When you buy a coffee, grab groceries, or purchase a scarf, you are participating in one of the largest sectors of the global economy: retail sales.
Retail sales are the process of selling products or services directly to the end consumer for personal use.
But it doesn’t stop there.
Retail is more dynamic than a single transaction between a retailer and a customer. It’s more about how you make your customer feel: the experience.
According to a PwC survey, a good experience influences purchasing decisions; up to 73% of consumers agreed.
Customers are no longer shoppers. When they buy, they want to experience the buying process, not just the product.
As Doug Stephens also said, “The future of retail is not about channels; it’s about context. The store is no longer a place where you go to buy; it’s a place where you go to experience the brand.”
In this blog, we will learn how retail sales work in practice, why it’s important to understand them, and how the tax system works in retail.
What is the Retail sales?
When a retailer sells goods or services directly to the end consumer for personal use, it is considered a retail sale.
Let’s break that down:
- “Goods or services”: This includes everything from a pair of shoes and a haircut to a subscription box or a digital download.
- “From a business directly”: The retailer is the intermediary between the producer (manufacturer, wholesaler) and you.
- “To the end consumer”: This is you, me, and everyone else who buys something for themselves, their family, or their household.
- “For their personal use”: This is the crucial distinction. If a business buys 100 laptops to resell, that’s wholesale. If you buy one laptop for your home office, that’s retail.
In this product journey, retail is the “last meal” – the final, direct connection from the supply chain to your shopping bag or doorstep.
Retail sales are Macroeconomic indicators
Retail sales are macroeconomic indicators, meaning they indicate shifts in the economy, whether toward expansion or contraction.
The U.S. Census Bureau, part of the Department of Commerce, is responsible for collecting and reporting nationwide retail sales data.
By tracking the total value of merchandise sold to consumers, the monthly reports provide insights into the overall health and direction of the economy.
With these numbers in hand, the government can:
- Predict the economic health of the U.S.
- Get a snapshot of overall consumer spending
A sustained increase in retail sales indicates strong consumer confidence, rising disposable income, and a strong economy, which can lead to higher production, job creation, and overall economic expansion.
On the other hand, a decline in retail sales can signal reduced consumer demand, economic uncertainty, and a potential slowdown or contraction.
Accordingly, governments and central banks closely monitor this data to inform policy decisions, while businesses and investors use it to gauge market trends and consumer sentiment.
Where does retail fit in?
Where does the retail sit in the long supply chain? Well, there is a complete product journey, a product takes to reach the retail store. That starts with manufacturing the products.
- Manufacturer: The company that produces the product (e.g., a phone maker).
- Wholesaler/Distributor: Often buys large quantities from the manufacturer and sells them in smaller bulk to other businesses (e.g., a tech distributor).
- Retailer: Buys specific products from wholesalers or directly from manufacturers to sell individual units to you, the consumer.
- Consumer: The person who ultimately uses the product.
The chain might seem linear, but when you step into it in practice, you understand the dynamics. Throughout this journey, the person with the most power is the consumer. Why? Because customer feedback can disrupt the whole process.
As Sam Walton, the founder of Walmart, famously said, “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
This means that, at the end of the day, what truly matters is how well you understand your customers’ needs.
Types of retail sales
The type of retail sales is generally categorized by sales channels.
- Brick-and-Mortar: These are your traditional physical stores – department stores, boutiques, supermarkets, convenience stores. They offer tangible experiences, immediate gratification, and personalized service.
- E-commerce: Selling goods or services over the internet. Platforms like Amazon, eBay, and countless individual brand websites are prime examples. E-commerce has revolutionized access and convenience, with Global online retail sales are projected to exceed $8 trillion by 2026. It’s a big chunk to count.
- Direct-to-Consumer (DTC): Brands that cut out traditional retailers and sell their products directly to customers, often via their own websites. Companies like Warby Parker, Casper, and Allbirds popularized this model. The DTC market is projected to reach $186 billion by the end of 2025 in the U.S. alone.
