Do You Need to Collect Sales Tax When Selling Online?

And no matter what they’re selling (or reselling, in the case of dropshippers), online businesses face a matrix of tax obligations that vary from state to state (and, in some cases, from county to county) and that are constantly evolving and changing. But understanding sales tax isn't just about avoiding penalties — it's also about positioning your business for scalable growth. Smart sellers are turning tax compliance into a competitive edge, using multi-state tax strategies to:

• Optimize pricing across state lines.
• Structure new product launches around tax implications.
• Build tax efficiency into their supply chain decisions.
• Leverage marketplace facilitator laws strategically.

This guide will cover everything you need to know about when to collect sales tax, how to handle multi-state compliance, and how to turn tax management into a strategic advantage for your business.

What is sales tax, and how does it apply to online sales?

As consumers, we’re familiar with sales tax and how it works. When we buy a product, a small percentage of the item’s price is added to the total we owe, and we don’t think too much about it. But for online sellers, figuring out whether, where, and how to collect sales tax can quickly become very confusing.

What is sales tax?

Sales tax is a fee paid by buyers when they purchase taxable goods or services. The seller collects the funds and passes them on to state and/or local governments. The tax dollars are then used to fund everything from roads and schools to emergency services.

If you own a brick-and-mortar store, the rules for collecting and distributing sales tax are usually relatively straightforward: sales tax is based on the store’s location. But online sellers typically sell in many states.

The growth of e-commerce and its impact

As online shopping grew to become a major way that people buy things, a massive gap in tax collection also developed. States could enforce sales tax only on some of online transactions, which meant lost revenue for public services.

This gap became especially significant with the rise of digital products. Unlike physical goods, items like e-books, software, and streaming subscriptions didn’t fit neatly into existing tax rules. Sellers were left wondering: Are these products taxable? And if so, where?

The Wayfair Case: A turning point

In 2018, the Supreme Court’s decision in South Dakota v. Wayfair, Inc. redefined the rules for sales tax collection. The case addressed whether states could require businesses to collect sales tax on out-of-state transactions, even if the business didn’t have a physical presence, such as a storefront or warehouse, in the state. Before this ruling, the “physical presence” rule, as outlined in earlier cases like Quill Corp. v. North Dakota (1992), limited states' ability to tax e-commerce sales.

The Court’s decision introduced the notion of economic nexus, which says that your business’s sales activity — regardless of physical presence — can create a tax obligation. Economic nexus can mean reaching a certain amount in revenue or having a certain number of total transactions in a state. Here’s what that might look like:

Here are a couple of examples of what that might look like:

• A business selling handmade jewelry exceeds $100,000 in online sales or completes 200 online sales transactions in South Dakota during the year, triggering an obligation to collect sales tax under the state’s economic nexus law (South Dakota Codified Laws, Chapter 10-64).
• A seller offering digital subscriptions surpasses Pennsylvania’s threshold of $100,000 in sales, requiring that they collect and remit sales tax in the state, even though their customers span multiple counties.

The Wayfair decision made one thing clear: It’s about where your customers are and how much they’re buying, rather than where your business is located.

Why this matters to your business

As an online seller, staying on top of sales tax laws isn’t just about ticking boxes for compliance. It’s about protecting your business from fines, penalties, or the stress of dealing with an audit. Even more, it’s about building trust with your customers. No one wants to see unexpected charges at checkout or find out they’ve been undercharged due to a seller’s oversight.

Understanding how sales tax applies to your business is the first step to avoiding these headaches. By knowing what’s expected—whether you’re selling digital goods, handmade crafts, or software—you can focus on growing your business without worrying about compliance issues catching up with you.

When are online sellers required to collect sales tax?

Understanding when to collect sales tax requires understanding a concept called nexus.

What is nexus?

Nexus is a fancy way of saying "connection." If your business has a significant connection to a state, you must collect and remit sales tax there. Nexus used to be simple—if you had a physical presence, like a store or warehouse, in a state, you had nexus. But the rules have evolved with the growth of online sales.

Now there are two main types of Nexus:

Physical nexus: Having physical nexus means having a physical presence in a state. This could include:

• An office or storefront.
• A warehouse or storage facility.
• Employees, contractors, or sales representatives operating in that state.

Economic nexus: This is where things get interesting for online sellers. Economic nexus is based on the volume of sales or transactions in a state, even if you don't have a physical presence there. For example:

• In South Dakota, you have economic nexus if you sell at least $100,000 worth of goods or have more than 200 transactions in a year.
• In Pennsylvania, the threshold is $100,000 in annual revenue.

How does nexus work in real life?

