential to avoid costly penalties and maintain smooth operations.
This guide will walk you through the key sales tax considerations every retail business should know.
1. What Is Sales Tax and Who Needs to Collect It?
Sales tax is a state-imposed tax on the sale of goods and certain services. It’s collected from customers at the point of sale and remitted to the appropriate taxing authority—typically at the state level, but also potentially local and county jurisdictions.
🏪 Who Must Collect Sales Tax?
If your retail business has a sales tax nexus (a sufficient connection) in a state, you’re required to collect and remit sales tax there. Nexus can be created by:
Physical presence (store, office, warehouse)
Employees or contractors working in the state
Inventory stored in a warehouse (including third-party fulfillment centers like Amazon FBA)
Economic activity (e.g., making over a certain amount in revenue or transactions in a state)
2. Understanding Sales Tax Nexus
A major change occurred after the 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc., which allowed states to enforce economic nexus laws. That means:
You don’t need to have a physical presence to be liable for collecting sales tax.
Many states now require out-of-state sellers to collect sales tax if they exceed certain sales or transaction thresholds (e.g., $100,000 in sales or 200 transactions per year).
✔️ Tip:
Check every state where you sell products. You may have nexus in multiple states without realizing it—especially if you sell online.
3. Sales Tax Registration Requirements
Before collecting any sales tax, you must register with the state’s Department of Revenue or equivalent authority. Once approved, you’ll receive a sales tax permit.
Collecting tax without being registered is illegal in many states—even if you plan to remit it later.
📌 Things to Remember:
Some states require separate registrations for state, city, and county sales tax.
You’ll also be assigned a filing frequency (monthly, quarterly, or annually) based on your sales volume.
4. Product and Service Taxability
Not everything you sell may be taxable. Taxability depends on the type of product or service, and the state in which it’s sold.
Examples:
Tangible goods (clothing, electronics): Usually taxable
Food items: Sometimes exempt or taxed at a reduced rate
Digital goods and software: Taxable in some states, not in others
Shipping and handling fees: May be taxable depending on local rules
Check state-by-state guides to ensure you’re not charging sales tax incorrectly—or failing to collect when you should.
5. Sales Tax Collection Best Practices
Once you’re registered, the next step is setting up reliable systems for collecting and reporting tax.
🔧 Use the Right Tools:
Point-of-sale (POS) systems should calculate tax rates based on customer location.
E-commerce platforms (like Shopify, WooCommerce, or BigCommerce) often offer automated tax features or integrations with tax compliance software (e.g., Avalara, TaxJar).
💡 Tip:
Always double-check the tax rate based on the shipping or billing address, not just the zip code—rates can differ between cities or counties in the same zip.
6. Sales Tax Reporting and Remittance
Sales tax you collect is not your income—it’s money held in trust for the state.
You’re responsible for:
Filing regular returns (monthly, quarterly, etc.)
Reporting total sales, taxable sales, and tax collected
Remitting payment by the due date
Missing deadlines can result in penalties and interest, even if the amount owed is small.
7. Managing Exempt Sales
Some sales may be tax-exempt, such as:
Sales to nonprofit organizations
Sales to resellers (with a valid resale certificate)
Sales of tax-exempt products (e.g., prescription medications)
You must collect and keep proper documentation for exempt sales to avoid audit issues. A valid resale or exemption certificate must be on file.
8. Audits and Compliance Risk
Sales tax audits are common in the retail world. States want to ensure you’re collecting and remitting correctly.
🛡️ Be Prepared:
Maintain detailed records of all sales and tax collected
Keep copies of exemption certificates
Reconcile monthly or quarterly with your accounting system
Don’t rely solely on your POS—use a dedicated sales tax platform or professional support
9. E-Commerce and Marketplace Facilitator Laws
If you sell on platforms like Amazon, Etsy, or Walmart Marketplace, you may benefit from marketplace facilitator laws.
These laws require the marketplace platform (not the seller) to collect and remit sales tax on behalf of third-party sellers.
✅ Pros:
Simplifies your tax obligations
Reduces filing complexity in many states
❗ Important:
You may still need to register in some states and file reports, even if tax is being collected for you.
10. Work with a Sales Tax Professional
While tax software can help, retail businesses with multiple products, selling across state lines, or experiencing rapid growth should consider working with a sales tax expert.
A professional can help you:
Determine where you have nexus
Understand product-specific taxability
Stay on top of filing deadlines
Avoid penalties or legal issues from noncompliance
Final Thoughts
Sales tax is a core part of retail business operations. Whether you’re selling locally or across state lines, having a solid understanding of how sales tax works—and staying up-to-date on changing laws—is crucial.
The more your business grows, the more complex your tax obligations can become. Proactive compliance today prevents costly problems tomorrow.
📩 Need help managing sales tax for your retail business?
At Tax Alternatives, we help retailers understand their nexus, register in the right states, automate sales tax collection, and stay compliant with changing regulations.
Fill out the form below to schedule a free consultation with our sales tax experts.
