State and Local Taxation (SALT) Basics

State and Local Taxation (SALT) Basics

State and local taxation (SALT) refers to the taxes imposed by U.S. states, counties, cities, and other municipal entities on businesses and individuals. For online businesses, SALT compliance involves managing obligations like sales tax collection, income tax apportionment, and industry-specific fees across multiple jurisdictions. These rules vary widely by location, creating unique challenges for digital operations spanning state lines.

This resource explains how SALT impacts online businesses and provides actionable strategies for maintaining compliance. You’ll learn how economic nexus standards determine where you owe sales tax, how to allocate income across states, and which local licenses or permits may apply to your operations. The guide breaks down core concepts like taxability rules, filing frequencies, and exemption certificate management, focusing on scenarios common to e-commerce, SaaS providers, and remote sellers.

SALT compliance directly affects your business’s financial health and legal risk. Overlooking local tax requirements can trigger audits, penalties, or unexpected liabilities—issues amplified by the cross-jurisdictional nature of online sales. Changes in legislation, such as post-Wayfair economic nexus laws, further complicate obligations for businesses without physical locations in taxable states. By clarifying these systems, the article prepares you to identify filing responsibilities, automate tax calculations, and implement scalable compliance processes.

The material prioritizes practical application, using real-world examples like handling sales tax on digital products or navigating local gross receipts taxes. Whether you operate a multistate e-commerce store or a remote service provider, understanding SALT principles helps minimize costs, avoid disputes, and adapt to regulatory shifts impacting online transactions.

Core Components of State and Local Tax Systems

State and local tax systems directly impact how businesses and individuals manage obligations across jurisdictions. These systems differ widely in structure, rates, and application—especially when dealing with online transactions or digital assets. Below are the three primary tax types you’ll encounter, along with key operational details.

Sales Tax: Definitions and Rate Variations Across Jurisdictions

Sales tax applies to retail transactions involving tangible goods and many digital products. Rates and rules vary by state, county, and city, creating compliance challenges for businesses operating online.

• Tax base differences: Some states tax most goods and services, while others exempt essentials like groceries or clothing.
• Origin vs. destination-based taxation:
  
  • Origin-based: Tax rates align with the seller’s location.
  • Destination-based: Rates depend on the buyer’s location (common for online sales).
• Economic nexus thresholds: Selling above a specific revenue or transaction volume in a state triggers sales tax collection obligations, even without a physical presence.

Local jurisdictions often add their own rates to state taxes. For example, a state rate of 4% might combine with a 2% county rate and 1.5% city rate, totaling 7.5%. Digital products like streaming services or software downloads are taxable in some states but exempt in others.

Businesses selling online must track rate changes across jurisdictions and update tax automation tools accordingly.

Income Tax: State-Specific Rules for Businesses and Individuals

States impose income taxes on individuals and businesses based on residency, physical presence, or economic activity. Rules differ significantly, affecting how you file returns or allocate income.

• Individual taxation:
  
  • Residency status: Full-year residents pay tax on all income; nonresidents pay only on income earned within the state.
  • Remote work considerations: Employees working across state lines may owe taxes in multiple states.
• Business taxation:
  
  • Entity type: C corporations often face corporate income tax, while pass-through entities (LLCs, S corps) report income on owners’ returns.
  • Apportionment: Multistate businesses allocate taxable income using formulas based on sales, payroll, and property in each state.

Nine states have no income tax for individuals, but most still tax business income. Some states apply gross receipts taxes instead of traditional income taxes, charging a flat rate on revenue without deductions.

Digital businesses face unique rules. For example, income from software subscriptions might be taxed as a service in one state and as intangible property in another.

Property Tax: Assessment Methods for Physical and Digital Assets

Property tax applies to owned assets, typically real estate, but evolving definitions now include certain digital assets. Local governments set rates and assessment schedules.

• Physical property:
  
  • Assessment frequency: Values may be reassessed annually, biennially, or during ownership transfers.
  • Tax calculations: Assessed value × local tax rate. Some states cap annual increases for residential properties.
• Digital assets:
  
  • Taxable property types: Server hardware, data centers, or leased equipment in a jurisdiction may trigger property taxes.
  • Intangible assets: Most states exempt digital goods like domain names or cryptocurrencies, but a few tax them if classified as “business personal property.”

