The United States has no national VAT or federal sales tax. Instead, sales tax is set by states — and often by counties, cities and special districts too. That makes US sales tax very different from VAT: whether you charge it, how much, and on what depends on where you and your customer are and what you’re selling. This guide explains the key concepts and how to show sales tax correctly on an invoice.
Sales tax rules differ in every state and change regularly. This guide is general information, not tax or legal advice. Check your state’s department of revenue or a tax professional.
Sales tax vs. VAT in one minute
| US sales tax | VAT (EU, UK and others) | |
|---|---|---|
| Who sets it | States and local jurisdictions | National government |
| When it’s charged | Generally only on the final retail sale | At every stage of the supply chain |
| Business purchases | Exempt when bought for resale (with a certificate) | Businesses pay VAT and reclaim it |
| Services | Often exempt, but varies by state | Generally taxable |
| Rate | Combined state + local rate, from 0% to over 10% | One national standard rate (plus reduced rates) |
Step 1: Do you have nexus?
You only have to collect sales tax in a state where you have nexus — a sufficient connection with that state. There are two main types:
- Physical nexus: an office, employees, inventory (including in a third-party warehouse), or other physical presence in the state.
- Economic nexus: since the Supreme Court’s 2018 decision in South Dakota v. Wayfair, states can require out-of-state sellers to collect tax once their sales into the state exceed a threshold. Many states use $100,000 in annual sales; some use a higher amount, and some also count the number of transactions (often 200). Thresholds and what counts toward them vary.
Five states have no statewide sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon — though some Alaskan localities do levy local sales taxes.
If you have nexus in a state, you generally must register for a sales tax permit there before collecting tax. Collecting tax without a permit is not allowed.
Step 2: Is what you sell taxable?
- Tangible goods are taxable in most states, with exemptions that vary — groceries, prescription drugs and clothing are common examples of exempt or reduced-rate items in some states.
- Services are often not taxable, but many states tax specific services (for example, repairs, installation, cleaning, telecoms or some personal services), and a few states tax a broad range of services.
- Digital products and SaaS are treated very differently from state to state: taxable in some (such as New York and Washington), partially taxable in others, and exempt in many.
- Mixed transactions — e.g. a service that includes tangible materials — can make the whole charge taxable in some states unless you separately itemise the parts.
Practical tip: itemise taxable and non-taxable parts on separate invoice lines. That’s often what allows you to charge tax only on the taxable part.
Step 3: Which rate applies?
Most states use destination-based sourcing: the rate is the combined rate where the customer receives the goods or service. A minority of states use origin-based sourcing for in-state sellers (based on the seller’s location), and some have hybrid rules.
The combined rate is the state rate plus any county, city and district rates. For example, the combined rate in New York City is 8.875% (4% state + 4.5% city + 0.375% Metropolitan Commuter Transportation District). Two addresses in the same ZIP code can have different rates, so use your state’s rate lookup tool or tax software rather than guessing.
Step 4: Check for exemptions
Some customers don’t pay sales tax on certain purchases:
- Resellers buying goods to resell — they give you a resale certificate.
- Exempt organisations — certain charities, schools, and government bodies — with an exemption certificate.
- Manufacturers buying certain materials or equipment, depending on the state.
Collect and keep a valid certificate for every exempt sale. If you’re audited and can’t produce it, you may owe the uncollected tax yourself.
How to show sales tax on an invoice
Many states require sales tax to be separately stated on the invoice or receipt, and it’s best practice everywhere. Show:
- The taxable subtotal (and any non-taxable lines separately)
- The tax rate and/or jurisdiction
- The sales tax amount
- The total
Example: mixed taxable and non-taxable items
Assume a customer in a location with a combined rate of 8.25% (state + county + city), where the goods and the seller’s delivery charge are taxable and the consulting service is not:
| Description | Qty | Unit price | Amount | Taxable |
|---|---|---|---|---|
| Office chair | 4 | $250.00 | $1,000.00 | Yes |
| Delivery | 1 | $120.00 | $120.00 | Yes |
| Workspace consultation | 3 hrs | $100.00 | $300.00 | No |
| Taxable subtotal | $1,120.00 | |||
| Sales tax (8.25%) | $92.40 | |||
| Non-taxable subtotal | $300.00 | |||
| Total due | $1,512.40 |
Whether delivery, installation or consulting is taxable depends on the state and on how the charges are structured. Many states tax delivery charges on taxable goods; some tax certain design or consulting services. Treat this purely as a layout example.
For exempt sales
Show $0.00 tax and note the reason: “Exempt — resale certificate on file” or “Tax-exempt organisation, certificate #12345 on file.”
Collecting, filing and remitting
Collected sales tax isn’t your money — you hold it on behalf of the state. You’ll need to:
- File returns on the schedule your state assigns (monthly, quarterly or annually, usually based on volume).
- Remit the tax you collected, by jurisdiction where required.
- File even in periods with no sales, if your state requires it.
Marketplace sales
If you sell through a marketplace such as Amazon or Etsy, marketplace facilitator laws in nearly every sales-tax state make the marketplace responsible for collecting and remitting tax on those sales. Your direct sales (e.g. invoices you send yourself) are still your responsibility.
Use tax
If you buy taxable items for your business from a seller who didn’t charge sales tax, you may owe use tax to your state. It’s the mirror image of sales tax and is commonly overlooked.
Common mistakes
- Charging tax in a state where you aren’t registered.
- Applying your own local rate to customers in other jurisdictions when the state is destination-based.
- Assuming services are never taxable.
- Lumping taxable and non-taxable items into one line.
- Not keeping exemption certificates.
- Ignoring economic nexus as your online sales grow.
Freelancers and service businesses
If you only sell services, you may not have to collect sales tax at all — but check your state’s list of taxable services. Separately, US clients will typically ask freelancers for a Form W-9, and may issue a 1099 form for income tax reporting. These are income-tax matters and don’t appear on the invoice itself. See how to invoice as a freelancer.
Setting it up in BillKit
In the invoice generator, set the tax name to “Sales tax”, enter the combined rate for your customer’s location, and use the notes to record any exemption. If some lines aren’t taxable, note it clearly — or issue separate invoices for taxable and non-taxable items if that’s simpler for your records. If you sell internationally too, compare with how VAT works on invoices.
Reminder: sales tax rules vary by state and locality and change frequently. Use your state’s official resources or a tax professional to confirm what applies to you.