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A Guide to Sellers' Permits & Sales Tax

February 23 2021

You need a seller's permit if you need to collect sales tax. You need to collect sales tax in certain situations where you're selling goods or services. So then the question is -- when do I need to collect sales tax? Let's use this 4-step process to find out.

Step 1: Identify the state or states in which you will be making sales

Where are the customers that are purchasing your product? What state/city are they residents of? Note this and then you'll use it in Step 2.

Step 2: Determine if you have a “nexus” in those states

To decide if sales tax is applicable to a particular transaction, you look to whether you have a nexus with that jurisdiction. Nexus means sufficient physical presence -- i.e. do you have a physical presence, like an employee or a warehouse, in that jurisdiction. 

This rule determines if your business is liable for collecting sales tax for sales in a particular jurisdiction even if you’re not registered in it. There are a lot of factors which can create “physical presence” in a particular state. Having an office, an employee, or even temporary business activities will be enough to create it.

Because of the popularity of online sales, several states have enacted laws expanding what nexus is. In those states you may be taxable under the nexus law even if you do not technically have a physical presence.

Click-through nexus

One nexus example is “Click-through nexus”. Your business has click-through nexus with a state in which you have an affiliate who refers customers to your website and receives commission from your sales in that area. You will usually only be required to collect sales tax if the commission credited to the click through website reaches a certain threshold. For example, let’s say you sell clothes in Arizona and your business is not physically present in California. And let’s say the threshold amount differs from state to state.

You have an affiliate in California who makes a reference to your shop through his website and receives commission from your sales. These circumstances might be enough to create “Click-through nexus” between your company and that state. Keep in mind though that there are other affiliates who might not refer through a website nor receive a commission but whose affiliation might trigger the creation of a nexus between you and that state.

Drop shipping

The third situation when sales tax is applicable is drop shipping. Drop shipping is a retail method which involves a third party, the shipper. In a drop shipment transaction, the retailer does not have the product in his inventory. He sells the item through his website or via phone. After this, he asks the supplier to ship the item to the end customer.

Step 3: Determine if the goods or services you sell require the collection of sales tax in those states

You can usually find this out by identifying your industry and searching that way. For example, we would search “Software as a Service” or SaaS when trying to identify what sales taxes needed to be collected.

Some services like grooming services or repairs to property can require collection of sales tax, while others like accounting services are often not taxed. Additionally, certain goods may not require sales tax (certain foods or medicines, for example).

Step 4: If required to collect sales tax, determine requirements for the state(s) and local governments

Conduct your research in each state on the Department of Revenue website. State governments want to collect sales tax that is owed, and they do a great job educating business owners on required taxes.

Once you’ve determined your need for a sellers permit, you will need to register with the state or states where you will be collecting sales tax. The process is done online on the state’s Department of Revenue website. Once you have obtained your seller’s permit, your corporation will be authorized to collect applicable sales taxes.


Will sells novelty hats online. He organized his company in Delaware because he heard that there is no sales tax there. But his goods ship from San Francisco, where his office and warehouse is.

Will created a viral video about why he decided to start selling his hats, and the company became very popular, particularly in San Francisco and entrepreneurs in Silicon Valley.

He was a bit overwhelmed with the sudden exponential increase in demand. To cope, he just focused on meeting every order as soon as possible. He made more than a million dollars from this sudden spike in interest over his hats. And since he was in Delaware, he didn’t collect sales tax on any of the sales.

A year later, he received notices from San Francisco and California telling him to pay sales taxes on the sales he made in San Francisco and California. Unfortunately, since he actually had a presence in those areas, he was supposed to collect and pay sales taxes for those sales. And what’s worse--since his customers had already paid and the sales were already complete, he couldn’t go back and tack the sales tax price onto their purchases. So he had to foot the bill himself, which put his company out of business since he operated on such low margins.

Will could’ve avoided this by having a better understanding of sales taxes and by collecting the sales taxes at the point of sale.


Other FAQs on Sales Tax & Seller's Permits

Who collects the sales tax?

All parties involved can be from different states and it can be difficult to decide what tax rules should be applied. The main problem in this situation is to identify sales tax nexus. There are four possible situations. When both retail and supplier have nexus in a particular state, the retailer is responsible for collecting sales tax. The same rule applies in case when only the retail has nexus in that state.

On the other hand, in a situation when only supplier has nexus, he becomes responsible for sales tax and will therefore collect from the retailer. Consequently, the supplier will collect sales tax for the transaction between him and the end customer.

The retailer can avoid sales tax by using the exemption given to resale. If you do business like the retailer here, be sure to secure the required documentation so you can properly avail of the exemption. In general, tax rules related to drop shipping differ from state to state, especially those related to supplier taxation. States like California, Nevada, Massachusetts or Wisconsin will impose taxation, but there are other states which don’t tax the supplier in such situation.

Use Tax

Finally, when both retailer and supplier don’t have nexus, the customer is responsible for paying the use tax if the state law there imposes it. For example, if your business is located in Illinois, the supplier is from Virginia and you sell a product to the customer from North Carolina, neither you nor your supplier will be liable for sales tax. In this case, the customer will be the one who pay use tax for the product he bought. (of course, almost no customer actually does this).

Also worth noting is that if you have a nexus, you typically have to register as a foreign entity and vice versa (not always, but often).

Chris Daming, J.D., LL.M.

Written by Chris Daming, J.D., LL.M.

Chris is the founder and CEO of LegalGPS. Previously, he served in the Army (82nd Airborne), then went to law school and got his J.D. and LL.M. He practiced law and ran the Startup Legal law firm before founding LegalGPS.