Online businesses often overlook property tax obligations for physical infrastructure (e.g., warehouse servers) or digital assets meeting state-specific definitions. For example, a cloud-based company might owe taxes on servers located in a state, even if no employees work there.

Assessors increasingly scrutinize digital asset valuations, requiring detailed records to dispute inaccurate assessments.

This section outlines foundational concepts, but always verify current laws in jurisdictions where you operate or reside. Tax automation software and professional advisory services help manage multi-jurisdiction compliance.

Compliance Requirements for Online Businesses

Online businesses face unique tax compliance challenges when operating across multiple states. You must manage varying rules for tax collection, reporting, and documentation. Below are three critical areas to address.

Nexus Determination: Physical Presence vs. Economic Thresholds

Nexus determines whether you owe taxes in a state. Physical presence historically created nexus through offices, warehouses, or employees. Today, most states use economic thresholds instead.

• Physical presence still applies if you own property, have remote workers, or use third-party fulfillment centers (e.g., Amazon FBA).
• Economic nexus triggers tax obligations when sales exceed a state’s revenue or transaction count. Common thresholds include $100,000 in annual sales or 200 transactions.
• Hybrid rules exist in some states. For example, Texas uses a revenue-only threshold, while California combines economic and physical presence tests.

Check each state’s criteria where you have customers. Update your tax registration when crossing thresholds. Ignoring nexus risks audits, penalties, and back taxes.

Filing Frequency Differences: Monthly, Quarterly, or Annual Requirements

States assign filing frequencies based on your sales volume or tax liability. These schedules are not uniform.

• Monthly filing applies to high-volume sellers in states like New York or Texas. Expect this if your tax liability exceeds $500–$1,000 monthly.
• Quarterly filing is standard for mid-sized businesses in most states.
• Annual filing may be allowed for small sellers with minimal tax obligations (e.g., under $100 annually).

Filing deadlines vary:

• California requires returns by the last day of the month following the reporting period.
• Florida sets deadlines for the 1st, 4th, 7th, and 10th months of the year.

Automate deadline tracking using tax software or state portals. Missing deadlines leads to fines, even if no tax is owed.

Exemption Certificate Management for Wholesale Transactions

Selling to resellers or tax-exempt entities requires valid exemption certificates. These documents prove you legally avoided charging sales tax.

• Collect certificates at the time of sale. Accept digital or signed paper copies.
• Store certificates securely. Most states require retention for 3–7 years.
• Verify certificate validity. Check for expiration dates or missing details (e.g., business name, tax ID).

Common certificate types:

• Reseller certificates for wholesalers
• Government or nonprofit exemption forms
• Agricultural or manufacturing exemptions

Update certificates periodically. Some states require renewal every 1–3 years. Failure to maintain proper records invalidates exemptions, leaving you liable for uncollected taxes.

Use digital systems to organize certificates. Cloud storage with search functions reduces audit risks and streamlines retrieval.

Automated Tax Calculation Systems

Automated tax calculation systems handle multi-jurisdiction tax management by integrating with your existing sales channels, applying accurate rates, and maintaining compliance records. These systems reduce manual errors, adapt to frequent regulatory changes, and provide defensible documentation for audits.

API Integration Options for E-commerce Platforms

Modern tax automation relies on direct API connections between tax engines and your e-commerce infrastructure. Tax APIs plug into platforms like Shopify, WooCommerce, or custom-built solutions to calculate taxes during checkout.

Key integration features include:

• Pre-built connectors for major platforms requiring minimal coding
• Custom API endpoints for proprietary or legacy systems
• Multi-tax support handling sales tax, VAT, GST, and hybrid models
• Cart-level validation flagging exempt items or customer tax IDs

APIs process transactions in under 500 milliseconds, applying rules based on:

1. Product category (e.g., clothing vs. digital goods)
2. Buyer location (state, county, city, special districts)
3. Seller nexus status

Use cases for API integration:

• Adding tax calculations to mobile app checkouts
• Synchronizing tax data across POS systems and marketplaces
• Generating tax-inclusive pricing for international stores

Real-Time Rate Updates and Boundary Mapping Tools

Tax jurisdictions update rates 600+ times annually in the US alone. Automated systems maintain accuracy through:

