Sales Tax on Invoices: A US Small-Business Guide

General guidance, not tax advice. Sales tax is set by each state and locality and changes often. Rates and rules below are illustrative — confirm your obligations with the relevant state department of revenue or a tax professional before relying on them.

You land a client in Chicago and send your first invoice. Do you charge sales tax? What rate? Your home state's rate, or theirs? The answer depends on what you're selling, where you have nexus, and which of over 11,000 US tax jurisdictions applies to that transaction. This guide walks through each piece.

The US Sales Tax Landscape

There is no federal sales tax in the United States. Sales tax is imposed at the state and local level, with each state writing its own rules — the result is a patchwork of over 11,000 jurisdictions, each with different rates, definitions of what's taxable, and filing schedules.

45 states plus DC impose a state-level sales tax. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) do not, though some Alaska localities charge their own.

State rates range from 2.9% (Colorado) to 7.25% (California). Local taxes stack on top: the combined rate in Chicago is 10.25%, and parts of Louisiana and Alabama exceed 11%. The rate you charge generally depends on where the buyer is located, not where you are.

Nexus: When Sales Tax Becomes Your Problem

You only need to collect sales tax in states where you have "nexus," a legal connection that triggers a tax obligation. There are two types.

Physical nexus means you have a tangible presence in the state: an office, a warehouse, a remote employee, or inventory in a fulfilment centre.

Economic nexus means you exceed a sales threshold in a state even without physical presence. Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, most states set this at $100,000 in annual sales or 200 transactions, though thresholds vary and some states have dropped the 200-transaction test entirely. Cross the threshold and you're obligated to register, collect, and remit.

Once you have nexus and sell taxable goods or services in a state, you must register for a sales tax permit, collect tax from buyers at the point of sale, and file returns on the state's assigned schedule (monthly, quarterly, or annually).

Products vs Services: What's Actually Taxable?

Tangible products are taxable in virtually every state that has a sales tax. If you sell physical goods, you almost certainly need to charge sales tax where you have nexus.

Services are where it gets messy. Most states exempt most services, but the exceptions are significant and highly state-specific:

The safest move: check your specific state's department of revenue website for a list of taxable services, or consult a tax professional. Getting this wrong in either direction creates problems. Undercharging means you owe the state. Overcharging means unhappy customers and potential legal exposure.

Displaying Sales Tax on Your Invoice

When you do charge sales tax, show it as a separate line item. Never bury tax inside your product prices without disclosure. Standard format:

Example: Subtotal: $1,000.00 Sales Tax (8.875%): $88.75 Total: $1,088.75

Show the tax rate in parentheses so the client can verify the calculation. If multiple jurisdictions apply (state plus county plus city), you can break them out individually or combine them into a single "Sales Tax" line with the combined rate.

Some states require your sales tax permit number on the invoice. Even where it's not required, including it is good practice — it signals legitimacy and can prevent questions from the buyer's accounts payable team.

Our US invoice template includes a dedicated tax field with the rate displayed.

Exemptions You Should Know About

Not every sale is taxable, even in states where you have nexus.

Resale: if the buyer is purchasing goods for resale rather than personal use, they provide a resale certificate and you don't charge tax. Keep these certificates on file. If you're audited without them, you're liable for the uncollected tax plus penalties.

Non-profits: qualified 501(c)(3) organisations are exempt in most states. They should provide an exemption certificate.

Government: federal and state government agencies are generally exempt.

Manufacturing: many states exempt raw materials and equipment used directly in manufacturing processes.

Interstate sales: if you ship goods to a state where you have no nexus (physical or economic), you generally don't collect tax. With economic nexus rules expanding since Wayfair, however, this exemption has narrowed significantly.

Registration and Filing

If you have nexus and sell taxable goods or services, the process is: register for a sales tax permit through the state's department of revenue website (collecting without a permit is illegal in most states); collect tax at the correct rate based on the delivery address, since most states use destination-based sourcing; file returns on the schedule the state assigns; remit the collected tax.

For businesses selling in multiple states, the administrative burden adds up fast. Services like Avalara, TaxJar, or state-provided tools can automate rate calculation, collection, and filing. They're worth the cost if you sell in more than three or four states.

Some states let you keep a small percentage (typically 1–3%) of the tax you collect as compensation for your collection efforts. Check if your state offers this vendor discount — it adds up over time.

Getting the Invoice Right: Common Pitfalls

Wrong rate. Using your home state's rate instead of the buyer's location rate is the number one audit trigger. The rate follows the delivery address, not your address.

Missing economic nexus. It's easy not to notice you've crossed a threshold in a state you rarely think about. Monitor your state-by-state sales totals regularly.

Taxing exempt items. Overcharging tax on exempt products or to exempt buyers creates refund obligations. Keep exemption certificates current.

Not separating tax. Bundling tax into the price without itemising it violates most state requirements.

Ignoring local taxes. The city or county rate that stacks on top of the state rate is easy to overlook, especially when selling to buyers in high-rate jurisdictions.

Two questions that come up often:

Is there a federal sales tax? No. The US has no federal sales tax or VAT. Sales tax is state and local only, and five states have no state-level sales tax at all.

Do I charge tax based on my location or the buyer's? Most states use destination-based sourcing, so you charge the rate at the buyer's delivery address. A handful of states (including Missouri and Illinois for certain sellers) use origin-based sourcing instead.

Create invoices with a proper tax field using our invoice generator.