Burkland Brief:
- Sales and use tax are core operational and financial risk areas
- Nexus determines where your business must collect and remit sales tax
- Different states tax different things: SaaS, digital products, and services are common gray areas
- Failing to collect or remit sales tax correctly can result in audits, penalties, and personal liability
Sales and use tax can be confusing areas of compliance, especially for businesses that sell in multiple states or offer a mix of products and services. Rules vary widely, and what’s taxable in one place may not be in another.
This FAQ covers the most common questions business owners ask, with clear explanations to help you avoid costly mistakes.
What’s the difference between sales tax and use tax?
- Sales tax is what your business collects from customers when you sell taxable goods or services.
- Use tax is something your business may owe when you purchase taxable items and don’t pay sales tax at the time of the sale. This often happens when buying from an out-of-state vendor who isn’t required to collect sales tax in your state.
Example: Let’s say you run a business in Illinois and purchase a $5,000 piece of equipment online from a seller in Oregon. Oregon doesn’t have sales tax, so the seller doesn’t collect any. But because you’re using the equipment in Illinois (a state that does tax that type of purchase) you’re responsible for reporting and paying use tax to Illinois at the same rate as the local sales tax.
Use tax ensures that in-state businesses don’t have a competitive disadvantage compared to out-of-state sellers. It’s essentially the state’s way of collecting what it would have earned in sales tax.
What’s the role of sales and use tax in a growing business?
Sales and use tax are core operational and financial risk areas. They impact pricing, billing system design, margin calculations, customer communications, and your audit profile.
If your business is selling in multiple states or through different channels (e.g. DTC, B2B, wholesale, marketplaces), the risk of non-compliance increases with every new jurisdiction. The U.S. has more than 12,000 distinct sales tax jurisdictions, according to the software company Avalara. Even if your business operates in just a handful of states, you may be responsible for applying and remitting taxes across dozens, or even hundreds, of localities. Many of these jurisdictions set their own rates and adjust them independently with the parameters of the state’s statutes, which adds a layer of complexity that’s difficult to manage without automated tools or centralized processes or a tax consultant.
Sales tax should be included in any conversation around expansion, product launches, and billing infrastructure. Waiting to “deal with it later” is one of the most expensive mistakes business owners make.
When do I need to collect sales tax in another state?
If your business has a tax connection, or “nexus”, in another state, you may be required to collect and remit sales tax there. This applies even if you’ve never stepped foot in that state. These rules came into play after the 2018 South Dakota v. Wayfair, Inc. Supreme Court decision and now apply in all states.
There are two types of nexus:
- Physical nexus: Having a physical presence in the state (like an office, warehouse, employee, or inventory).
- Economic nexus: Exceeding a sales or transaction threshold in a state, even without a physical presence.
Each state defines these thresholds differently, so you’ll need to track where you’re doing business and how much revenue is coming from each location.
Start by maintaining a nexus map—a clear, regularly updated list of where your business has physical or economic presence. Too often, companies assume they only need to register where they have offices or employees, but economic nexus laws in 45+ states say otherwise.
Best practices:
- Review nexus thresholds quarterly
- Set up alerts for state revenue and transaction thresholds
- Collect, verify, and validate exemption certificates
- Create a separate GL account to hold collected sales tax (it’s a liability, not revenue)
Examples of Economic Nexus by State
| State | Revenue Threshold | Transaction Threshold |
| California | $500,000 | None |
| New York | $500,000 | 100 |
| Florida | $100,000 | None |
| Illinois | $100,000 | 200* |
*Scheduled to be eliminated in 2026
The thresholds listed are illustrative and may change. For the most accurate, up-to-date information, always check with each state’s Department of Revenue or work with a tax advisor who specializes in multi-state compliance.
How do I know if my products or services are taxable?
Most states tax tangible goods, a growing number now tax digital products while others tax services.
A few examples:
- Tangible goods like furniture, hardware, and clothing. Usually taxable.
- Digital goods like eBooks or software. Depends on the state.
- Services like graphic design or consulting. Often exempt, but not always.
If you sell in multiple states, you’ll need to review taxability rules for each one or work with a tax advisor who specializes in multi-state compliance.
What happens if I sell through an online marketplace?
Marketplace facilitator laws have shifted much of the tax burden, but not all of it.
In most states, marketplace facilitators (such as Amazon, Etsy, Walmart Marketplace, and eBay) are now required to collect and remit sales tax on behalf of third-party sellers. That means if you sell through one of these platforms, they’ll usually handle the tax on your sales made directly through the platform.
