How to calculate sales tax and avoid audits in 2025

One of the toughest things for a small business owner to learn is how to calculate sales tax correctly. With the rise of e-commerce, understanding and complying with sales tax laws is more important than ever before.

According to QuickBooks’ Entrepreneurship in 2025 report, 71% of business owners say their business operates online to some degree. This means that many small businesses are now subject to sales tax laws in multiple states.

Using this guide, we’ll walk you through the intricacies of sales tax. We’ll start by defining sales tax, including how to collect it and how to pay it. Then, we’ll dive into how to avoid sales tax audits.

Jump to:

• What is sales tax?
• How to calculate sales tax
• Who has to collect sales tax?
• What items do you collect sales tax for?
• Sales tax rate by state
• How to pay state sales tax
• How to avoid a sales tax audit
• Find peace of mind come tax time
• Calculate sales tax FAQ

What is sales tax?

Sales tax is a tax businesses collect when selling certain goods or services. The buyer pays the sales tax, but you, as the seller, collect it. You then must sendthe sales tax to the proper state or local tax agency. 

States have their own sales tax laws, so the tax rate will vary by state. However, many counties, cities, or districts may have an additional sales tax that you need to include. The total sales tax rate is: 

Total sales tax rate = State sales tax rate + any additional local sales tax rates 

For example, the total sales tax rate for a business with a location of 2700 Coast Ave, Mountain View, California, is:

• California sales tax rate: 7.25%
• Santa Clara County sale tax rate: 1.875%
• Total sales tax rate = 9.125%

If you need to charge sales tax and manually calculate it, the sales tax formula for calculating sales tax is the sales price multiplied by the total sales tax rate.

How to calculate sales tax

To calculate sales tax, you need to multiply the price of an item or service by the tax rate. Here's how to calculate sales tax:

• Determine your total sales tax rate: Use the calculator above to find out the tax rate applicable in your area. For this example, let’s say your total sales tax rate is 7.5%. 
• Identify the price of your item or service: Next, determine the price of the item or service on which you want to calculate the sales tax. Let's say the price is $50.
• Calculate the sales tax: Multiply the price by the tax rate to calculate the sales tax amount. In our example, $50 multiplied by 7.5% equals $3.75. Therefore, the sales tax on a $50 item would be $3.75.
• $50 X 7.5% = $3.75
• Figure the total amount: If you want to find the total amount including sales tax, simply add the sales tax amount to the original price. In this case, $50 plus $3.75 equals $53.75.
• $50 + $3.75 = $53.75

Note that some adjustments can lower the retail price of your item, which lowers the sale tax. These adjustments can include discounts, coupons, rebates, trade-ins, and returns. Make sure to account for those adjustments before figuring your sales tax amount.

Who has to collect sales tax?

If you run a business that sells taxable goods or services, you need to get a sales tax license from your state and charge sales tax. As a small business owner, you're responsible for collecting the right amount of tax and paying it to the state. You must send sales tax to any tax area where your business has a nexus, meaning a physical or economic connection.

Generally, if a business has a physical presence or nexus in a particular state, such as a store, office, or warehouse, it must collect sales tax on taxable transactions made in that state. 

Additionally, some states have economic nexus laws that require businesses to collect sales tax if they have a certain level of sales or transactions in the state, regardless of physical presence.

Sales tax for brick-and-mortar businesses

Almost all retail sales may be subject to sales tax. This means that if you own a small business that sells clothing, any time you sell an article of clothing to a retail customer, that customer is responsible for paying the necessary sales tax amount on the total cost. As the business owner, you’re responsible for keeping track of the tax you collect so that you can report it to your local and state governments.

There are, of course, exceptions to this rule. Notably, sales tax is only applicable at the final point of sale from a business to a consumer. So sales tax can only be levied against the final retail sale of an item, not against a wholesale transaction.

As a brick-and-mortar business, it’s also important to note where you’re responsible for paying sales tax. A state cannot demand that a company register to collect sales tax unless the business has a physical presence in that state.

Having a physical presence in a state is known as a nexus, which is defined as:

• An office, store, or other facility located in the state
• A business where the business owner or their employees take orders, perform services, or otherwise do business within the state’s borders

If you have any physical presence in the state, an argument can be made that you have established a nexus and thus are subject to the state’s sales tax laws.

