Online Sales Taxes: What You Need to Know
Selling products online has never been easier, but understanding your sales tax obligations has become more complex. Whether you sell through your own website, an online marketplace like Amazon or Etsy, or multiple e-commerce platforms, you may be responsible for collecting and remitting sales tax in states where your business has a tax obligation, known as “nexus.”
Failing to comply with state sales tax laws can lead to unexpected tax bills, penalties, and interest that can quickly impact your bottom line. Here’s what every online seller should know about online sales taxes and how to stay compliant.
Key Takeaways
Online sellers may be required to collect sales tax in multiple states depending on where they have a tax obligation (nexus).
Economic nexus laws vary by state, with different sales and transaction thresholds determining when businesses must register and collect tax.
Understanding your sales tax responsibilities early can help you avoid costly penalties and compliance issues as your business grows.
What Is Online Sales Tax?
Online sales tax is the sales tax that businesses collect from customers on taxable goods and services sold over the internet. Unlike federal income taxes, sales tax is imposed by individual states and, in many cases, local governments.
When a customer makes a purchase, the seller collects the applicable sales tax at checkout and later remits those funds to the appropriate state tax authority.
Years ago, many online retailers only collected sales tax in states where they had a physical presence, such as an office, warehouse, or storefront. However, that changed after the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., which allowed states to require many remote sellers to collect sales tax based on their level of business activity within the state.
Today, thousands of e-commerce businesses are responsible for collecting sales tax in states where they have sufficient economic activity—even if they have no physical location there.
Who Is Required to Collect Online Sales Tax?
Not every online seller has to collect sales tax in every state. Your obligation depends on whether your business has established nexus in a particular state.
Businesses that commonly need to collect online sales tax include:
- E-commerce businesses selling directly through their own websites
- Amazon, Walmart Marketplace, Etsy, and eBay sellers
- Businesses using Shopify, WooCommerce, BigCommerce, or similar platforms
- Subscription box companies
- Businesses selling digital products (where taxable)
- Businesses shipping taxable goods across state lines
It’s also important to understand that many online marketplaces are considered marketplace facilitators. In most states, these marketplaces are responsible for collecting and remitting sales tax on behalf of third-party sellers. However, if you also sell through your own website or other channels, you may still have separate sales tax obligations.
Understanding Nexus Rules
Nexus is the connection between your business and a state that creates a legal obligation to collect sales tax.
There are two primary types of nexus:
Physical Nexus
Physical nexus generally exists if your business has:
- An office or retail location
- Employees working in the state
- Inventory stored in a warehouse or fulfillment center
- A distribution facility
- Temporary business locations, such as trade shows (in some states)
If your business has a physical presence, you’re typically required to register and collect sales tax in that state.
Economic Nexus
Economic nexus is based on your sales activity within a state, regardless of physical presence.
Most states have adopted thresholds similar to:
- $100,000 in annual sales
- 200 separate transactions (though many states have eliminated the transaction threshold)
Once your business exceeds a state’s threshold, you’ll generally need to:
- Register for a sales tax permit.
- Begin collecting sales tax.
- File sales tax returns.
- Remit collected taxes on time.
Because each state sets its own thresholds and filing requirements, businesses operating nationwide should regularly monitor where they may have established nexus.
Which States Require Online Sales Tax?
Nearly every state with a statewide sales tax now requires qualifying remote sellers to collect online sales tax once economic nexus thresholds are met.
The five states that do not have a statewide sales tax are:
- Alaska*
- Delaware
- Montana
- New Hampshire
- Oregon
*Although Alaska has no statewide sales tax, many local jurisdictions impose local sales taxes, and remote sellers may still have collection obligations under the Alaska Remote Seller Sales Tax Commission.
Every other state with a statewide sales tax has enacted remote seller rules following the Wayfair decision.
Because state laws continue to evolve, businesses should periodically review state nexus requirements or consult a tax professional to ensure compliance.
How Much Are Online Sales Taxes?
There is no single online sales tax rate.
Sales tax rates vary depending on:
- The state
- County
- City
- Special taxing districts
- The type of product being sold
For example:
- Some states have no statewide sales tax.
- Others impose combined state and local rates that exceed 9% in certain jurisdictions.
- Some products, such as groceries, clothing, prescription medications, or digital goods, may receive special tax treatment depending on the state.
Most ecommerce platforms and sales tax software automatically calculate the appropriate rate based on the customer’s shipping address, helping reduce calculation errors.
How to Handle Sales Tax For Your Online Business
Managing online sales tax becomes more challenging as your business grows, but following a structured approach can make compliance much easier.
1. Determine Where You Have Nexus
Review where your business has:
- Physical locations
- Employees
- Inventory
- Significant sales activity
This helps identify where you may need to register.
2. Register for Sales Tax Permits
Before collecting sales tax, register with each state’s tax authority where you have nexus. Collecting sales tax without proper registration can create compliance issues.
3. Use Automated Sales Tax Software
Many businesses use software that integrates directly with ecommerce platforms to:
- Calculate the correct tax rate
- Track nexus thresholds
- Generate reports
- Prepare filing information
Automation reduces manual errors and saves valuable time.
4. File Returns on Time
Sales tax filing schedules vary by state and may be:
- Monthly
- Quarterly
- Annually
Even if you collect little or no tax during a filing period, you may still be required to file a return.
5. Keep Good Records
Maintain organized records of:
- Sales by state
- Exemption certificates
- Tax collected
- Marketplace sales
- Filed returns
Good documentation can make audits significantly easier and help resolve disputes if questions arise.
What Happens If You Don’t Collect Online Sales Tax?
If your business fails to collect sales tax when required, the state may still hold you responsible for the unpaid tax, even if you never collected it from your customers.
Potential consequences include:
- Back taxes
- Interest charges
- Late filing penalties
- Tax liens
- Collection actions in severe cases
Many businesses don’t realize they’ve exceeded an economic nexus threshold until months or even years later, allowing unpaid tax liabilities to accumulate.
If your business has fallen behind on sales tax obligations, addressing the issue early may help reduce penalties and provide more options for resolving the debt.
Frequently Asked Questions
Need Sales Tax Help?
Keeping up with online sales tax requirements can be challenging, especially as your business grows into new states or sells across multiple platforms. If you’ve fallen behind on filing sales tax returns, owe back sales taxes, or recently discovered your business has created nexus in states where you haven’t been collecting tax, don’t wait for penalties and interest to continue adding up. The experienced professionals at Business Tax Relief can review your situation, explain your options, and help you work toward resolving your state tax issues. Contact us today at 855-774-0271 for a confidential consultation and take the first step toward getting your business back into compliance.