Let’s say you run an online home decor store. You ship products to customers across the U.S. You don’t have offices or warehouses outside of your home state, but your sales data reveals:

• $120,000 in revenue from South Dakota.
• $550,000 in revenue from New York.
• $450,000 in revenue from Pennsylvania.

In this case, you’d be responsible for collecting sales tax in all three states because you’ve exceeded their economic nexus thresholds, even though you’ve never set foot there.

Marketplace facilitator laws: A helping hand for sellers

If you sell through platforms like Amazon, Etsy, or eBay, marketplace facilitator laws might simplify things for you. These laws require the platform — not the seller — to collect and remit sales tax for transactions made through their site.

For example:

• If you sell handmade jewelry on Etsy, Etsy will handle the sales tax collection for states requiring it.
• However, suppose you also sell directly from your website. In that case, you must monitor your sales activity and handle tax collection.

Marketplace facilitator laws ease the burden but don't eliminate your responsibility to understand where you have nexus and to ensure that your direct sales are compliant.

Why understanding nexus matters

Failing to recognize where you have nexus can lead to serious consequences:

• Audits and penalties: States are increasingly aggressive about enforcing compliance.
• Missed opportunities: Staying compliant builds customer trust, but failing to do so can damage your reputation.

Knowing when and where you’re required to collect sales tax ensures that you avoid fines, reduce stress, and focus on growing your business.

Once you've identified where your business has nexus, the next challenge is understanding how tax rules vary from state to state. Each state has its approach to sales tax, creating a patchwork of laws that can be confusing. 

Tips for managing compliance in multiple states

Staying compliant can feel overwhelming if your business has nexus in several states. Here are practical strategies to help you manage these obligations:

1. Use tax mapping tools: Invest in software that automatically calculates applicable state and local taxes based on your customers’ shipping addresses.
2. Stay updated on state laws: Tax thresholds and rules change frequently. For example, Florida’s economic nexus law was introduced in 2021, catching many sellers off guard. Subscribing to updates from state tax authorities can help you stay ahead.
3. Streamline with automation: Automating your sales tax calculations and filings can save time and reduce errors, especially if your business operates in multiple states. Tools like Numeral can handle these complexities for you.

Why it’s important to stay informed

Failing to comply with state-specific rules can lead to significant penalties, audits, and having to pay back taxes. Worse, non-compliance may erode customer trust if unexpected charges arise. By understanding the key differences between states and using tools to simplify the process, you can ensure that your business operates smoothly, no matter where your customers are.

Steps to start collecting sales tax online

Once you've determined where your business has nexus and is therefore required to collect sales tax, the next step is to implement compliance. These steps will guide you through the process, from registering for permits to automating tax collection.

1. Register for sales tax permits

The first step to legally collecting sales tax is obtaining a sales tax permit in each state where you have nexus. Here's how it works:

• Visit the state’s Department of Revenue website to apply for a permit.
• Provide basic details about your business, including your EIN (employer identification number) and an estimate of your expected sales in that state.
• Once approved, you'll receive a sales tax permit number, which you must use when you file and remit taxes.

Tip: Wait to start collecting sales tax in a state until you have your permit. Collecting without authorization can lead to penalties.

2. Set up automated tax collection

Most e-commerce platforms make it easy to collect sales tax by automating the process. Platforms like Shopify, WooCommerce, and Amazon offer built-in tools that calculate tax rates based on the buyer’s location and product taxability.

Here’s how to get started:

• Enable tax settings in your e-commerce platform. (eg Setting up sales tax on Shopify)
• Input the states where you’re registered to collect sales tax.
• Double-check that the platform's calculations include local tax rates, which can vary significantly.

Automation ensures accuracy, saving you the time and hassle of manual calculations. 

3. Calculate the correct sales tax

Accurate tax calculation is essential for staying compliant. This includes:

• State, county, and city rates: Some states, like Colorado, have multiple layers of tax rates.
• Product-specific rules: Depending on the state, items like groceries, clothing, or digital products may be taxed differently—or not at all.

Using tools that integrate with your platform, such as Numeral, can simplify this process and ensure compliance.

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Challenges and considerations for online sellers

Navigating sales tax compliance is more than a one-and-done task. Staying compliant is an ongoing challenge as laws change and your business grows. Here are the three key areas where online sellers face hurdles and how to address them.

1. Adapting to changing laws

States frequently adjust thresholds, add new requirements, or change the taxability of specific goods and services. For example:

• Florida introduced economic nexus laws in 2021, catching many sellers off guard.
• States like Colorado update local tax rates regularly, requiring constant vigilance.