However, that doesn’t mean you’re in the clear.
Here’s what you still may be responsible for:
- Registering in states if you meet their nexus thresholds (many states require registration even if the marketplace remits tax on your behalf)
- Filing periodic returns to report your marketplace sales, even if no tax is due
- Collecting and remitting sales tax on sales made through other channels (like your own Shopify site or wholesale invoices)
- Keeping accurate records of which sales were made through a facilitator and which were not
Keep your marketplace and DTC sales data segmented in your accounting system. Misreporting or double-reporting revenue is one of the most common causes of tax notices and filing issues for businesses that sell across multiple channels.
Do I need to charge sales tax on shipping and handling?
It depends on the state. Some states tax shipping if it’s part of the taxable sale, while others don’t, especially if shipping is separately stated on the invoice. If you bundle shipping and product pricing together, you may inadvertently trigger tax on the entire amount.
Do I need to collect sales tax on B2B sales?
Yes, unless the business buyer provides you with a valid resale certificate or exemption certificate.
- A resale certificate confirms that the buyer is purchasing goods to resell, not for use.
- Exemption certificates apply to nonprofit or government entities, among others. These are also used for state specific exemptions like agriculture, manufacturing, etc.
If you don’t collect these certificates and a sale is later challenged, you could be held liable for the uncollected tax.
Do I really have to pay use tax on small purchases?
Yes. If you buy a taxable item and the seller doesn’t collect sales tax, your business is responsible for reporting and paying use tax in the usage state, no matter the amount.
In practice, states typically focus on larger or repeated purchases during audits, but any unpaid use tax can become a liability. Keeping detailed records and reviewing vendor invoices for missing sales tax is a good habit.
What happens if I don’t collect sales tax when I’m supposed to?
If you fail to collect sales tax where you have nexus, your business may face fines, interest charges, and audits.
In many states, business owners and officers can be held personally liable for uncollected taxes. This is one area where ignorance is not a defense. It’s important to get it right from the beginning or correct it as soon as you discover an issue.
What records should I keep for sales and use tax?
You’ll want to maintain:
- Sales tax returns and payment confirmations
- Detailed sales records by invoice, product, and address
- Resale and exemption certificates
- Purchase receipts for items where use tax may apply
Good recordkeeping is your best defense in the event of an audit.
How often do I need to file sales tax returns?
Filing frequency depends on the state and your volume of sales. Some situations require monthly filing, others quarterly or annually.
When you register with a state’s tax authority, they’ll assign you a filing schedule. Don’t forget to file even if you had zero sales during the period. Many states require “zero returns” to stay compliant.
What if I just found out I’ve been doing this wrong?
You’re not alone. Many business owners only realize they have sales or use tax exposure when they expand into new states or get audited.
The good news is that many states offer voluntary disclosure agreements (VDAs) that reduce or waive penalties if you come forward before they catch the mistake. A tax professional can help you navigate this process and get back on track. If your business has unpaid sales tax liabilities, it’s important to act quickly. Once an audit is underway, it’s often too late to take advantage of voluntary disclosure programs. Most states won’t offer them after an audit or any communication regarding that tax type has been triggered.
How far back can states audit my business for sales or use tax?
Most states have a statute of limitations ranging from 3 to 4 years. But if you never registered or filed, there may be no time limit. States can assess back taxes indefinitely. Voluntarily registering and correcting issues now is much safer than waiting for an audit.
How does sales tax impact M&A or investor due diligence?
Tax exposure can stall deals or reduce your valuation. In M&A, buyers often request escrows or holdbacks if they see unclear sales tax exposure. In private equity, tax issues become part of the Quality of Earnings (QoE) review as part of a specialized tax due diligence process.
A clean, documented sales tax posture:
- Increases trust with buyers and investors
- Speeds up diligence timelines
- Reduces the risk of post-close disputes or clawbacks
Bottom Line
Sales and use tax issues rarely show up until they’re a problem, and by then, they’re expensive. Whether you’re opening a second location, launching a new product line, or just growing faster than your systems can keep up, it pays to know where you stand before states come calling.
Staying compliant across jurisdictions doesn’t have to be complicated. With the right tools and support you can protect your margins, avoid unpleasant surprises, and stay focused on running your business.
Need help sorting out your sales and use tax obligations?
Burkland’s tax team helps growing businesses stay compliant, file accurately, and avoid common pitfalls. Contact us to request more information.