tax
Sales Tax / VAT
Tax added to the sale of goods and services - sales tax in the US, VAT in the UK and EU.
Definition
Sales tax (US) and VAT (UK/EU) are taxes added to the price of goods and services that the business collects from customers and remits to the tax authority. In the US, sales tax varies by state and locality (4-10% typically) and is generally collected only by businesses with 'nexus' (physical or economic presence) in that state. In the UK, VAT is 20% standard rate and registration is required once turnover exceeds £85K. The business is a collector, not a payer - the tax belongs to the authority, not to revenue.
US sales tax nexus after Wayfair
The 2018 Supreme Court decision South Dakota v Wayfair transformed US sales tax compliance. Before Wayfair, a business had to collect sales tax only in states where it had physical presence (office, warehouse, employee). After Wayfair, states can require sales tax collection based on economic nexus: typically 100K in sales or 200 transactions per year into the state. Forty-five US states plus DC have enacted economic nexus rules with varying thresholds. Practical impact: a US e-commerce business selling nationally likely has nexus in 20 to 40 states and must register, collect, and remit in each. Service businesses generally have less exposure because services are taxable in fewer states, but states like Hawaii, New Mexico, South Dakota, and Washington tax most services. Audit your nexus footprint annually; non-compliance penalties compound quickly.
US sales tax automation tools
Manual sales tax compliance across 45 states is impractical at scale. Three platforms dominate US small business sales tax automation. Avalara: most comprehensive, mid-market and up, 100 to 500 dollars per month minimum, integrates with QuickBooks, Shopify, NetSuite, Salesforce. TaxJar (Stripe-owned): SMB-focused, 19 to 99 dollars per month, strong Shopify integration. Anrok: SaaS-specific, growing rapidly, focused on software and digital services. Sovos: enterprise. The decision: under 1M revenue, TaxJar is usually sufficient; 1M to 50M, Avalara or Anrok; above 50M, Avalara or Sovos. Budget 0.1 to 0.3 percent of revenue for sales tax software and filings. Manual compliance above 5 states is a false economy.
What is taxable versus exempt in the US
Sales tax taxability varies dramatically by state and product category. Generally taxable in most states: tangible goods, equipment, certain rentals. Generally not taxable in most states: professional services (consulting, legal, accounting in most jurisdictions), wholesale sales for resale with valid resale certificates. Variable by state: SaaS and digital products (taxable in roughly 30 states, exempt in 20), shipping and handling (taxable in some states, exempt if separately stated in others), data processing services, advertising services, training and education. Maintain a current taxability matrix for your products in each state where you have nexus. Misclassification penalties accumulate per transaction and are typically discovered in audit.
UK VAT and international sales
For US businesses selling to UK customers, the VAT regime is more uniform but more inclusive. Standard rate 20 percent applies to most goods and services. Registration threshold 90K GBP (2024) for UK-resident businesses; non-resident businesses selling to UK consumers must register from the first sale (no threshold). UK VAT compliance for US e-commerce sellers shipping consumer goods: use the OSS (One Stop Shop) for EU sales, register directly with HMRC for UK sales. UK VAT can be reclaimed on input costs by VAT-registered businesses. For US service businesses selling B2B to UK clients, the reverse charge mechanism shifts the VAT obligation to the UK buyer; you generally do not collect UK VAT on B2B services. Consumer (B2C) digital services are different and require UK VAT collection from the first sale.
FAQ
When do I need to register for sales tax in a US state?
When you exceed that state's economic nexus threshold (typically 100K in sales or 200 transactions annually) or establish physical nexus (office, warehouse, employee, inventory in Amazon FBA warehouse). Some states have lower thresholds; California is 500K, Texas is 500K, New York is 500K plus 100 transactions. Check the current threshold for each state where you have meaningful sales. Once you cross the threshold, you generally have 30 to 60 days to register and begin collecting. Late registration triggers back-tax assessment plus penalties and interest.
What happens if I do not collect sales tax I should have?
You become personally liable for the uncollected tax. Tax authorities can assess back taxes for the past 3 to 7 years depending on state, plus penalties (typically 5 to 25 percent of tax owed) plus interest (typically 5 to 12 percent annually). The business cannot retroactively collect from customers; the tax comes out of your pocket. Voluntary disclosure agreements (VDAs) in most states limit lookback to 3 to 4 years and waive penalties if you self-report before being audited. The cost of compliance is always lower than the cost of remediation.
Is SaaS taxable in the US?
Depends on the state. Roughly 30 US states tax SaaS as taxable software or services, including New York, Texas, Pennsylvania, Washington, Massachusetts, Connecticut, Arizona, Ohio. Approximately 20 states explicitly exempt SaaS, including California (for now), Florida, Virginia, Colorado. The list changes; states routinely reclassify SaaS taxability via legislation or department of revenue rulings. SaaS businesses must maintain a current taxability matrix and update billing accordingly. Anrok and Avalara specialize in SaaS taxability tracking.
Do I charge sales tax to out-of-state customers?
Yes if you have nexus in their state, no if you do not. The customer's location determines applicable rate; your location is irrelevant for nexus determination. A California seller with nexus in Texas charges Texas sales tax to Texas customers at Texas rates (state plus local). A California seller without Texas nexus does not collect Texas sales tax (the Texas customer technically owes use tax to Texas, but enforcement is rare for consumer purchases under audit thresholds). For business customers, B2B sales may qualify for resale certificate exemption; collect and validate the certificate before exempting the sale.
Where do I keep collected sales tax until I remit?
Best practice: a separate bank sub-account labeled 'Sales Tax Collected' or 'Trust Liability'. Sweep collected sales tax to this account weekly or monthly. The tax is not your money - it belongs to the state from the moment you collected it. Commingling sales tax with operating cash leads to the classic small business failure mode of spending the tax on payroll or inventory, then panicking at filing time. Some accounting systems (QuickBooks, Xero) automatically segregate sales tax in a liability account on the balance sheet; the discipline is to actually hold the cash, not just track the liability.
In your business
- →Never spend collected sales tax / VAT - it's not your money, it belongs to the IRS / HMRC
- →Set aside collected tax in a separate account or sub-balance
- →Once registered for VAT or required to collect sales tax in a state, stay compliant - penalties compound