Sales tax is a type of consumption tax typically applicable to the sale of goods and services. The sales tax rate varies by state and is calculated on the final sale price.
The United States does not have a nationwide Sales tax; each state sets its own sales tax rules.
Out of the 50 states in the U.S., 45 levy sales tax. However, five states have no sales tax. These states are known as NOMAD states, which stand for New Hampshire, Oregon, Montana, Alaska, and Delaware.
One might consider registering in one of the NOMAD states to avoid sales tax. However, this does not exempt you from sales tax considerations entirely. The five states without a state sales tax compensate for it through other forms of taxation. For example, Alaska and Montana have local option taxes, while Delaware imposes a gross receipts tax. Although Oregon has no sales tax, it has some of the highest income tax rates in the country.
If your business is located in a state without sales tax, you may still be required to collect and remit sales tax if you have nexus in other states. Therefore, it’s essential to evaluate your business’s purpose, location, and the products or services you sell in the U.S. This will help you determine where to register for sales tax.
A foreign business may be affected by state-level sales tax if it establishes a nexus in that state. The obligation for such a business to charge, collect, and pay sales tax arises once the company establishes a nexus in the state. Generally, nexus can be created through physical or economic means.
A foreign business may create a nexus even if it is not physically located in the US. This occurs when a business surpasses either a specified sales amount or a certain number of transactions in a state during a year. Thus, the foreign business should carefully track its physical presence, sales volume, and transaction count to determine whether it has established any nexus. This may trigger sales tax collection obligations.
Example: A UK online retailer sells $150,000 worth of clothing to customers in California through 300 separate orders in 2024, despite having no physical presence in the United States. California’s economic nexus threshold for sales tax collection is either $500,000 in sales or 200 transactions per year. In this case, the retailer exceeds the transaction limit and is required to register to collect California sales tax on sales, even though it is based entirely overseas.
To learn more about sales tax and related regulations, please refer to this article.