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What happens to all those packages at the end of the year? The holiday season brings joy to consumers and e-commerce businesses alike. But once the festivities are over, most e-commerce business owners are left with a daunting task: figuring out how to manage sales tax. The corporate tax accounting process can be especially overwhelming for businesses without a clear understanding of the nexus laws or how to calculate the correct tax amount. One of the first steps to getting organized for tax season is to learn about e-commerce sales tax and how it applies to your business. In this article, we’ll cover the basics of e-commerce sales tax for businesses to stay compliant and avoid costly penalties.
As a trusted provider of accounting services for small businesses, Haven can help you understand e-commerce sales tax and manage your corporate tax accounting so you can stay focused on your goals.
Table of Contents
The Basics: What is Ecommerce Sales Tax
Ecommerce sales tax is a consumption tax charged on the sale of goods and certain services. Just like in a physical store, it’s collected at the point of purchase and remitted to the appropriate government authority, usually at the state or local level.
Who Owes Sales Tax and Who Collects It?
While customers are the ones legally obligated to pay sales tax, the responsibility for collecting and remitting it typically falls on the seller. In practice, this means eCommerce businesses must:
Determine if a sale is taxable based on the buyer’s location.
Collect the correct tax amount during checkout.
File and remit those taxes to the state or local government.
If a seller fails to collect tax when required, they may be held liable to pay it themselves, along with penalties and interest. This makes compliance critical for online retailers.
How Sales Tax Rules Have Evolved Post-Wayfair
Historically, sales tax collection was based on physical presence. If your business didn’t have a physical location in a state (like a store, warehouse, or office), you weren’t required to collect sales tax there. This changed dramatically in 2018 with the South Dakota v. Wayfair, Inc. decision. The U.S. Supreme Court ruled that states could require online retailers to collect sales tax even without a physical presence, based solely on their economic activity in that state, known as economic nexus.
Understanding Economic Nexus: Thresholds, Triggers, and Multi-State Compliance
This ruling reshaped eCommerce compliance. Now, if your sales in a state exceed a certain threshold, you must collect and remit sales tax there, regardless of where your business is located. For online businesses, this means tracking sales across multiple states, understanding varying thresholds, and staying up to date with constantly changing state rules.
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Where Does Your Business Owe Sales Tax?
Nexus, or sales tax nexus, determines if a business has a tax obligation to a state. When a company establishes nexus in a state, it must collect and remit sales taxes on purchases made by customers in that state. Understanding sales tax nexus is crucial for eCommerce sellers because it dictates where they need to register, collect tax, and file returns.
What Is Sales Tax Nexus and Why Does It Matter?
Sales tax nexus refers to the link between your business and a state’s tax authority. If you establish nexus in a state, you are legally required to comply with that state’s sales tax laws. This can happen in two ways:
Physical Nexus
Your business may owe sales tax in a state if you:
Maintain an office, warehouse, or storefront.
Store inventory in third-party fulfilment centres (e.g., Amazon FBA).
Employ remote staff or sales representatives in that state.
Lease property or equipment there, such as servers or storage facilities.
Economic Nexus
After the South Dakota v. Wayfair, Inc. ruling, most states adopted economic nexus laws. This means that simply selling a certain dollar amount or number of transactions in a state can trigger sales tax obligations.
Examples of state-specific thresholds:
Alabama: $250,000 in sales in the previous calendar year. Alabama is a destination-sourced state, meaning tax is based on the buyer’s location. Shipping is not taxed if you use a common carrier and list it separately on the invoice.
California: $500,000 in sales in the current or previous year. California is a mixed-source state: city, county, and state taxes are origin-based, while district taxes are destination-based. Shipping is taxed if combined with handling or marked up, but not if passed through at cost and listed separately.
New York: $500,000 in sales and at least 100 transactions delivered into the state in the previous four quarters. It’s a destination-sourced state and taxes shipping unless the item itself is tax-exempt.
State-by-State Differences in Sourcing Rules
Origin-Based States: Tax is calculated based on the seller’s location.
Destination-Based States: Tax is calculated based on the buyer’s location (the most common approach).
Mixed-Source States: States like California use both, depending on the tax type.
These variations make it essential for eCommerce businesses to track where their customers are, how much they sell in each state, and how local sourcing rules apply.
Common Triggers for New Nexus
Businesses often establish nexus unintentionally through:
Crossing economic thresholds in a new state.
Hiring remote workers who live in another state.
Storing inventory in third-party fulfilment centres across the country.
Expanding sales channels (e.g., adding marketplace or social media shops)
Failing to identify and comply with nexus obligations can lead to audits, penalties, and back taxes. Regularly reviewing your sales data and business activities is essential to ensure you remain compliant in every state where you owe tax.
