Why this matters
Sales tax is the tax you collect for someone else, get it wrong and you're overcharging customers or quietly building a liability. US rates vary across thousands of jurisdictions, and where you owe (nexus) can include states you merely ship to.
What "done" looks like
- You know which states you have nexus in
- Xero applies the right rate per jurisdiction on invoices automatically
- Products and services are flagged taxable or exempt correctly
How to do it
- Determine nexus: physical presence (office, inventory, employees) plus economic thresholds, many states use $100,000 in sales as a trigger for remote sellers.
- Register with each state's tax authority before collecting.
- Set up Xero's US auto sales tax: enter your business address and registrations, and Xero calculates rates per transaction automatically.
- Flag item taxability, services and some goods are exempt in some states, taxable in others.
- Run the sales tax report each filing period and reconcile it against what you remit.
- Re-check nexus yearly as sales grow.
Common mistakes
- Charging your home-state rate to everyone regardless of destination rules
- Ignoring economic nexus until a state notice arrives with back taxes and penalties
- Treating collected tax as revenue and spending it, it was never your money
Real-world examples
- Xero's US auto sales tax is powered by Avalara and covers more than 13,000 jurisdictions, calculating by business address, customer location, and item taxability, a documented integration launched in 2023.
- Since the 2018 South Dakota v. Wayfair Supreme Court decision, states can require remote sellers to collect based on economic activity alone.
From a founder's point of view
Sales tax is the one bookkeeping mistake that compounds with interest and penalties, because the money was never yours. Automate the rates, respect the registrations, and treat the collected balance as untouchable.
Rule of thumb
Done means every invoice taxes by the customer's jurisdiction automatically, and you could name each state you're registered in without checking.
