Launching an online store has never been easier. With just a few clicks, you can reach customers across the country, turning your passion into a thriving business. But as your sales grow, you’ll inevitably encounter one of the most complex challenges in e-commerce: sales tax.
What used to be a relatively straightforward issue has become a tangled web of state-specific rules and regulations. For online sellers, understanding your obligation is not just good practice—it’s the law. This guide will break down the essentials you need to know to stay compliant.
The Old Days vs. The New Reality: Understanding “Nexus”
The core concept behind sales tax is “nexus.” In simple terms, nexus is a connection or presence your business has in a state that legally obligates you to collect and remit sales tax from customers there.
For decades, this was mostly about physical presence. If you had an office, a warehouse, an employee, or a storefront in a state, you had nexus there. For most online businesses with a single location, this meant you only had to worry about collecting sales tax from customers in your home state.
That all changed in 2018.
The Game Changer: South Dakota v. Wayfair
A landmark Supreme Court ruling in the case of South Dakota v. Wayfair, Inc. completely redefined the rules for online retailers. The court decided that states could require businesses to collect sales tax even if they had no physical presence in that state.
This created a new type of nexus: economic nexus.
Economic nexus is established when your business meets a certain threshold of sales revenue or a specific number of transactions within a particular state. This means you could be sitting in your office in California and suddenly have a legal obligation to collect sales tax in New York, simply because you sold enough to customers there.
What Are the Economic Nexus Thresholds?
This is where it gets complicated, because every state is different. However, a common threshold adopted by many states is:
- $100,000 in gross sales into the state in the previous or current calendar year.
OR - 200 or more separate transactions into the state in the previous or current calendar year.
Some states have different thresholds, and some only have a sales revenue requirement (not a transaction count). The critical takeaway is that you must track your sales volume per state to know where you might be approaching an economic nexus threshold.
I Have Nexus. Now What?
If you’ve determined you have nexus in a state (or several), you need to take action. Here are the three key steps:
- Register for a Sales Tax Permit: Before you can collect a single cent of sales tax, you must register with that state’s Department of Revenue (or equivalent agency) to get a sales tax permit. Collecting sales tax without a permit is illegal.
- Collect the Correct Tax Rate: This is harder than it sounds. Sales tax isn’t just a single statewide rate. There are thousands of different tax jurisdictions across the U.S., with varying city, county, and special district taxes. The correct rate depends on your customer’s exact shipping address. Thankfully, most major e-commerce platforms (like Shopify, BigCommerce, etc.) have built-in tools or integrations that can help automate these calculations.
- File and Remit the Tax: Collecting the tax is only half the job. You must then file a sales tax return with the state—usually on a monthly, quarterly, or annual basis—and remit all the tax you collected. Missing a filing deadline can result in significant penalties and interest.
A Note on Marketplace Facilitator Laws
If you sell your products through a marketplace like Amazon, Etsy, or eBay, you may be in luck. Most states now have “Marketplace Facilitator” laws that require the marketplace itself to collect and remit sales tax on your behalf. This simplifies compliance for your marketplace sales, but be aware: those sales often still count toward a state’s economic nexus threshold, which could trigger an obligation for sales made through your own website.
Navigating the world of sales tax is a significant undertaking for any online business owner. Between tracking nexus across 50 states, calculating the right rates, and meeting filing deadlines, it can quickly become overwhelming and distract you from what you do best—selling your product.
At Kohani & Associates, we specialize in taking the complexity out of compliance. We help businesses understand their sales tax obligations, get registered in the necessary states, and ensure that their filing and remittance are handled accurately and on time. If you’re tired of worrying about nexus and want to focus on growth, contact us for a consultation. Let us handle the tangled web so you can get back to business.thumb_upthumb_down