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Steps to Compliance for Ecommerce Sellers
Understand Where You Have Nexus
Nexus establishes your sales tax obligations and indicates where you must collect and remit sales tax. Physical presence, such as an office, warehouse, or employees, can create nexus. High sales volumes or transaction amounts within a state can create an economic nexus, triggering sales tax collection. Nexus rules vary by state, so it’s critical to ensure accurate compliance with nexus laws in each state where you do business.
Sales Tax Compliance Basics: Nexus, Registration, and Multi-Channel Responsibilities
Here are a few key points to remember:
Aggregate Sales Across Channels
Make sure you include all of your sales from all of your channels to determine nexus. For instance, if you’re selling on both Amazon and Shopify, and you’ve sold $75,000 in Arizona on Amazon and $35,000 on Shopify, you’ve passed the economic threshold of $100,000. You need to register and set up your Shopify channel to collect in Arizona. Amazon takes care of its own collection and remitting, but you’re responsible for collecting and remitting sales tax on your Shopify sales.
No Collection Before Nexus
You’re not responsible for sales tax before you have nexus in a state, whether through physical presence or passing the economic nexus threshold.
Register Before Collecting
You must register before you start collecting sales tax in a state. Don’t set up your channels to collect in a state before you have nexus and have registered. Collecting without a sales tax permit is illegal and considered criminal fraud. Some platforms, like Shopify, may notify you to start collecting in a state, but ensure you do it right by following these steps:
Confirm your nexus.
Register.
Set up your channel to start collecting, using your registration date as the starting point.
Monitoring Your Nexus Footprint: A Key to Ongoing Compliance
Staying aware of your nexus footprint is critical for maintaining compliance and avoiding unnecessary complications. Make it a regular part of your routine to review and update your nexus status.
Explore Voluntary Disclosure Agreements
If you didn’t register promptly and now have sales tax obligations in one or more states, you might be starting to feel a bit panicky. You may want to consider a voluntary disclosure agreement, or VDA, in these states. These programs, offered by many state governments, allow businesses to come forward and report their unpaid sales taxes. You might wonder, “Why would I want to do that?”
Here’s why:
Reduced Penalties And Interest
In return for disclosing unpaid taxes, states will often reduce penalties and interest.
Shorter Lookback Periods
VDAs require businesses to pay back the sales tax and interest for a specific period, typically shorter than the timeframe an audit would cover. This can save you a significant amount of money and stress. (For instance, Illinois’ Voluntary Disclosure Program limits the lookback period to four years.)
Voluntary Participation
These programs are voluntary, meaning you must take the initiative to come forward and agree to the VDA terms.
Review Product Taxability
The third crucial step is reviewing your product taxability. This is important because even if you’ve passed the economic nexus threshold in a state, if your products aren’t taxable, you don’t have to collect sales tax.
Here are some key points to remember:
Know Your Products
If you’re selling standard tangible personal property, like widgets, this might not concern you. But if you’re in special categories like clothing, software as a service, foods and groceries, or supplements, the laws might have changed.
Stay Updated On Changes
For instance, Kansas is slowly implementing laws that will soon eliminate sales tax on food and groceries. In New York, individual clothing and footwear items under $110 are exempt from New York City and New York State sales tax, but they are taxable once they exceed that amount. Another instance is how candy is taxed differently depending on ingredients. Keeping track of these changes is crucial.
Regular Reviews
It’s vital to know what laws affect your products in all the states where you have nexus or will soon have nexus. Believe me, it’s better to be safe than sorry. Checking this at least yearly is a good practice.
Collect Valid Exemption Certificates
The fourth crucial step is collecting exemption certificates for sales tax exemptions. This is really important because sales tax audits are becoming far more common. You need to ensure you have valid exemption certificates on file for any tax-exempt customers. Examples of these customers include governments, nonprofits, and schools. This also applies if you’re selling to customers who are reselling the products.
Key points to remember:
Valid Certificates
Make sure you have valid certificates on file for all tax-exempt customers. This is critical for avoiding unnecessary tax liabilities.
Drop Shipping Considerations
If you’re drop shipping from suppliers, ensure you send them resale certificates to avoid paying sales tax. If you are the supplier, you need to get valid exemption certificates from my sellers.
Monitor Expiration Dates
For any states where you have nexus, keep an eye on the expiration dates of these documents. Stay in contact with your customers to renew them before they expire.
Protect Yourself
It’s vital to protect yourself because if you get audited and don’t have these certificates, you’ll be on the hook for the uncollected sales tax. If a customer claims they’re buying to resell or says they’re tax-exempt, always ask for a valid exemption certificate. If they can’t provide it, you have the right to charge them sales tax.
