Ch4. Sales and Use Tax — Consumption Tax Structure and Business Obligations

What Is Sales Tax?

Sales tax: A transaction-based consumption tax imposed at the state and local level on the sale of tangible personal property and certain services.

Unlike VAT (Value-Added Tax) used in most other countries, the US does not have a federal sales tax. Sales taxes are administered by states and localities:

Key characteristics:
- Imposed at point of sale (retailer collects from customer)
- Rate varies by state and locality (combined rates: 0%–11%+)
- No sales tax in: Alaska, Delaware, Montana, New Hampshire, Oregon
- Applies primarily to tangible goods; services vary by state

The ultimate burden falls on the consumer, but businesses collect and remit the tax to the state — making compliance a business obligation.

Output Tax, Input Credit, and the Amount Remitted

Unlike VAT, standard US sales tax does not use a credit-invoice system. There is generally no “input credit” for sales tax paid on business purchases (with some exceptions for manufacturing machinery in certain states).

However, a resale certificate (also called an exemption certificate) works somewhat like a VAT zero-rating for resellers:

Sales tax on a supply chain (simplified):
Manufacturer → Distributor: No tax collected (resale certificate)
Distributor → Retailer: No tax collected (resale certificate)
Retailer → Consumer: Tax collected on full retail price

The consumer bears the entire sales tax burden.
Businesses buying for resale pay no sales tax on those purchases.

Example (State rate 8%)

Transaction	Sale Price	Sales Tax Collected	Remitted
Manufacturer → Distributor	$50	$0 (resale cert)	$0
Distributor → Retailer	$70	$0 (resale cert)	$0
Retailer → Consumer	$100	$8	$8

Nexus — When Must You Collect Sales Tax?

Nexus is the level of connection between a business and a state that creates an obligation to collect and remit that state’s sales tax.

Physical Nexus

Having a physical presence in the state creates nexus:

Office, warehouse, or store
Employees or independent contractors working in the state
Inventory stored in the state (including in Amazon FBA warehouses)

Economic Nexus (Post-Wayfair, 2018)

Following the South Dakota v. Wayfair Supreme Court decision (2018), states can impose sales tax collection obligations on remote sellers based on economic activity alone:

Typical economic nexus thresholds (varies by state):
- $100,000 in sales into the state, OR
- 200 or more transactions into the state
(within the prior or current calendar year)

All 50 states with sales tax have enacted some form of economic nexus law post-Wayfair.

Taxable vs. Exempt Transactions

Taxable Transactions

Tangible personal property (clothing, electronics, furniture, etc.)
Some digital products and software (varies by state)
Prepared food and restaurant meals
Hotel rooms and accommodations

Common Exemptions

Exemption Category	Examples
Groceries (unprepared food)	Most states exempt food for home consumption
Prescription medicine	Nearly universally exempt
Agricultural inputs	Seeds, feed, farm equipment (many states)
Manufacturing machinery	Equipment used in production (many states)
Resale	Items purchased specifically for resale
Nonprofit organizations	Qualifying tax-exempt entities

Zero Rate vs. Exemption

Under US sales tax, there is no “zero rate” equivalent to VAT. Exemptions simply mean the transaction is not subject to the tax at all. Most businesses buy for resale using an exemption/resale certificate.

Use Tax

Use tax is the complement to sales tax. When a taxable item is purchased without paying sales tax (e.g., purchased from an out-of-state vendor that didn’t collect, or purchased in a no-tax state), the buyer owes use tax to their home state.

Use tax applies when:
- You buy goods out-of-state for use in your state
- Sales tax wasn't collected at the time of purchase
- Rate: same as the state's sales tax rate

Example:
Texas business buys $10,000 of equipment from a Montana vendor.
Montana has no sales tax, so no tax was collected.
Texas business owes Texas use tax: $10,000 × 6.25% = $625

Resale Certificate (Exemption Certificate)

Businesses that purchase goods for resale provide a resale certificate to the seller to avoid paying sales tax on those purchases.

Key requirements:

The buyer must hold a valid sales tax permit in the state
The goods must actually be resold
Certificates have varying validity periods by state

Misuse of resale certificates (buying for personal use with a resale cert) is tax fraud and carries significant penalties.

Sales Tax Filing and Remittance

Registration: Businesses with nexus must register with each state’s revenue department before collecting sales tax.

Filing frequency: Determined by the amount of tax collected:

Typical filing schedules:
- Monthly: High-volume sellers
- Quarterly: Mid-volume sellers
- Annually: Low-volume sellers

Filing deadline: Usually the 20th–25th of the month following the reporting period.

Marketplace facilitators: Platforms like Amazon, Etsy, and eBay are now required by most states to collect and remit sales tax on behalf of third-party sellers, simplifying compliance for small sellers.

Sales Tax vs. VAT

Feature	US Sales Tax	VAT (Europe, most countries)
Collection point	Final retail sale	Every stage in supply chain
Input credit	No (resale exemption used instead)	Yes — businesses reclaim VAT paid
Rate	Varies by state/locality	Set by national government
Federal level	None in the US	Single federal rate
Record keeping	Simpler for end consumer	More complex for businesses

Business Compliance Checklist

Determine where you have physical and/or economic nexus
Register for a sales tax permit in each nexus state
Configure your sales systems to collect the correct tax rates (product + jurisdiction)
Obtain valid resale or exemption certificates from qualifying customers
File and remit on time — late filing penalties can be substantial
Keep records of all sales and certificates for at least 4 years

Learning Checklist

Explain the difference between sales tax and VAT
Describe physical nexus vs. economic nexus (post-Wayfair)
Explain when a resale certificate eliminates the obligation to collect tax
Give three examples of commonly exempt transactions in most states
Explain the use tax and when it applies

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