A Practical Guide that Answers Your Biggest Sales Tax Questions

Do you have questions about the ins and outs of sales tax? You’re not the only one. Professionals at all levels of experience often find themselves with more questions than answers when it comes to deciphering the rules and regulations of sales and use tax. Whether you’re a veteran specialist or a novice looking to build confidence in a new profession, you want answers. 

Sales Tax 101 starts with understanding what sales tax is. The most basic definition is an amount (tax) added to the price of goods or services when they are sold to the final buyer. This tax is usually separately stated and is in addition to the total price and paid by the person buying the item or service. 

Where things get complicated is keeping up with the rules surrounding sales tax. The states continuously edit their nexus rules and thresholds, taxability rules, as well as their reporting deadlines. Without the correct information, businesses risk miscalculations, late filings, and audit exposure. 

Sales Tax Institute has you covered with the resources and foundational information you need to start understanding your obligations, taxability and exemptions, and how to stay compliant, which allows businesses to operate smoothly and avoid unnecessary penalties. This guide breaks down three of the biggest questions sales tax professionals ask, providing clear answers to help you navigate your responsibilities with certainty. 

1. Where Do I Have to Collect Sales Tax?

This may seem like a simple question on the surface, but when you dig into how your business connects to different taxing jurisdictions, things can get complicated quickly. The keyword here is nexus. In the world of sales tax, nexus is the link between your business and a taxing jurisdiction. Once that bond begins, you are liable for collecting sales tax. 

Physical nexus is created by an office location or a remote employee, but it also extends to independent contractors or service providers. This kind of nexus might also be established through storing property for sale in the state, attending a tradeshow or event for the purpose of selling, or an employee or independent contractor visit customers or prospects in the state. Temporary and permanent presence can create nexus. 

So, if you don’t have a physical presence, you don’t have to collect sales tax, right? You may be mistaken if you sell products through an e-commerce platform. The 2018 South Dakota v. Wayfair decision changed how businesses think about nexus by establishing economic nexus as another form of tying a company to a taxing jurisdiction.  

The ruling came about in response to the growing use of online selling and the resulting decrease in sales tax revenue paid to the states. Economic nexus defines nexus for remote out-of-state sellers based on the economic activity in a state if physical presence doesn’t exist.  Economic nexus is established once a remote seller reaches a certain number of transactions or sales threshold. However, economic nexus requirements have gone through several changes since their initiation. 

For example, Alaska removed the transaction threshold, making the gross sales threshold the main determining factor in economic nexus. North Carolina has enacted similar changes and gross sales are now the primary consideration for remote sellers. Sellers with operations in both states now only have nexus if gross sales exceed $100,000. Most recently, Utah has eliminated their transaction threshold effective July 1, 2025. 

Keeping track of updates like these is essential to avoid penalties and ensure compliance.

2. What Is Taxable and What Is Exempt?

If you understand where you are liable for collecting sales tax thanks to nexus, your next question is probably some variation of: What is taxable? The rules around taxability and exemptions differ depending on the location, so it’s important to get nerdy about the details when it comes to understanding your sales tax obligations. 

One key detail is determining if your product or service is classified as tangible personal property, intangible property, real property or service, and how the state you’re selling in looks at those items’ taxability. Tangible personal property (TPP) is something that can be picked up and moved, and it is usually subject to tax unless the state has a specific exemption for that item. Combining a TPP sale with a service for a single charge can change your obligations, so make sure to review bundling policies. 

Consider the taxability of digital goods like software as a service (SaaS). In Connecticut, SaaS taxability is based on the conditions of the service agreement and whether or not the primary purpose is the service component or simply access to software. Alternatively, Iowa determines taxability based on how the SaaS is used, i.e., for personal or business use. For Iowa, commercial enterprise use of SaaS isn’t subject to tax, yet in Ohio, it is the opposite, and only personal use of SaaS is exempt. 

On the flip side of understanding taxability, managing exemptions and certificates is another critical aspect of sales tax compliance. Failure to properly manage these documents can result in significant penalties during an audit. Thankfully, this State-by-State Exemption Guide provides a comprehensive directory for handling exemptions. 

Understanding these distinctions can help you navigate the complexities of sales tax with greater confidence and accuracy. We’ll take a closer look at this concept, along with the nuances of nexus, during the upcoming  Sales Tax 101 webinar. Save your spot today!

3. How Do I Stay Compliant?

Now, what happens if you don’t have your finger on the pulse of updates to the definitions of nexus or taxability? You could miss a registration deadline, leading to unpaid tax liabilities and interest charges. Mitigate that risk by following this compliance checklist: 

• Understand Filing Frequencies and File Accurately

To avoid penalties, you must file returns accurately and on time. Some filing frequencies are monthly, while others are quarterly, semiannual, or annual, depending on the regulations and volume of sales for a business.  

If you are unsure of the exact requirements for filing, reporting, or remitting in a specific area, consider hiring a consultant to ensure you’ve dotted all your i’s and crossed all your t’s. 

• Validate Vendor Charged Tax 

You may be worried about underpaying, which is a valid concern. However, there’s also the worry of overpaying tax that isn’t due as a buyer. While you may receive a refund or credit towards future returns, the process may entail going through the seller or the state. The best way to avoid this is to ensure taxes charged by vendors are correct. 

• Understand Sourcing Rules 

Sourcing rules impact reporting. Arizona, California, and Illinois, amongst others, follow origin-based sourcing, where tax is based on the seller’s location. But states like Alabama, Arkansas, and Colorado follow destination-based sourcing, where the buyer’s location determines the tax. Understanding these rules is essential for accurate tax reporting and compliance. 

• Stay Organized for Multi-State Compliance and Use Automation Tools to Save Time 

Staying organized is key to tracking your reporting obligations. However, it can be hard to keep track of everything if you’re on a small team or have time constraints. Where possible, consider implementing sales tax automation tools to simplify the process. These tools help manage multi-state compliance by automating tax calculations, tracking nexus thresholds, and ensuring timely filings.  

While automation reduces the risks of errors and saves time, it’s still necessary to carefully review these processes and their results. Like humans, machines can also make mistakes. 

You can maintain compliance and avoid costly mistakes by staying informed and following this checklist. Do you still have questions? This article includes more details on sales tax basics and another handy checklist. 

Take Control of Sales Tax with the Right Resources 

Having the proper knowledge and resources can turn confusion into confidence, empowering you to navigate the complexities of sales tax with peace of mind. 

Understanding nexus, taxability rules, and filing requirements is crucial for preventing errors, reducing audit risk, and ensuring compliance. By staying informed about state-specific regulations and leveraging checklists like those above, businesses can strengthen and streamline their sales tax processes. 

For a deeper dive into these topics, join our upcoming Sales Tax 101 webinar. Sign up today to strengthen your understanding and simplify your approach to sales tax. With the right guidance and resources, you can take control of your sales tax obligations and focus on growing your business confidently.