Selling to customers in multiple states sounds exciting (and lucrative), but it comes with added responsibilities. Recent laws mean you may now be on the hook for paying sales tax in states outside of where your business is based.
From understanding where you need to collect sales tax (yes, that can vary by state or country) to figuring out the right rates to charge, there’s a lot to unpack—and a lot of potential pitfalls.
The penalties for mishandling sales tax can be steep, both financially and legally, and nobody wants to end up in hot water over something that could have been managed early on. While it might seem complicated, setting up a solid approach to sales tax can make a world of difference.
How Does Ecommerce Sales Tax Work?
The topic of tax isn’t exactly thrilling, but it’s worth getting your head around the basic concept of sales tax so you don’t fall foul of the rules and regulations.
How It All Began: The 2018 South Dakota v. Wayfair, Inc. case
The South Dakota v. Wayfair, Inc. case was a landmark ruling that completely changed the way online businesses manage sales tax.
Before 2018, most states required businesses to have a physical presence (like a store or warehouse) to charge sales tax. But Wayfair changed that, allowing states to require out-of-state sellers to collect and remit sales tax if they make a certain number of sales or transactions within that state.
Basically, Wayfair redefined what it means to have a “nexus” (a connection that obligates you to collect sales tax) with a state.
While the decision gives states more flexibility in how they define nexus, it also means online businesses now have to pay closer attention to where their sales are happening and whether those sales hit the threshold for collecting tax.
Understanding Nexus
In ecommerce, “nexus” is the term used when you have enough of a presence in a state to require sales tax collection. But figuring out where you have nexus isn’t always straightforward and can hinge on a number of factors.
A traditional nexus is based on physical presence.
If you have a store, office, or warehouse in a state, you almost certainly have nexus there. But since the Wayfair case, even businesses without a physical footprint in a state could have nexus if they meet certain sales thresholds. Most states now require you to collect sales tax if you reach a certain amount in sales (often around $100,000) or a set number of transactions (typically around 200) within the state.
For example, if you’re an ecommerce brand selling to Californians and your sales there exceed $500,000 each year, there’s a good chance you have nexus there and need to collect sales tax from California customers.
Businesses Need to Calculate the Correct Rates
Once you’ve identified where you have nexus, the next step is calculating the correct tax rate—and here’s where things can get a little complex.
Sales tax rates can vary at both the state level and local jurisdictions. This means you might need to collect a base state rate and an additional county or city-level tax depending on where a buyer lives.
For instance, Texas has a base state sales tax rate of 6.25%, but some cities and counties add their own taxes on top, meaning the total rate could reach up to 8.25% in certain areas.
Once you know the rates you need to collect, you must register for a sales tax permit in every state where you have nexus.
To register, you submit an application to each state’s Department of Revenue. After you’re registered, you need to start filing returns immediately—a.k.a. reporting and paying the sales tax you’ve collected.
Filing frequency varies by state and can be monthly, quarterly, or annually, depending on your sales volume.
The Importance of Getting It Right
Not collecting or remitting sales tax in states where you have nexus isn’t something the tax authorities take lightly.
If you fail to collect sales tax where you should, the state can actually require you to pay what you should have collected out of your own pocket. For a growing business, that can add up quickly and create a hefty tax bill you weren’t planning for. Many states also tack on interest and penalties for underpayment.
Failing to stay compliant might also get you audited. This can be costly and time-consuming because you need to dig up years’ worth of records.
6 Best Practices for Handling Sales Tax
Understanding where you have nexus is probably the most complicated part of the process. Once you’ve done that, you can determine how much sales tax you need to collect in each location and when you need to file.
Here are some tips for keeping it simple.
1. Determine Where You Have Nexus
Start by reviewing each state’s nexus criteria and identifying the states where it applies to you. Each state sets its own thresholds, so check if you meet them based on factors like sales volume or transaction count.
Another important aspect to consider is sourcing—whether sales are taxed based on your location (origin-sourced) or the customer’s location (destination-sourced).
Origin-based sourcing is simpler, as you only need to apply sales tax rates based on your own location. However, destination-based sourcing, which most states use, means you’ll need to calculate rates according to each customer’s location.
2. Register For a Sales Tax Permit in Your Nexus States
Once you know where you have nexus, register for a sales tax permit with the authority in each of those states.
These permits let you legally collect and remit sales tax and the costs range from free to around $100. Nearly all states offer online registration.
Note that these permits often have expiration dates. Some, like Arkansas, are active until canceled, while others, like Colorado, need renewing every two years. It’s really important to keep track of these renewal dates to avoid accidentally doing business without a valid permit.
3. Understand State-Specific Exemptions
Every state has its own set of exemptions. Familiarize yourself with them and understand which ones apply to your business so you don’t have to collect unnecessary sales tax.
For example, some states let nonprofit organizations make tax-free purchases if they meet certain requirements. Other states won’t tax items purchased for resale as long as the buyer isn’t the final consumer.
Look out for sales tax holidays too. Some states temporarily waive sales tax on select items, like school supplies or clothing during back-to-school season.
4. File Your Sales Tax Returns on Time
Your next priority is filing accurate sales tax returns.
Each state has specific filing schedules, and these are often tied to your sales volume. For instance, if you’re collecting under $100 in tax monthly, you may only need to file quarterly, while higher monthly collections could mean filing monthly.
It’s important to file a return for every state you’re registered in, even if you didn’t collect any tax during the period. Submitting a zero return means you avoid late fees or penalties some states impose for missed filings.
