Sales Tax Glossary and FAQ for Online Sellers
Plain-English definitions of the terms that show up in state guidance, platform settings, and audit letters, followed by answers to the questions online sellers ask most.
- Combined rate
- The total sales tax rate that applies at a specific address, calculated by adding the state rate to every county, city, and special district rate whose boundary includes that address. Two addresses in the same city can have different combined rates if a district boundary separates them.
- Consumer use tax
- A tax owed directly by the buyer to their own state when they purchase a taxable item and the seller did not collect sales tax. It is charged at the same rate as sales tax and exists to prevent buyers from avoiding tax by purchasing from out-of-state sellers.
- Destination-based sourcing
- A rule under which the sales tax rate is determined by the location where the customer receives the goods, usually the shipping address. Most states use destination sourcing, and nearly all states apply it to sales that cross state lines.
- Drop shipping
- A fulfillment arrangement in which the retailer sells to the customer but a third-party supplier ships the product directly. Sales tax responsibility in drop shipping depends on which parties have nexus in the destination state and whether the retailer can provide the supplier with a valid resale certificate.
- Economic nexus
- A collection obligation created purely by the volume of sales into a state, without any physical presence there. Every state with a sales tax has adopted an economic nexus standard following the 2018 Supreme Court decision that permitted it.
- Economic nexus threshold
- The level of sales, and in some states the number of transactions, into a state that triggers economic nexus. Thresholds are set by each state, are measured over a period the state defines, and differ in whether they count gross, retail, or taxable sales.
- Exemption certificate
- A document a buyer provides to a seller to establish that a sale is exempt from sales tax, such as a purchase for resale, by a nonprofit, or for manufacturing use. The seller must keep the certificate on file to justify not collecting tax on that sale.
- Filing frequency
- How often a state requires a registered seller to file a sales tax return, typically monthly, quarterly, or annually. States assign the frequency based on expected tax liability and can change it as a seller's volume grows or shrinks.
- Home rule jurisdiction
- A local government, such as certain cities or parishes in a few states, that administers its own sales tax separately from the state, with its own registration, rates, and returns. Home rule adds a second layer of compliance on top of the state process.
- Marketplace facilitator
- An operator of an online marketplace that, under state law, must collect and remit sales tax on behalf of the third-party sellers using its platform. Facilitator laws exist in every state with a sales tax, though thresholds and definitions vary.
- Nexus
- The connection between a business and a state that is sufficient for the state to require the business to collect its sales tax. Nexus can arise from physical presence, from economic activity, or in some states from affiliate or referral relationships.
- Origin-based sourcing
- A rule under which the sales tax rate is determined by the seller's location rather than the buyer's. A minority of states use origin sourcing, and generally only for sales where both the seller and the buyer are inside the state.
- Physical presence nexus
- Nexus created by a tangible connection to a state, such as an office, store, warehouse, inventory held by a fulfillment provider, employees, contractors, or in some states participation in trade shows. Physical presence creates nexus regardless of sales volume.
- Prepayment
- A requirement in some states for higher-volume sellers to pay an estimated portion of their sales tax liability before the filing period ends, with the balance settled on the regular return. Missing a prepayment can trigger penalties even if the final return is on time.
- Product taxability
- Whether a specific type of product or service is subject to sales tax in a given state, and at what rate. Categories such as clothing, groceries, digital goods, software, and supplements are taxed differently across states, so a single product can be taxable in one state and exempt in another.
- Remittance
- The act of paying collected sales tax to the state, usually along with the filed return. Sales tax is held in trust for the state between collection and remittance, which is why states treat unremitted tax more severely than ordinary debt.
- Resale certificate
- A type of exemption certificate a buyer gives a seller to purchase goods tax free because the buyer intends to resell them. The buyer then collects tax from the final customer. Requirements for a valid certificate vary by state, and some states do not accept out-of-state certificates.
- Rooftop-level rate lookup
- Determining the sales tax rate by resolving a specific validated street address to the exact set of jurisdictions that contain it, rather than approximating by ZIP code or city name. It is the level of precision needed to get combined rates right in areas with special districts.
- Sales tax holiday
- A limited period, usually a weekend or a week, during which a state suspends sales tax on specific categories such as school supplies, clothing under a price cap, or emergency preparedness items. Sellers shipping into the state are generally expected to honor the holiday on qualifying items.
- Sales tax permit
- The registration a business obtains from a state that authorizes it to collect sales tax there. In most states it is a violation to collect tax without a permit, and the permit number is what the state uses to track returns and payments.
- Seller's use tax
- The tax an out-of-state seller collects and remits on sales into a state where it has nexus but no in-state location. Some states register remote sellers for seller's use tax rather than sales tax; the rate is the same but the account type and return may differ.
- Special taxing district
- A local government unit created for a specific purpose, such as transit, a stadium, a hospital, fire protection, or economic development, that levies its own sales tax within its boundary. District boundaries frequently cut across city and ZIP code lines.
- Streamlined Sales Tax
- A cooperative agreement among roughly two dozen states to simplify and standardize sales tax administration. It offers a single registration that creates accounts in all chosen member states and a uniform exemption certificate accepted across them.
- Tangible personal property
- Physical goods that can be seen, weighed, measured, or touched, which is the traditional base of sales tax in every state. Services, digital products, and software are taxed only where a state has specifically extended its tax to them.
