US sales tax confuses anyone arriving from a VAT country, because almost every intuition transfers badly. There is no federal sales tax. There is no input credit to reclaim. The rate is not national, and frequently not even uniform within a state. And whether you must charge it at all depends on a concept — nexus — that has no VAT equivalent.
The compressed version: sales tax is levied by states and their local jurisdictions, charged once at the final sale, and collected by the seller only where that seller has a connection to the state significant enough to create an obligation.
Sales tax is not VAT
VAT applies at every stage of a supply chain, with each business reclaiming the tax it paid on its inputs, so tax accumulates only on the value each stage adds. Sales tax applies once, at the final retail sale, and businesses buying for resale are exempt at the point of purchase rather than reclaiming afterwards.
That single difference drives most of the practical divergence. There is no input tax to recover, so sales tax paid on a genuine business purchase is usually just a cost. Exemption is handled with paperwork rather than a return: a reseller gives the seller an exemption certificate and the seller does not charge the tax at all.
The other divergence is who sets the rules. VAT is national. Sales tax is set by states, and often by counties, cities and special districts stacking on top — which is why a single state can contain hundreds of distinct combined rates, and why "the rate in Texas" is not a meaningful phrase.
Nexus: whether you must collect at all
Nexus is the connection between a seller and a state that obliges the seller to register, collect and remit. Without nexus in a state you generally have no duty to collect that state’s tax, however many customers you have there.
Physical nexus is the older and simpler form: an office, employees, inventory in a warehouse, sometimes even attending trade shows. Economic nexus is the consequential modern form, established after the Supreme Court’s 2018 Wayfair decision, which permitted states to require collection based purely on sales volume with no physical presence at all.
The thresholds cluster tightly. Of the states publishing an economic nexus dollar threshold, the large majority use $100,000 in sales, with a handful at $250,000 or $500,000. Many states historically paired this with a 200-transaction test, but that second test is being abandoned steadily — well over a dozen states have dropped it, Illinois removed its 200-transaction rule from January 2026, and Kentucky follows in August 2026. The direction is clearly toward a sales-only standard.
For a service business or freelancer the position is usually easier than it sounds: many services are not taxable in many states, and thresholds around $100,000 per state exclude most small sellers from most states. The businesses that need to take this seriously are those selling taxable goods, or taxable digital products and software, at volume across state lines.
Which rate, and whose
Once you have nexus, the rate generally follows the customer rather than you. Most states are destination-sourced: the applicable rate is the combined state, county, city and district rate at the delivery address. A minority apply origin sourcing for sales within the state, where the seller’s location governs.
This is why rate lookup is a job for software rather than a table you maintain by hand. Combined rates can change across a street, districts overlap irregularly, and rates change on their own schedules. Charging a stale rate produces either an under-collection you must fund yourself or an over-collection you owe back to the customer.
Taxability compounds it. What is taxable varies by state and by product: groceries, clothing, digital goods, software-as-a-service and professional services are all treated inconsistently. The same invoice line can be taxable in one state and exempt in the next, which makes this a product-classification problem before it is a rate problem.
What the invoice should show
Where you charge sales tax, show it as a separate line rather than folding it into the price. Separate statement is expected by customers, frequently required by state rules, and necessary for the customer’s own records — a business buyer needs to see what tax was charged even though they cannot reclaim it.
A workable layout gives the subtotal before tax, the sales tax as its own line with the rate applied and ideally the jurisdiction, then the total. Where line items differ in taxability, showing tax per line or grouping taxable and exempt items separately prevents an argument about how the total was reached.
Where you are not charging tax, be able to say why. An exempt sale supported by a customer’s certificate should reference it; a sale into a state where you lack nexus needs no note to the customer but does need your own record explaining the decision if it is ever questioned.
Exemption certificates are the paperwork that matters
When a customer claims exemption — most often a reseller, sometimes a non-profit or government body — the exemption lives in their certificate, not in their assertion. You collect and retain the certificate, and it is what justifies not having charged tax if a state later audits you.
The liability position is the part people underestimate. If you fail to charge tax that was due, the state generally comes to you for it, not to your customer. A missing or expired certificate can therefore convert an exempt sale into tax paid out of your own margin, years after the sale.
The discipline is simple: collect the certificate at or before the first exempt sale, check it is complete and covers the right state, note any expiry, and store it with your records for the retention period. It is one of the highest-value pieces of filing a US seller does.
Common Mistakes
Assuming one rate per state
County, city and district taxes stack on the state rate, so a single state can contain hundreds of combined rates. Under destination sourcing the customer’s address decides, not yours.
Treating sales tax like reclaimable VAT
There is no input credit. Sales tax paid on business purchases is generally a cost, and the way to avoid it on goods you resell is an exemption certificate at purchase — not a reclaim afterwards.
Ignoring economic nexus because you have no physical presence
Since Wayfair, sales volume alone can create an obligation. Most states use a $100,000 threshold and the transaction-count test is being dropped, so growth into a state can create a duty you never registered for.
Accepting an exemption claim without the certificate
If the certificate is missing or invalid, the state generally pursues you for the uncollected tax. The customer’s word is not documentation; the certificate is.
Frequently Asked Questions
Do I charge sales tax on services?
It depends entirely on the state and the service. Many states tax few or no professional services while taxing others, and treatment of digital products and software varies widely. Check the specific state rather than assuming services are exempt everywhere.
What if I sell to customers in a state where I have no nexus?
You generally have no obligation to collect that state’s tax. The customer may technically owe use tax directly, but that is their responsibility rather than yours. Monitor sales into each state, because crossing a threshold creates an obligation going forward.
Do I charge sales tax to international customers?
Exports are typically outside the scope of US state sales tax, though rules and evidence requirements are state-specific. Note that the destination country may impose its own import VAT or duties on your customer.
How is this different from VAT on an invoice?
VAT is charged at every stage with businesses reclaiming input tax, requires a VAT number on the invoice, and is set nationally. Sales tax is charged once at retail, is not reclaimable, uses exemption certificates instead of input credits, and is set by states and localities.
Sources & Further Reading
- South Dakota v. Wayfair, Inc. — opinion of the Court — Supreme Court of the United States
- Guidance for businesses on state sales tax registration — Streamlined Sales Tax Governing Board
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