It helps to keep a visible, updated filing schedule for each state. For example, in Missouri, monthly sales tax returns are due on the very last day of the month, while quarterly returns are due on the last day of the month following the quarter’s end.
Tip: create a tax calendar that maps out every due date and filing frequency for each state where you’re registered.
5. Document Everything and Stay On Top of Changes
Keep meticulous records of the sales tax you’ve collected, any exemption certificates, filing deadlines, rate changes, and historical records of all your filings.
It’s important to stay on top of any changes or upcoming changes, too. Tax laws change more often than you think, and it can be a nightmare trying to stay compliant if you have nexus in multiple different states.
Tip: set up alerts for rate changes in your nexus states, new marketplace facilitator laws, changes in economic nexus thresholds, and product taxability updates.
6. Automate Your Sales Tax Tracking and Filing
Manually tracking sales tax might work when your business is just starting and only has nexus in one or two states. But as you expand, manual filing can quickly eat up your time and leave you open to mistakes. With over 12,000 tax jurisdictions across the US, a dedicated sales tax automation tool can help you streamline the process.
Ecommerce sales tax software can simplify everything, from identifying nexus to automatically calculating the right tax rates based on each buyer’s address, and even filing your returns on schedule. As your business grows, investing in a tool like Numeral, TaxJar, or Avalara can help you confidently stay compliant, save time, and reduce the risk of errors.
Note that certain tools will handle just the rate calculations, some will handle just the registrations and filings, and others will do both.
What Happens If You’re Selling on Amazon or eBay?
If you’re selling through platforms like Amazon or eBay, your sales tax process can look a little different. These platforms have Marketplace Facilitator Laws, which means they’re responsible for collecting and remitting sales tax on your behalf in states where such laws are active.
For example, Amazon offers an automated tax collection service. You can configure tax settings based on the states where you have nexus, and Amazon will calculate, collect, and remit sales tax on your behalf. Note that it’s still up to you to determine where you have nexus and properly set up the platform’s tax settings.
On eBay, sellers are also given the option to charge sales tax, and eBay automatically collects and remits tax for certain states due to marketplace facilitator laws. But again, you’ll need to keep track of any states where you might have additional obligations beyond what the platform collects, as well as stay on top of your filings.
What About Shopify?
If you’re selling on Shopify, you’re in the driver’s seat for sales tax compliance as the platform doesn’t automatically collect or remit sales tax for you. Instead, Shopify provides tools to make managing sales tax easier, but it’s up to you to set them up based on your nexus obligations.
To get started, you’ll need to configure sales tax collection in your Shopify settings.
This means identifying where you have nexus and entering the right tax rates for those regions. Shopify can calculate these rates automatically, but it’s up to you to stay on top of where your business has nexus and update your settings as things change.
While collecting sales tax through Shopify is pretty straightforward, remember that you’re responsible for filing and remitting it to the right states. The easiest way to do this is to use a Shopify app or third-party sales tax software like Numeral to automate tax collection and filing.
Read our step-by-step guide to setting up sales tax on your Shopify store.
What Sellers Need to Know About Cross-Border Sales and Tax Compliance
Cross-border sales usually require Value Added Tax (VAT) or Goods and Services Tax (GST) on top of any other local sales taxes. Unlike US sales tax, VAT and GST are consumption taxes paid by the end customer, and they’re often included in the product price.
The requirements and rates for VAT or GST vary from country to country. If you’re selling to customers in the EU, VAT generally applies across the board, with rates varying between 17% and 27% depending on the country.
Some countries have specific rules for low-value goods or digital products. For example, Australia requires a 10% GST on imported goods over AUD $1,000, while the EU has a threshold-free VAT policy for all imported goods.
For most regions, the rule of thumb is if you’re selling to individual customers (as opposed to businesses) and your sales exceed the country’s threshold, you’ll need to register, collect, and remit the appropriate tax.
Register For Tax Collection In Each Country With significant Sales
Once you know where you’re likely to have tax obligations, the next step is registration. Countries set different thresholds for when to register for VAT or GST, usually based on annual sales volume.
For instance:
- European Union: As of 2021, the EU introduced the One-Stop-Shop (OSS) system, which makes VAT easier for ecommerce sellers. If your annual sales to EU customers exceed €10,000, you need to register for VAT in an EU country and can use OSS to remit VAT for all EU sales, rather than registering in each individual country.
- United Kingdom: Post-Brexit, UK VAT regulations now apply separately from the EU. Cross-border ecommerce sellers shipping to the UK need to collect and remit VAT if the consignment value is £135 or less. For amounts above £135, the buyer is responsible for paying VAT at customs.
- Canada: GST/HST registration is required if your Canadian sales exceed CAD $30,000 annually—rates are different in each province.
Understand “Distance Selling” Rules and Import Duties
Distance selling rules often dictate when you need to start collecting tax based on the destination country’s laws, especially in the EU. Once you pass a certain sales threshold, you need to collect VAT at the buyer’s rate, not your own. This applies even if you’re based outside the buyer’s country.
On top of this, you might need to pay import duties, especially if you’re selling high-value goods. Import duties are separate from VAT or GST and are usually calculated based on the product type, country of origin, and declared value.
Final Thoughts
Understanding and managing sales tax is definitely not the most glamorous part of running an ecommerce business, but it’s a non-negotiable.
With laws now placing more responsibility on sellers to collect and remit taxes across various states (and even countries), it pays to get it right from the start.
By identifying where you have nexus, understanding the specific rules for each region, and investing in automation tools, you can make sure you’re compliant from the get-go—and avoid any nasty, expensive surprises while you’re at it.