Staying ahead of these changes can feel overwhelming, but keeping an eye on state announcements and subscribing to updates can help. Automation tools like Numeral can provide real-time alerts when laws impacting your business change.

2. Recordkeeping for audits

Accurate records are your first line of defense if a state tax authority comes knocking. You’ll need:

• Detailed sales reports showing where transactions occurred.
• Records of sales tax collected and remitted.
• Copies of sales tax permits for states where you’re registered.

Keeping digital records in a cloud-based system can simplify this process and ensure that you're always audit-ready.

3. Sales tax on digital products

The rules are even more complex if you sell digital goods, like e-books or SaaS. Some states tax digital products at the same rate as physical goods, while others exempt them entirely. For example:

• Texas considers digital downloads taxable.
• Florida exempts many digital goods, creating a patchwork of rules.

Understanding how each state treats your products is essential to avoid errors.

Solutions for managing sales tax compliance

Sales tax compliance can feel like juggling too many balls at once — keeping track of nexus, calculating rates accurately, and filing on time for multiple states. Fortunately, you don't have to do it all manually. Automated solutions can simplify the process, saving you time and reducing the risk of costly errors.

Why use a sales tax automation tool?

Automated solutions are designed to take the headache out of sales tax compliance. Here’s what they can do for you:

• Track nexus thresholds: Automation tools monitor your sales activity and notify you when you're approaching Nexus in a state.
• Calculate tax rates in real time: State, county, and city rates often change, so automation ensures that you always apply the correct rate for each transaction.
• Streamline filing and payments: Instead of manually managing filing deadlines for multiple states, use automation tools to handle the heavy lifting, ensuring timely payments.

 Here are a few of the best sales tax solutions for e-commerce businesses.

Making compliance easy

Automation serves as a critical safeguard, ensuring that your business stays protected and compliant. Errors in sales tax compliance can lead to penalties, audits, and wasted resources. By choosing the right tools, you can stay ahead of regulations, avoid costly mistakes, and confidently run your business.

Best practices for online sales tax compliance

Compliance with sales tax laws depends on consistent habits that help your business navigate potential challenges effectively. Here are some best practices to ensure that you remain on top of your tax obligations.

1. Monitor for new nexus triggers

Sales thresholds and tax laws aren't static. After a strong quarter of sales, a state where you didn't previously have nexus could become a compliance requirement. Regularly review your sales data to see where you may have exceeded nexus thresholds.

Pro tip: Set quarterly reviews to compare your sales against state-specific thresholds. Many automation tools, like Numeral, can send alerts when you approach or cross a threshold.

2. Regularly update your sales tax settings

E-commerce platforms like Shopify and WooCommerce offer automated tax settings, but they're more of a one-and-done solution. Tax rates can change frequently, especially locally in Colorado or California. Make it a habit to:

• Double-check your platform’s tax settings quarterly.
• Ensure that new tax rate updates are applied.
• Verify taxability rules for new products you add to your catalog.

Many Shopify sellers opt to use a Shopify app for sales tax compliance.

3. Consult a tax professional or use a tax engine

When in doubt, ask for help. Tax professionals can provide tailored advice based on your business model. In contrast, tax engines like Numeral can handle the heavy lifting, from real-time rate calculations to filing deadlines. The combination of expert insight and automation ensures you're covered.

By adopting these best practices, you can reduce compliance risks, save time, and focus on growing your business confidently.

Simplify your sales tax compliance today

Sales tax compliance might seem overwhelming, but with the right tools and strategies, it can be easy for your business to succeed. By understanding nexus, staying on top of changing laws, and automating the compliance process, you can confidently manage your obligations while focusing on growth.

This is where Numeral comes in. It’s your all-in-one solution for sales tax compliance. Here’s how it helps:

• Nexus tracking and alerts: Numeral monitors your sales activity in real-time, sending you alerts when you approach new thresholds. This keeps you ahead of compliance requirements, so there are no surprises.
• Accurate tax calculations: State, county, and city tax rates constantly change. Numeral ensures that every transaction reflects the correct rate, eliminating guesswork.
• Seamless filing and payments: Forget juggling multiple deadlines. Numeral handles registrations, filings, and remittances across jurisdictions, so you stay compliant without lifting a finger.

What’s more, Numeral integrates effortlessly with your e-commerce platform, whether you’re using Shopify, WooCommerce, or another system. It’s designed to simplify your workflow, reduce errors, and give you peace of mind.

Hundreds of online sellers have already turned to Numeral to manage their sales tax obligations and avoid costly penalties. Ready to join them? Schedule a demo today and discover how Numeral can transform how you handle sales tax compliance.