Navigating Sales Tax in the US: What’s Taxable and What’s Not?

Understanding sales tax in the US is essential for small businesses, especially when dealing with different state regulations. Since tax rules vary, knowing what’s taxable and what’s exempt can help business owners avoid compliance issues. Whether you’re selling goods or services, having the right knowledge and access to sales tax services can make tax management easier.

This guide breaks down the essentials of US sales tax to help you stay compliant.

1. How Sales Tax Works in the US

Sales tax is determined at the state and local levels, meaning tax rates and rules can differ significantly. Key points to keep in mind:

• There is no federal sales tax; each state sets its own tax policies.
• Forty-five states and Washington, D.C., impose sales tax, while five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not.
• Local governments can add their own sales tax, increasing the total rate a business must charge customers.
• Tax laws and rates change frequently, requiring businesses to stay updated to remain compliant.

2. What Types of Sales Are Taxable?

Most states impose sales tax on physical products and some services.

2.1 Physical Goods

• Apparel and accessories – Clothing and footwear are often taxable, though some states provide exemptions for lower-cost items.
• Electronics and appliances – Items such as smartphones, laptops, and home appliances typically incur sales tax.
• Furniture and home goods – Sofas, mattresses, and décor are usually subject to tax.
• Prepared and restaurant foods – Meals purchased from restaurants, takeout, and catering services are commonly taxed.

2.2 Digital Products and Software

• Streaming and subscription services – Some states apply sales tax to digital streaming platforms.
• Digital downloads – E-books, movies, and software may be taxed depending on state regulations.
• Software as a Service (SaaS) – Cloud-based software products may be taxable in certain jurisdictions.

2.3 Services

While many professional services are tax-exempt, certain services may be taxed, including:

• Repairs and installations
• Personal care services like haircuts and spa treatments
• Admission to entertainment events and recreational activities

✅ Your sales tax, expertly managed. Our tax team takes care of registration, filing, and deadlines. Learn about our service here.

3. What’s Exempt from Sales Tax?

Not all goods and services are taxable. Many states offer exemptions for necessities and certain business purchases.

3.1 Essential Goods

• Grocery staples – Basic food items such as fresh produce and bread are often exempt, though processed foods like candy and soda may still be taxed.
• Medical supplies and prescription drugs – Many states do not tax prescription medications, prosthetics, and wheelchairs.
• Educational materials – Some states provide tax exemptions for textbooks and learning supplies.

3.2 Business and Manufacturing Exemptions

• Resale goods – Businesses purchasing inventory for resale typically do not pay sales tax at the time of purchase.
• Farming and manufacturing equipment – Some states exempt machinery used in production from sales tax.

4. Sales Tax Variations by State

Each state sets its own rules for taxable and exempt transactions.

4.1 New York Sales Tax Rules

• Taxable:
  • Restaurant meals, soft drinks, and snack foods
  • Clothing over $110 per item
  • Electronics and household appliances
• Exempt:
  • Most grocery staples, prescription drugs, and medical devices
  • Some clothing under $110 per item

4.2 California Sales Tax Rules

• Taxable:
  • Most consumer goods, including furniture, clothing, and electronics
  • Prepared foods and restaurant meals
  • Digital downloads and certain services
• Exempt:
  • Grocery store food (except for soda and candy)
  • Prescription medications and medical devices
  • Sales to government agencies

5. Sales Tax Compliance for Business Owners

Understanding and complying with sales tax laws can help businesses avoid penalties. Steps for compliance include:

• Registering for a Sales Tax Permit – Businesses must obtain a sales tax permit before collecting tax from customers.
• Keeping Track of Tax Rate Changes – State and local tax rates change frequently.
• Determining Nexus Requirements – Businesses selling across state lines may need to collect tax in multiple states due to economic nexus laws.
• Filing and Paying Sales Tax on Time – Each state has its own deadlines, and missing them may result in penalties.

Summary

Sales tax in the US varies widely across states, making it essential for small businesses to stay informed. Most tangible goods are taxable, while essentials like groceries and prescription medications are often exempt. Businesses must keep track of changing tax rates, nexus rules, and filing deadlines to remain compliant. By understanding these regulations and leveraging sales tax services, businesses can manage sales tax more effectively and avoid unnecessary penalties.

Expert Sales Tax Support 

Focus on your business while our tax team handles your compliance. Get comprehensive support from registration to filing, plus direct access to your Customer Success Manager via SMS. Chat with us now, email [email protected], or use our contact form.