What Do You Know About Sales Tax Accounting in the U.S.?

Understanding Sales Tax Accounting in the U.S.

If you're running a business in the U.S., especially in retail, wholesale, or service industries, sales tax is an unavoidable topic. For many small and medium-sized business owners, managing sales tax reporting and accounting can be both complex and error-prone. This challenge is further compounded for businesses operating across multiple states, where they must navigate a maze of different tax rules and regulations. In this article, we’ll walk through the basics of sales tax, the collection process, accounting methods, and recent developments to help you better understand how sales tax accounting works in the U.S.

1. What Is Sales Tax?

Sales tax in the U.S. is a consumption tax paid by consumers when purchasing goods or services. It is typically collected by the seller and periodically remitted to the state or local government. Unlike federal taxes, sales tax falls under state jurisdiction, meaning that tax rates, taxable items, and filing schedules can vary significantly from state to state.

For example, states like Alaska, New Hampshire, and Oregon do not impose a state-level sales tax. In contrast, California has a base state sales tax rate of 7.25%, and with local taxes added, the total rate can exceed 10% in certain areas.

2. Sales Tax Collection and Accounting Process

Before collecting sales tax, businesses must register with the state tax authority and obtain a Sales Tax Permit. Once registered, businesses are responsible for calculating, collecting, and remitting the appropriate tax on each sale.

1. Calculating and Recording Sales Tax

Businesses must calculate sales tax based on the tax rate applicable to the location of the sale. This is often handled automatically through POS systems or accounting software. For instance, online retailers like Amazon apply the correct tax rate based on the customer’s shipping address.

2. Categorizing and Reconciling Sales Tax

Sales tax must be recorded separately from revenue in accounting systems. A dedicated liability account-Sales Tax Payable-is typically used to track taxes collected but not yet remitted. At the end of each month or quarter, businesses reconcile the total tax collected with the funds received in their bank accounts.

3. Filing and Paying Sales Tax

Each state has its own filing schedule-monthly, quarterly, or annually. Businesses must submit a Sales Tax Return via the state’s tax portal and pay the required amount. Late filings or payments can result in penalties and interest charges.

3. Recent Developments in Sales Tax Policy

With the rapid growth of e-commerce, states are tightening enforcement on online sales tax collection. In 2025, several states have ramped up oversight of remote sales, requiring online retailers without a physical presence in the state to collect and remit sales tax.

For example, New York introduced new rules in early 2025 mandating that online sellers with annual sales exceeding $500,000 into the state must collect and remit sales tax. This aligns with the U.S. Supreme Court’s 2018 decision in South Dakota v. Wayfair, which established the Economic Nexus principle. Under this rule, businesses may owe sales tax in a state based on their economic activity-even without a physical presence.

Additionally, many states are pushing for digital transformation in tax administration. California’s Department of Tax and Fee Administration CDTFA, for instance, now offers a fully online filing system, streamlining the process for businesses to submit returns and make payments.

4. Common Mistakes and Recommendations

1. Overlooking Local Taxes

Many business owners only consider the state-level tax rate, ignoring local taxes such as city, county, or special district taxes. For example, in Dallas, Texas, the state rate is 6.25%, but local taxes can add another 2%, bringing the total to 8.25%. It’s essential to apply the full combined rate based on the transaction location.

2. Confusing Taxable and Exempt Items

States often provide exemptions for certain goods or services, such as groceries, prescription drugs, or books. Businesses must understand their state’s exemption rules to avoid overcharging or under-collecting tax.

3. Avoiding Tax Software

Manual tax calculations are inefficient and prone to error. We recommend using professional accounting tools like QuickBooks or Avalara. These platforms automatically determine the correct tax rate based on location, generate tax reports, and help reduce the burden of compliance.

5. Conclusion

Sales tax accounting is a fundamental yet critical aspect of doing business in the U.S. It not only affects legal compliance but also impacts cash flow and financial reporting accuracy. As states continue to enhance tax enforcement, especially in the e-commerce space, business owners must stay informed and proactive in their tax management.

Whether you operate a physical store or an online platform, understanding the sales tax process and staying up to date with regulatory changes is essential for long-term business success.