Calculate and Report Use Tax
The next thing to tackle is the use tax. This area is heavily audited for online sellers, so it’s crucial to understand and stay compliant.
Here are some key points to remember:
Understand Use Tax
Use tax applies to products that are used but not sold, such as product giveaways, promotional samples, or donations. These items need to be reported as use tax on your state’s return.
Filing Use Tax
Typically, use tax is recorded on the same return as sales tax, and you usually only need to worry about it in your home state.
Stay Informed
This article on how tax affects ecommerce businesses provides more detailed information and explains how to determine your tax liability.
Understand Retail Delivery Fees
Retail delivery fees are becoming more prevalent. The sixth area to be aware of is retail delivery fees. These are starting to pop up, and they apply to transactions delivered by a motor vehicle. Though the details vary by state, they all aim to generate more revenue without requiring a vote on the ballot.
Key points to remember:
Know The Rates And The States
Colorado was the pioneer, introducing a fee of $ 0.27 per transaction in July 2022, which increased to $ 0.29 in 2024. Minnesota is following suit with a $.50 fee per transaction over $100 starting in July 2024.
Watch For Small Seller Exemptions
Thanks to the uproar from sellers after Colorado’s implementation, both Colorado and Minnesota now have small seller exemptions in place. Colorado’s only takes effect after a business sells $500,000 into the state in a calendar year, while Minnesota’s doesn’t take effect until $1M in sales.
Stay Updated On State Legislation
New York is also considering a retail delivery fee, proposing a $.25 per delivery.
Deal with Home Rule Jurisdictions
On top of all the sales tax variations by state, some states are even more challenging to comply with and meet sales tax obligations because of home rule jurisdictions. States like Colorado, Alabama, Alaska, Arizona, Idaho, and Louisiana have local jurisdictions that administer their own sales tax rules, independent of the state department of revenue.
Key points to remember:
Understand Home-Rule Authority
In home-rule jurisdictions, local governments have the authority to establish and administer their own sales tax rules. This can create a complex web of compliance requirements since each locality can have different rules.
Colorado Example
Colorado is notorious for its complex home-rule system, with 72 cities having their own sales tax rates, exemptions, and requirements to file and remit sales tax returns.
Alabama, Alaska, Arizona, And Louisiana
Similar complexities exist in Alabama, Alaska, Arizona, Idaho and Louisiana. Each state allows local jurisdictions significant leeway in administering sales tax, leading to varying requirements across the state. Efforts are underway to simplify Alabama’s and Louisiana’s rules, though.
Stay Organized
Keeping track of all these local rules can be daunting. It’s essential to stay organized and ensure you’re compliant with each tax jurisdiction where you have nexus. Using a robust sales tax automation tool can help manage these complexities.
Be Aware of Aggressive States
Many states are becoming more assertive, but some are particularly tough on online sellers. This ties back to knowing where you have nexus, and we can’t stress this enough. Don’t ignore this issue.
Key points to remember:
Identify Aggressive States
As of now, the states that are really targeting online sellers include Arizona, Arkansas, California, Florida, Illinois, Maine, Massachusetts, Michigan, Minnesota, New Jersey, New York, Pennsylvania, South Carolina, South Dakota, Texas, Utah, Washington, and Wisconsin. Others are joining the crusade all the time.
Expect Scrutiny
Some states are sending out pre-audit questionnaires, questioning registration dates and requesting several years of sales history when sellers register. Others are sharing seller lists with other states and ramping up their auditing resources to pursue online sellers more effectively. And some are actively partnering with platforms, like Amazon, to obtain seller lists and determine where sellers have inventory.
Take Action
Don’t mess around. If you have nexus in these states, get registered as soon as you meet the thresholds. Be proactive and register in aggressive states as you reach nexus to help you avoid penalties and audits.
Prepare for Sales Tax Holidays
A sales tax holiday is a specific timeframe when customers don’t have to pay sales tax on eligible purchases of normally taxable products. As a retailer, this means you cannot collect sales tax on any eligible sales made online, in-store, by email, or through any other means during the holiday period.
Key points to remember:
Understand The Rules
Every sales tax holiday is different, but they usually have a theme. Common themes include back-to-school sales tax holidays, disaster preparedness supplies, or hunting and ammunition.
Check State Guidelines
As of now, 22 states have a combined 45 sales tax holidays scheduled for 2024. Each state has its own rules and eligible items, so it’s important to check the guidelines for each state where you have Nexus.
Plan Ahead
Make sure you’re prepared for these holidays. Adjust your systems so you don’t collect sales tax on eligible items during these periods.