- Omnichannel Retail: This model is a blend of online and offline experiences, ensuring a seamless journey for the customer. For instance, “buy online, pick up in-store” (BOPIS) or using an app to scan products while shopping in a physical store. This sale channel highly respect the needs of your customer – It’s about meeting the customer wherever they are, on their terms.
How sales tax works in U.S. Retail
Sales tax is a consumption tax imposed on the sale of goods and services to the end consumer.
In the U.S., the sales tax varies depending on factors such as the state, the county, and local regulations.
Retailers essentially act as collection agents for the government.
When a customer makes a purchase, the retailer adds the legally required sales tax to the total.
Retailers collect and hold the tax for a period before it is remitted to the appropriate state and/or local tax authorities.
It’s important to note that the United States does not have a national sales tax – which means each state sets its own.
As of 2025, 45 states, along with the District of Columbia, impose a statewide sales tax.
The five states that do not have a statewide sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon.
However, even in some of these states, local jurisdictions may impose their own sales taxes.
What is “Nexus”?
A retailer’s obligation to collect sales tax in a particular state is determined by a legal concept known as “nexus.”
Traditionally, nexus was established by having a physical presence in a state, such as a store, warehouse, or office. But the rise of e-commerce has broadened this definition.
The landmark 2018 Supreme Court decision in South Dakota v. Wayfair, Inc., fundamentally altered the landscape.
Now, states can also establish nexus based on economic activity.
This means that an out-of-state retailer with no physical presence can be required to collect sales tax if their sales into that state exceed a certain dollar amount or a specific number of transactions within a year.
These thresholds vary by state, but common examples include $100,000 in sales or 200 transactions.
Determining the correct tax rate
One of the most complex aspects for retailers is determining the correct sales tax rate to apply.
This is because the total tax rate is often a combination of state, county, and city taxes.
For example, a customer in Chicago, Illinois, will pay the Illinois state sales tax, the Cook County sales tax, and the city of Chicago sales tax, all combined into one rate.
The applicable rate for a transaction depends on whether the state is an “origin-based” or “destination-based” state for remote sellers:
- Origin-Based: In these states, the sales tax rate is determined by the location of the seller.
- Destination-Based: This is the more common approach, where the sales tax rate is based on the location of the buyer (the shipping address).
For online retailers, this means they must be able to calculate the precise sales tax rate for every customer’s specific address, a task that has led to the proliferation of automated sales tax software solutions.
Taxable vs. Non-Taxable Goods and Services
To add another layer of complexity, not all goods and services are subject to sales tax. Each state has its own set of rules regarding what is taxable.
Common categories of non-taxable or exempt items in many states include:
- Most groceries
- Prescription and some over-the-counter drugs
- Certain types of clothing (in some states, up to a certain price)
- Textbooks
On the other side, some items, like gasoline and tobacco products, are often subject to separate excise taxes in addition to or instead of sales tax.
Retailers must correctly categorize their products to ensure they are applying the tax appropriately.
The Process for Retailers
For a retail business, the sales tax process generally follows these steps:
- Registration: The retailer must first register for a sales tax permit (also known as a seller’s permit) in every state where they have established nexus.
- Collection: At the point of sale, the retailer calculates and collects the appropriate sales tax from the customer.
- Reporting: On a predetermined schedule (typically monthly, quarterly, or annually), the retailer must file a sales tax return with the state and/or local tax authorities. This return details the total sales, taxable sales, and the amount of sales tax collected.
- Remittance: Along with the sales tax return, the retailer remits the collected sales tax to the government.
If retailers fail to properly collect, report, and remit sales tax, they could face significant penalties, interest charges, and audits.
Therefore, a thorough understanding of and compliance with sales tax regulations is equally important as running a retail business in the United States.
End note
If you plan to start a retail business or work in retail, you must understand the nuances of running a successful retail store and what actually matters in retail sales: customers.
To conclude, what do you think is the first thing that matters most to your customers?