• Daily rate monitoring tracking legislative changes
• Geolocation services pinning exact transaction addresses
• Boundary layer mapping identifying overlapping tax districts

Boundary mapping resolves conflicts where:

• ZIP codes span multiple tax jurisdictions
• Special economic zones have unique rates
• Home-rule cities override state tax rules

Address validation tools prevent errors by:

• Standardizing street formats
• Detecting PO boxes versus physical addresses
• Flagging military bases or tribal lands with separate tax rules

Geofencing techniques apply to:

• Delivery radius taxes for prepared food
• Digital services taxed by user location
• Temporary rate changes during disaster periods

Audit Trail Features for Compliance Documentation

Automated systems create immutable records proving tax decisions. Every transaction stores:

• Timestamp of calculation
• Jurisdiction code for applied rate
• User ID triggering the transaction
• Rate version used in computation

Audit logs must show:

• Rate change history with effective dates
• Exemption certificate management
• Documentation of taxability logic
• Error correction workflows

Custom reporting formats meet state-specific requirements:

• California’s Schedule B reports
• Texas’s single/local use tax breakdown
• EU VAT recapitulative statements

Integration with compliance tools adds:

• Automated filing deadlines
• Payment reconciliation tracking
• Penalty/interest calculators
• Voluntary disclosure agreement (VDA) triggers

Configure retention policies to:

• Store records for 7+ years (varies by state)
• Encrypt sensitive customer data
• Export logs in CSV, XML, or PDF formats

Automated systems flag high-risk patterns like:

• Consistent rounding errors
• Mismatched exemption certificates
• Rate overrides without manager approval
• Frequent jurisdiction mapping changes

These features shift compliance from reactive audits to continuous monitoring, letting you fix errors before filings.

Five-Step Process for Multi-State Tax Registration

Managing tax obligations across multiple states requires a systematic approach to avoid penalties and maintain compliance. Follow this structured process to establish tax accounts correctly.

Step 1: Identify Nexus States Using Sales Volume Analysis

Determine where your business has tax obligations by analyzing sales activity in each state. Most states enforce economic nexus laws, which trigger filing requirements when you exceed specific sales thresholds.

• Review transaction counts and revenue totals in every state where customers are located. Common thresholds include $100,000 in annual sales or 200 transactions.
• Track physical presence triggers like offices, warehouses, or employees working remotely.
• Use automated sales tracking tools to monitor real-time data and flag states where you approach or cross nexus thresholds.
• Document all findings to justify registration decisions during audits.

Update this analysis quarterly, as thresholds vary by state and sales patterns change over time.

Step 2: Submit Business Registration to State Departments

File official paperwork with state agencies to legally operate and collect taxes. Each state has distinct registration processes and fees.

• Register your business with the state’s Secretary of State office (for entity formation) and its Department of Revenue or Taxation (for tax accounts).
• Obtain an Employer Identification Number (EIN) from the IRS if you haven’t already.
• Prepare documents like Articles of Incorporation, ownership details, and banking information.
• Submit applications through online portals where available, such as state-specific tax websites.
• Track processing times—some states approve registrations in days, while others take weeks.

Keep registration certificates accessible for audit purposes.

Step 3: Configure Tax Software with Product Category Codes

Automate tax calculations by integrating product-specific tax rules into your billing systems.

• Assign taxability codes (e.g., CLOTHING or DIGITAL_GOODS) to every item in your product catalog. These codes determine how items are taxed in each jurisdiction.
• Sync your tax software (e.g., Avalara, TaxJar) with state and local rate databases to apply accurate rates.
• Flag products with exemptions, such as groceries in some states or software-as-a-service (SaaS) in others.
• Test the system by running mock transactions for high-volume states to verify correct tax application.

Update product codes whenever you add new items or states modify tax laws.

Step 4: Implement Tax Collection at Checkout Systems

Activate tax calculations during customer purchases to ensure compliance at the point of sale.

• Integrate your tax software API with ecommerce platforms like Shopify or WooCommerce.
• Validate customer addresses using USPS standardization tools to pinpoint exact tax jurisdictions.
• Display taxes separately on receipts to maintain transparency and simplify reconciliation.
• Store exemption certificates digitally for tax-exempt buyers and configure rules to auto-apply exemptions during checkout.
• Audit checkout workflows monthly to confirm tax collection aligns with current registrations.