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5 Key Challenges of Ecommerce Sales Tax
1. Multi-State Compliance: The Complexities of Different State Tax Laws
When you sell across state lines, you must navigate different tax rates, exemptions, and filing requirements. Each state sets its own rules, and some even have local jurisdictional taxes layered on top. The U.S. Chamber of Commerce notes that manual compliance in multiple states can quickly overwhelm small businesses, making automated tools or professional support almost essential. Without a streamlined system, it’s easy to miss filing deadlines or apply incorrect rates.
2. Economic Nexus Thresholds: New Rules for Remote Sellers
Since the Wayfair ruling, states can enforce economic nexus laws that require remote sellers to collect and remit tax once they exceed certain sales or transaction thresholds. According to Bloomberg, states actively monitor and enforce these thresholds to capture tax revenue from out-of-state businesses. Sellers now need to track sales volume and transaction counts carefully in each state, a task that becomes more complex as your customer base grows.
3. Product-Specific Taxability: Not All Products Are Taxed the Same
Not every product is taxed the same way. For example, some states exempt clothing or groceries, while others do not. Digital products, like eBooks, downloads, or streaming services, also face varying rules. These inconsistencies mean that what’s taxable in one state may be exempt in another, forcing businesses to review taxability rules for their product catalogue constantly.
4. Audit Risks: The Dangers of Under-Collecting Taxes
Even minor errors in tax collection or late filings can lead to audits. Forbes warns that these audits can result in:
Significant fines
Penalties
Back taxes
Missing remittance deadlines or under-collecting tax, even accidentally, can put your business under scrutiny and disrupt operations.
5. Cross-Border Sales (VAT/GST): The Complications of Selling Internationally
For businesses selling internationally, compliance gets even more complicated. Many countries impose VAT (Value Added Tax) or GST (Goods and Services Tax), which follow entirely different rules from U.S. sales tax. For example, the EU requires sellers outside its borders to register for VAT if they sell digital products to EU customers. Failing to manage these obligations can create legal and financial exposure in foreign markets.
End-to-End Financial Management: From Bookkeeping to Fractional CFOs
Let your business take flight while Haven manages your financial runway. Built by founders for founders, we handle everything from daily bookkeeping to complex tax filings and R&D credits that put cash back in your pocket, as well as fractional CFO services. Join 400+ startups who've saved millions in tax credits, countless hours of administrative work, and never missed a filing deadline - all while accessing 24/7 Slack support from CPAs who understand the unique challenges of growing businesses. Book a call today to learn how our dedicated team providing accounting services for small businesses can help you focus on building rather than bookkeeping.
4 Pro Tips for Smooth Ecommerce Sales Tax Management
1. Create an Organized Sales Tax Compliance Strategy
Managing ecommerce sales tax doesn’t have to be overwhelming. With the right approach, tools, and knowledge, you can stay compliant without constantly worrying about deadlines or errors. Set up a structured workflow for tax compliance. This includes:
Filing reminders: Use calendar alerts or project management tools to track state-specific filing deadlines.
Monitoring nexus status: Regularly review sales volume and transactions in each state to identify new tax obligations before they become a problem.
Staying updated: Subscribe to state tax department newsletters or industry resources to keep track of regulatory changes.
2. Use Software for Accurate Sales Tax Calculation
Manual tax tracking across multiple states is a recipe for errors. Automation tools like TaxJar, Avalara, or built-in platform tax engines can:
Automatically calculate the correct rate based on the buyer’s location.
Track sales against nexus thresholds.
Remit taxes to state agencies automatically or generate ready-to-file reports.
3. Consult a Tax Professional When Needed
If you’re expanding into new states or selling internationally, consult a tax professional.
They can:
Interpret complex state laws or VAT/GST rules.
Help you register in new jurisdictions.
Provide audit support and advice on risk reduction.
4. Understand Marketplace Facilitator Laws
If you sell through platforms like Amazon, Walmart, Etsy, or eBay, marketplace facilitator laws may simplify your compliance burden.
How they work:
These laws require marketplaces to collect and remit sales tax on behalf of their third-party sellers. Nearly every U.S. state has adopted such laws.
What this means for sellers:
You generally don’t need to register or file tax returns for those marketplace sales if tax is fully handled by the platform. You must still determine where you have nexus and ensure your platform tax settings are correct.
Platform examples:
Amazon: Offers an automated tax collection service. You configure tax settings, and Amazon calculates, collects, and remits tax on your behalf.
eBay: Automatically collects and remits sales tax in states where marketplace facilitator laws apply, but you must monitor states where you might have additional obligations.
Shopify: Unlike marketplaces, Shopify is not a facilitator. You are responsible for configuring your tax settings and handling collection, remittance, and filings yourself.
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