Sales tax for online businesses

Online transactions are trickier when it comes to sales tax collection for small businesses, especially in this past year. 

There are three main reasons this area is so challenging:

1. Wherever you have established nexus, you must collect sales tax on sales made to residents in that state.
2. Many states that charge sales tax also have a complementary “use” tax law. In these states, you have to pay use tax on any purchases made online or through a catalog where sales tax is not charged. The use tax rate is often the same as the sales tax rate, but the requirement to report use tax is on the purchaser, not the seller.
3. In June 2018, the US Supreme Court upheld a South Dakota law that reversed the long-standing physical presence requirement for nexus. Now, sellers with an economic presence in states where they sell online have a nexus. This also means that they are required to collect sales tax and pay it to the state.

If you’re an online business, collecting internet sales tax can be equally confusing and overwhelming. 

Here are a few terms and rules you should know about:

• Origin-based sales tax: Sales tax collected by the seller based on where the seller is located. Origin-based sales tax is imposed in 12 states: Arizona, California, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia.
• Destination-based sales tax: Sales tax collected by the seller based on where the buyer is located.
• Tax rules for remote sellers: Remote sellers are defined as sellers that do not have a physical presence. Remote sellers are subject to specific guidelines and thresholds that vary by state. Check with your state’s Department of Revenue to locate your sales tax rules.

What items do you collect sales tax for?

While the specific items subject to sales tax may vary from one jurisdiction to another, certain goods are commonly subjected to this tax.

In general, items that require sales tax include tangible goods that are sold for personal or business use, including:

• Clothing
• Electronics
• Furniture
• Appliances
• Home decor
• Vehicles
• Household supplies

However, certain states or localities may impose sales tax on additional items such as: 

• Luxury items
• Recreational vehicles
• Professional services.

Typically, sales tax does not apply to groceries. It’s important to check the specific rules and regulations in your jurisdiction as the items subject to sales tax can vary.

Sales tax rate by state

Sales tax rates vary by state, with some states imposing higher rates than others, while some states have no sales tax at all. 

Below is a list of the sales tax rates by state:

Note that there are some states without sales tax, including Alaska, Delaware, Montana, New Hampshire, and Oregon.

How to pay state sales tax

To pay your local sales tax, you will need to prepare and file a sales tax return. The vast majority of states offer electronic filing so you can avoid the trouble of manual reporting. Some states require businesses to report and pay sales tax each month, whereas others operate quarterly or yearly.

With smart accounting software like QuickBooks, you can set up automatic sales tax payments to ensure timeliness and avoid late penalties.

Tips for avoiding a sales tax audit

Sales and use tax audits can be overwhelming for small business owners, requiring them to invest a lot of time and money. Each different state has different requirements for what may trigger a sales and use tax audit. For instance, states may choose companies based on certain factors, like the company’s:

• Size
• Sales volume
• Complexity of its tax returns

Events can also trigger an audit. Although there are some things that you cannot control, there are steps you can take to reduce the likelihood of a random sales tax audit.

Items necessary for daily life

Some states recognize there are certain products that people must purchase to survive. Therefore, things like food, clothing, and prescription medicines are often exempt from local sales tax. Some states may not completely exempt these items but may instead assess a lower tax rate.

Selling to tax-exempt buyers

According to US law, states cannot charge sales tax on any sales made to the federal government or its agencies. In most states, this is also true for sales made to the state and its agencies or to cities, counties, or local jurisdictions. Nonprofit, religious, and educational organizations are also exempt from sales tax in many states.

Items used for public good

Some states exempt items they believe encourage activities that contribute to the public good, such as industrial development or pollution control.

For example, in many states where farming is the primary industry, the total price of products or equipment used to produce food for human or animal consumption is sales tax-exempt. This may also be the case with the sale of manufacturing equipment. Raw materials purchased by a business to manufacture or make something else that will be sold may also be exempt.

Find peace of mind come tax time

Whether you’re just starting a business or you’re an established small business owner, sales tax is something you’ll always need to account for if you’re selling goods. 

Keeping track of how much you need to charge for sales tax can be a hassle, and accounting software like QuickBooks can automate the sales tax process and take the burden of collection and calculation off your plate.