- Tax-inclusive pricing
- Displaying a single price that already contains sales tax, with the tax backed out afterward for reporting. It is uncommon for US online stores, and some states restrict or regulate how tax-inclusive prices must be disclosed to customers.
- Trailing nexus
- A rule in some states that keeps a collection obligation in place for a period after the activity that created nexus has ended, such as the remainder of the calendar year or a following year. Sellers cannot always stop collecting the moment they drop below a threshold.
- Vendor discount
- A small allowance some states grant sellers for filing and paying on time, retained from the tax collected to compensate for the cost of collection. It is often capped per period and forfeited when a return is late.
- Voluntary disclosure agreement
- A program under which a seller who should have been registered and collecting in a state comes forward before the state contacts it, typically in exchange for a limited lookback period and reduced or waived penalties. It is the standard route for cleaning up past exposure.
- Zero return
- A sales tax return filed for a period in which the seller had no taxable sales in that state. States require zero returns from every registered seller on the assigned schedule, and a missed zero return generates the same notices and penalties as a missed regular one.
- ZIP code rate approximation
- Assigning a sales tax rate based on the five-digit postal code rather than the full street address. Because ZIP codes are mail routes rather than tax boundaries, the method charges the wrong combined rate for a share of addresses and is a common source of audit adjustments.
Questions people ask
How do I know which states I need to collect sales tax in?
You need to collect in every state where you have nexus. Start with physical presence: any state where you have an office, employees, contractors, or inventory, including inventory in a third-party warehouse. Then measure your sales by ship-to state against each state's economic nexus threshold over the period the state defines. Any state that meets either test is a state where you register and collect.
What is the difference between sales tax and use tax?
They are two sides of the same tax. Sales tax is collected by the seller at the point of sale and remitted to the state. Use tax is owed by the buyer directly when a taxable purchase was made without tax being collected, such as from a seller with no nexus. The rates are the same; the difference is who pays the state.
Why do two customers in the same city pay different sales tax rates?
Because the combined rate is built from several layers, including special districts whose boundaries do not follow city limits. One customer may be inside a transit or stadium district and the other just outside it. This is also why rates keyed by ZIP code are unreliable, since a ZIP can contain both addresses.
Do I charge the rate where my business is located or where the customer is?
For sales shipped across state lines, almost always the customer's location. For sales within your own state, it depends on whether the state is origin based, where your location's rate applies, or destination based, where the customer's address rate applies. Most states are destination based, so the customer's rate is the safe default to understand first.
Is shipping taxable?
It depends on the state and on how the charge is presented. In many states, shipping is taxable when the goods are taxable. In others, shipping that is separately stated on the invoice is exempt. Handling charges are often treated differently from pure freight, and combined shipping and handling lines tend to be taxed. Check the rule for each state where you collect.
If a marketplace collects sales tax on my orders, am I done?
Not entirely. The marketplace handles tax on orders placed through it. You still own tax on orders from your own website, you may still need to be registered in states where marketplace inventory creates physical presence, marketplace sales may count toward your economic nexus thresholds, and some states want facilitated sales reported on your own return.
What happens if I collect sales tax in a state where I am not registered?
Collecting without a permit is a violation in most states, and any tax you collect must be remitted or refunded to customers; it can never be kept. The fix is to register promptly, remit what you collected, and stop collecting in states where you have no nexus. If you do have nexus there, registration was required anyway.
How often do sales tax rates change?
Continuously across the country, though individual jurisdictions change less often. Many local changes take effect on the first day of a calendar quarter, so January, April, July, and October see the most activity, but changes also happen on other dates. Any rate data you maintain yourself needs to be reviewed at least quarterly for every state where you collect.
What records should I keep for sales tax?
For every order, keep the ship-to address, the products sold and their tax categories, the rate and jurisdictions applied, the tax charged, and any refunds. Keep exemption certificates for every exempt sale, copies of every filed return, and proof of payment. Retain everything for at least as long as the longest lookback period among the states where you file, and longer if you never filed somewhere you should have.
Do I need to file a return if I had no sales in a state this period?
Yes, if you are registered there. States expect a return on the assigned schedule regardless of activity, and a missing zero return produces the same late notices and penalties as a missing regular return. Filing zero returns takes minutes and prevents a surprising amount of correspondence.
Are digital products and software subject to sales tax?
In some states yes, in others no, and the definitions vary. Some states tax downloaded software but not streaming access, some tax software delivered as a service, and at least one taxes only a portion of the charge. Treat digital goods as their own taxability category and check each state where you collect rather than assuming they follow physical goods.
Can I stop collecting in a state once my sales drop below the threshold?
Not always immediately. Several states apply trailing nexus, which keeps the obligation in place for a defined period after you fall below the threshold, and physical presence nexus does not depend on sales volume at all. Check the state's rule, and when you do stop, close the account properly rather than simply ceasing to file.
Should I hire a professional or use software for sales tax?
For the per-order calculation, software that resolves rates at the address level is the practical answer regardless of size, since a person cannot do that arithmetic on every order. A professional adds value on judgment questions: nexus studies, taxability of unusual products, voluntary disclosures, and audits. Many sellers use both, with the software feeding clean data to whoever prepares the returns.