InvoiceFreeRemote work allows independent professionals to collaborate with clients across the country from their home desks. However, working across state lines creates frequent confusion: Do I charge my state's tax rate, the client's state tax rate, or no tax at all?
The Two Prerequisites for Charging Out-of-State Tax
Before you can legally add sales tax to an out-of-state invoice, two conditions must both be true:
- Nexus in the Client's State: You must have physical nexus (an office, remote employee, inventory) or economic nexus (typically $100,000+ in annual sales) in the destination state.
- A Valid Sales Tax Permit: You must be officially registered with the client's state Department of Revenue. Collecting tax without a state license is illegal in every US jurisdiction.
Comparing Interstate Invoicing Scenarios
Table 14.1 illustrates common interstate scenarios for remote freelancers and small businesses:
| Your Location | Client Location | Deliverable Type | Do You Charge Sales Tax? | Why / Explanation |
|---|---|---|---|---|
| Colorado | New York | Custom Software Development | No (0%) | No nexus in NY; custom software is an exempt service. |
| Illinois | California | Branding & Graphic Design | No (0%) | No physical presence in CA; sales below $500K economic nexus. |
| Texas | Texas (In-State) | Data Processing Services | Yes (Texas Rate) | Physical nexus in TX; data processing is specifically taxed in TX. |
| Florida | Georgia | Physical Handcrafted Furniture | No (0%) | No nexus in GA. Client may owe GA consumer use tax, but seller does not collect. |
| California | United Kingdom | Marketing Consulting | No (0%) | Exported services outside the US are exempt from state sales tax. |
Understanding Destination Sourcing for Remote Work
For businesses that sell taxable goods or taxable services across state lines and have established nexus, most states follow destination-based sourcing:
- The transaction is sourced to the location where the customer takes possession or receives the benefit (the client's shipping or business address).
- The tax rate applied is the combined state, county, and municipal rate of the client's jurisdiction.
What About Consumer Use Tax?
When you sell a taxable physical product or service across state lines without charging sales tax (because you lack nexus), the state government does not simply waive the tax. Instead, the legal obligation shifts to the buyer under Consumer Use Tax laws.
The buyer is legally responsible for reporting and remitting use tax on their own annual corporate or state tax return. You as the remote seller are not responsible for calculating or remitting that use tax.
Create clean out-of-state invoices
InvoiceFree makes it easy to set 0% tax or apply exact destination rates.
Generate Free InvoiceFrequently Asked Questions
Can a client demand that I collect their local sales tax?
No. A client cannot compel you to collect out-of-state tax. If you do not have nexus in their state and are not registered with their revenue department, you have no legal mechanism or authority to collect their state tax.
Does having a remote contractor in another state create physical nexus?
Hiring a full-time W-2 employee in another state creates physical nexus. However, hiring an independent 1099 contractor in another state generally does not create physical nexus in most jurisdictions, provided the contractor operates as an independent business and does not act as your exclusive sales agent.