Adjust systems immediately if you expand into new states or existing nexus thresholds change.

This process reduces errors and ensures you collect, report, and remit taxes correctly across all jurisdictions. Regular reviews and updates keep your business compliant as sales grow and regulations shift.

Recent Regulatory Changes Impacting Online Sellers

State and local tax rules for e-commerce businesses changed significantly after the 2018 Supreme Court decision in South Dakota v. Wayfair. Three key developments now dictate compliance requirements: economic nexus thresholds, marketplace facilitator laws, and digital product tax rules. These changes apply regardless of your business’s physical location, requiring proactive monitoring of sales activity across all states where you operate.

Economic Nexus Thresholds: $100,000 Sales or 200 Transactions

You trigger sales tax obligations in a state once you exceed either $100,000 in annual sales or 200 separate transactions there. This standard applies to 43 states as of 2023, replacing previous physical presence requirements. The thresholds apply to combined sales across all channels – your website, third-party platforms, and wholesale shipments.

Key details:

• States calculate thresholds differently. Some use prior calendar year totals, while others use rolling 12-month periods
• Four states use alternate thresholds (California: $500,000; Texas: $500,000; Florida: $100,000; Missouri: $100,000)
• Ten states count only taxable sales toward thresholds, while others include all sales
• Five states enforce transaction count alone as a trigger (Colorado, Hawaii, Maine, Mississippi, Vermont)

You must track sales in every state monthly. Automated tax software typically handles this, but manual verification helps prevent compliance gaps. Once you cross a threshold, file for a sales tax permit within 30 days in most states.

Marketplace Facilitator Laws in 45 States (2023 Update)

45 states now require Amazon, eBay, and similar platforms to collect and remit sales tax on third-party seller transactions. This shifts compliance responsibility from individual sellers to marketplaces in most cases. The five states without marketplace laws (Florida, Kansas, Missouri, New Mexico, Tennessee) still require direct seller compliance.

Critical implications:

• Most marketplace sales no longer count toward your economic nexus thresholds
• Direct sales (through your own website or physical locations) still create nexus
• Some states require marketplace sellers to file zero-tax returns confirming platform-collected taxes
• Three states (Arkansas, South Carolina, Washington) still hold sellers liable for uncollected marketplace taxes

You must separate marketplace sales from direct sales in tax calculations. Maintain records showing which transactions were marketplace-facilitated versus self-handled. Update exemption certificates if selling through multiple platforms.

Digital Product Taxability Rules by State

27 states tax digital products as of 2023, with definitions varying significantly. Tax treatment depends on product type, delivery method, and buyer’s intended use. Common taxable categories include:

• Streaming services (taxable in 23 states)
• Digital downloads (taxable in 19 states)
• Cloud software (taxable in 17 states)
• eBooks (taxable in 6 states despite print book exemptions)

Key patterns:

• Six states (Hawaii, New Mexico, South Dakota, Tennessee, Texas, Washington) tax most digital products broadly
• Nine states exempt digital products if identical physical versions are untaxed (e.g., books, educational materials)
• Local taxes apply in 11 states, including Colorado’s home-rule cities and Louisiana parishes
• Seven states tax SaaS (software-as-a-service) specifically, while others categorize it as data processing

Product tax codes must align with each state’s definitions. A music file sold as a download might be taxable in one state but exempt if streamed in another. Tax automation tools require precise categorization of all digital offerings by jurisdiction. Regular audits of tax code mappings prevent misclassification penalties.

Key Takeaways

Here's what you need to know about state and local tax compliance for online sales:

• Track economic nexus thresholds in 45+ states – if your sales exceed state-specific limits (often $100k+ or 200+ transactions), you must collect and file taxes there.
• Automate tax calculations to reduce errors by 78% – manual processes risk costly mistakes in rates, exemptions, or jurisdiction rules.
• Prioritize filing deadlines – late submissions typically cost 12% of taxes owed plus interest, compounding monthly until paid.

Next steps: Audit your sales channels to identify nexus obligations and set up automated tax software before the next filing cycle.