Sales Tax for Small Businesses: A State-by-State Overview

Sales tax is one of the most common and most misunderstood taxes small business owners face. Unlike federal income taxes, sales tax is governed at the state and local level, which means the rules can vary widely depending on where you operate and where your customers are located. For many small businesses, especially those selling online or across state lines, sales tax compliance directly affects pricing, cash flow, and legal risk.

Misunderstanding your sales tax obligations can lead to under-collecting tax, missed filings, or penalties that can add up quickly. This guide explains how sales tax works for small businesses, outlines key compliance concepts, like economic nexus, and provides a clear state-by-state overview of 2026 sales tax rates to help you stay compliant and confident as you operate.

Key Highlights

• Sales tax is regulated by states, not the federal government, and rules vary widely by location.

• Many small businesses owe sales tax in states where they have economic nexus, even without a physical presence.

• Five states do not impose a state-level sales tax, while others combine state and local rates.

• Filing frequency and registration requirements depend on your sales volume and where you operate.

• Working with experienced tax professionals can simplify multi-state sales tax compliance.

What is Sales Tax?

Definition and Basics

Sales tax is a consumption tax imposed on the retail sale of specific goods and services. In most states, sales tax collection occurs at the point of sale from customers, which businesses remit to the appropriate tax authority, such as the Department of Revenue. While the customer ultimately pays sales tax, your business is legally responsible for: 

• Calculating the correct rate 

• Collecting it properly

• Filing returns

• Submitting payment on time

Taxability varies by state. Tangible personal property is commonly taxed, but many states also tax digital products, subscriptions, or professional services. Other states provide exemptions for necessities such as groceries, prescription medications, and manufacturing inputs. Because these rules differ by local jurisdiction, understanding what you sell and where you sell it is essential.

Sales Tax vs. Use Tax

Sales tax and use tax work together. 

• Sales tax applies when the seller collects tax at the time of purchase.

• Use tax applies when sales tax was not collected, but the item is used, stored, or consumed in a state where it would normally be taxable.

For example, if a business purchases equipment from an out-of-state vendor that does not charge sales tax, the business may still owe use tax to its home state. Use tax is often overlooked, which can create exposure during audits.

How Sales Tax Works for Small Businesses

Registration and Collection

Before collecting sales tax, a business must register with the state or states where it has a sales tax obligation. Registration is required in every state where the business has nexus. Once registered, the business collects sales tax from customers based on the applicable state and local government rates.

The registration process typically requires information such as your business entity type (LLC, partnership, S corporation, C corporation, etc.), Employer Identification Number (EIN), products or services sold, and expected sales volume. Collecting sales tax before registering can lead to compliance problems, so registration should be completed before making taxable sales.

Economic Nexus Explained

Economic nexus determines whether a business must collect and remit sales tax in a state based on sales activity rather than physical presence. After the Supreme Court’s Wayfair decision in 2018, most states adopted economic nexus thresholds for remote sellers.

Common thresholds include $100,000 in sales or 200 taxable transactions in a state during a calendar year, although some states use higher thresholds. Once a threshold is exceeded, the business is generally required to register and begin collecting sales tax. For ecommerce businesses and remote sellers, understanding how sales tax works for small businesses operating online is especially important.

Filing and Remittance

Small business sales tax filing frequency varies by state and by company size. Depending on your sales volume, you may be required to file:

• Monthly

• Quarterly

• Annually

Many states also require zero returns, even when no taxable sales occur.

Late filings or payments often result in penalties and interest. Maintaining accurate records and tracking filing deadlines is critical, especially for businesses operating across multiple states.

2026 State-by-State Sales Tax Overview

How Rates Vary Across States

Local and state sales tax rates vary significantly across the United States. Some states impose relatively low base rates but allow jurisdictions to add local sales tax rates for additional taxes. Others maintain higher statewide rates with fewer local add-ons.

According to data on state and local sales tax rates, California has the highest statewide sales tax rate at 7.25%. Several states tie at 7%. Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose a state-level sales tax, although Alaska allows local sales taxes.

2026 Sales Tax Rates by State

This state sales tax table 2026 below summarizes base state rates, common local ranges, and typical combined rates for all 50 states. These figures reflect widely used averages and are consistent with guidance from the state sales tax rates chart used by tax professionals.

Sales Tax Holidays and Exemptions

What Are Sales Tax Holidays?

Specific periods when items are tax-exempt from state sales tax (and some local taxes) are called sales tax holidays. Back-to-school sales are among the most common forms of sales tax holidays in the United States, though they can be held regionally. Some states have sales tax holidays to prepare for catastrophic weather events and for hunting and fishing seasons.

Sales tax compliance tips for holidays:

• Carefully review and understand state rules. 

• Maintain detailed records of your sales tax holiday performance. 

• Configure point-of-sale (POS) systems to account for exemptions in advance. 

• Train employees in preparation for the sales tax holiday.  

Common Exemptions for Small Businesses

Typical exempt sales that your small business should account for include:

• Food (for private/home consumption)

• Essential medical supplies 

• Prescriptions 

• Clothing (including footwear)

• Educational materiels 

Common Challenges Small Businesses Face

Multi-State Compliance

Small businesses that sell items online will almost certainly sell to customers across state lines. You must account for differing tax laws and sales tax rates in these regions to ensure ongoing multi-state compliance.  

Keeping Up with Rate Changes

There are thousands of sales tax jurisdictions, and it's critical to keep up with potential rate changes that impact your operations.

Periodically monitor state and local tax jurisdictions for changes and update your POS system accordingly.  

Nexus Triggers and Remote Sales

Remote sellers may create an economic nexus in states where transaction and sales thresholds are met. The most common: 

• $100,000 in sales, or 

• 200 transactions.  

It's critically important to understand nexus triggers before entering a new market. 

Best Practices for Small Business Sales Tax Compliance

Sales tax compliance becomes more complex as a business grows, especially when selling across multiple states. 

Automating Sales Tax

Many business owners rely on automation tools to reduce errors and administrative burden. If you handle your business's sales tax responsibilities, using do-it-yourself accounting software to the fullest, such as ClientBooks, is a best practice. 

Working With Professionals

When you've reached the limits of sales tax automation effectiveness, consider professional support. Working with a firm that provides year-round tax support for small businesses can help ensure:

• Accurate registration

• Timely filings

• Proactive planning

Next Steps

Sales tax compliance is a core responsibility for small business owners, particularly in a marketplace where selling across state lines is increasingly common. Understanding how sales tax works, knowing where you have nexus, and staying current on state-specific rules are essential to avoiding penalties and protecting cash flow.

With the right systems and expert support from 1-800Accountant, America's leading virtual accounting firm, sales tax need not be overwhelming. Proactive planning and professional guidance can help you stay compliant, confident, and focused on growing your business.

Schedule a free 30-minute consultation to get started.