What is Sales Tax?
A consumption tax added to the sale of goods and some services, collected by the seller and remitted to state and local governments.
Definition
Sales tax is a percentage-based tax added to the sale price of goods and certain services, imposed by state and local governments in the United States. The seller collects the tax from the buyer at the point of sale and is responsible for remitting it to the appropriate tax authority on a set schedule (monthly, quarterly, or annually). Sales tax rates vary dramatically — by state, by city, and sometimes by product or service category. Unlike income tax, sales tax is a flat percentage added to the purchase price and is paid by the end consumer rather than directly by the business.
How Sales Tax Works for Freelancers
When a freelancer sells a taxable product or service, they add the applicable sales tax percentage to the invoice and collect it from the client. The amount collected is recorded as a liability — the freelancer holds it temporarily before remitting it to the government. The sales tax collected does not count as income; it is a pass-through amount owed to the state. For example, if you sell $1,000 worth of printed calendars and collect $80 in sales tax, your revenue is $1,000 and you owe $80 to the state.
Taxable vs. Non-Taxable Products and Services
The treatment of goods versus services varies by state. Most states exempt services from sales tax — freelance writing, design, consulting, and development services are typically not taxable. However, digital products (e-books, music, software, online courses) are taxable in an increasing number of states. Physical goods — books, merchandise, custom products — are generally taxable in all states that impose sales tax. Some categories like food and medicine are often exempted or reduced. Always check the rules for your specific state and product category.
Sales Tax Registration and Compliance
If you sell taxable goods or services, you typically need to register for a sales tax permit with your state's Department of Revenue — this is usually free and straightforward. Once registered, you collect sales tax from customers, track it separately in your accounting, and remit it on your assigned schedule. States also impose economic nexus rules since Wayfair — meaning you may owe sales tax in states where you have no physical presence but significant sales. Failure to collect and remit sales tax when required can result in penalties, interest, and back taxes.
Sales Tax on Invoices
If you are required to collect sales tax, it should appear as a separate line item on your invoice — clearly labeled and showing the percentage applied and the amount collected. The invoice should also show the pre-tax subtotal separately from the tax amount. Whether you include sales tax on your invoice or handle it separately depends on your state's requirements and your business setup. Eonebill supports multiple tax rates and can automatically calculate and apply the correct sales tax for your client's location.