Along with Brazil and India, the United States has one of the most complex tax systems in the entire world.
Today, we’ll demystify U.S. sales tax for you, whether you live in the U.S. or live outside the U.S. and are looking for information about selling to buyers in the U.S.
- How sales tax works
- When should merchants collect sales tax?
- Register for a permit with each state where you have nexus
- Is there a difference in the tax process for FBA sellers, dropshippers, and ecommerce shops?
- Product Taxability
- Collecting sales tax
- Reporting and filing
- Additional best practices when filing sales tax reports
- 3 biggest sales tax mistakes that eCommerce entrepreneurs make
- How to not let a potential sales tax issue derail the sale of your business
- Tax related articles
How sales tax works
There is no national sales tax in the U.S.
Instead, sales tax is governed at the state level. Each state can decide whether or not to have a sales tax, and forty-five states and Washington, D.C., all do. Only four states —Delaware, Montana, New Hampshire, and Oregon – do not have a sales tax.
Pro Tip: While Alaska technically doesn’t have a state sales tax, it does have local sales tax. This is becoming increasingly important due to the Alaska remote sellers coalition.
Sales tax is a percentage – usually between 4 and 8% of a retail sale. Sales tax is collected by the retailer and passed on to the state at periodic intervals. The state then uses that sales tax to pay for state and local budget items like schools, roads, transportation, and public safety.
Most states that have a sales tax also allow local areas (like cities and counties) to have a sales tax, too. When making a purchase at a brick-and-mortar store in the U.S., you might see that you paid an odd number, like 6.75% in sales tax.
This is because you are paying a statewide tax, city and/or county taxes, and maybe a “special taxing district” tax rate.
When should merchants collect sales tax?
In the U.S., eCommerce sellers (whether brick and mortar or online sellers) are only required to collect sales tax in states where they have “sales tax nexus.” However, you must have a permit before you collect sales tax from customers.
Sales tax nexus is just a fancy, legalese way of saying “a significant connection” in a state. If you have nexus in a state, then that state considers you on the hook for charging sales tax to buyers in the state. You’ll always have sales tax nexus in your home state where your business is incorporated, but you may find that certain business activities create nexus in other states, too. They include:
- A location – an office, warehouse, fulfillment center, store, or other physical place of business
- Personnel – an owner, employee, contractor, salesperson, installer, or other person doing work for your business
- Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
- Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
- A drop shipping relationship – If you have a 3rd party ship to your buyers, you may create nexus
- Selling products at a tradeshow or other event – Some states consider you to have nexus even if you only sell there temporarily
- Economic nexus – Exceeding the online sales or transactions amount set by the state
- Advertising nexus– This is a lesser-known one but many states will consider you to have nexus in a state if you run direct mail campaigns, have billboards, or geo-targeted Google or Facebook ads.
Note: There are MANY more things that can create sales tax nexus besides this list, but this is a great starting point).
Sales tax nexus applies whether you are based in the U.S. or outside the U.S. If you have a location, personnel, inventory, economic nexus, etc., in a U.S. state, then that state requires you to collect sales tax from in-state buyers.
Once you start selling online, you must first determine nexus, and then get registered, and collect and remit taxes to be compliant. This typically starts in the state where your business is registered. Most states impose sales tax, but several, such as Oregon, do not. If your home state charges sales tax, then you will likely have “nexus” in the state.
A Special Note on Economic Nexus Threshold
A pivotal 2018 Supreme Court of the United States ruling, South Dakota v. Wayfair, paved the way for U.S. states to require that sellers who meet a certain sales or transactions threshold in the state collect sales tax from buyers in that state.
Often, the threshold is $100,000 sales in a state in a year and/or 200 sales transactions into the state in a year. But you can see each state with an economic nexus law and find out their thresholds in:
Need to determine if you have economic nexus? You can DIY it with automated tax software like Zamp, or if you are doing at or above $1 million in sales, you may want to connect with an automated tax advisor, like TaxValet, for a done-for-you sales tax nexus evaluation.
Selling both physical and digital products
One of the most common things that eCommerce business owners overlook is digital product sales tax.
While not every state taxes digital products, if you have nexus in a state that does, it is important to have a clear understanding of where the customer is for tax calculation purposes. It may seem weird to ask a customer what the shipping address is if you’re not actually shipping anything, but you really should have that information because that’s the address that we’re supposed to be using when it comes to tax calculation for digital products. If you don’t have that, then it would be most appropriate to use the billing address, but most of us know your billing address might not necessarily be where you actually live. And so that’s why getting that customer address information is particularly helpful.
Pro Tip: In states where they have an exemption for digital products, it is critical that you examine the state’s specific statutes to be certain that your specific product would fit within the exemption language. Statutes that create exemptions are applied narrowly.
Another stumbling block is if your business sells a combination of both digital and physical products, the taxability for both of these things is going to be different.
Let’s say you sell both supplements and a workout system PDF. You sell the supplement for $30 and then the ebook for $15. This situation might seem straightforward. However, if you run any cross promotions and bundle the two, it can get tricky. If you sell something that’s taxable in a state and you’re bundling it with another item that is non-taxable in the state, which oftentimes is going to be a digital product because digital products are exempt in about half the states and the United States, all of a sudden the entire transaction can now be taxable.
Register for a permit with each state where you have nexus
If you have “nexus” in a state, you must register for a sales tax permit. It’s important to understand what the requirements and potential liabilities are for the specific state you have a “nexus” in.
An accounting firm, like Bean Ninjas, state sales tax office, or government website are all great resources to guide you through registering to collect sales tax. Each state is different, so it’s important to seek out information relevant to your state.
Pro Tip: It’s illegal to collect sales tax without a valid sales tax permit within certain states. From the government’s perspective, if you are collecting without a permit, you may be keeping that money in your pocket.
As with everything having to do with sales tax, registering to collect sales tax is different in every U.S. state. You can find our state-by-state guides on how to register for a sales tax permit here.
Is there a difference in the tax process for FBA sellers, dropshippers, and ecommerce shops?
This is one of the biggest questions we get asked, and the answer is often debated within ecommerce communities.
This is because when you sell on a platform like Amazon, Walmart, or TikTok Shop, it’s not clear if the person buying your products is your customer or Amazon’s.
However, the tax process shouldn’t differ regardless of the state(s), which you may be required to register due to nexus (More on that in the next section, or if you dropship, sell on Amazon, or directly from your own warehouse.
Selling on third-party marketplaces
When it comes to selling on marketplaces, there are a few things to keep in mind.
Marketplace facilitator laws mean that the marketplace is responsible for calculating, collecting, and remitting the tax, but assuming you have a permit in the state, you still need to report these marketplace sales on your return.
If you are storing inventory in the state because of the marketplace (Ex, Amazon FBA), you usually nexus in that state. And there’s a report in Amazon that you should periodically look at, where the inventory is stored. There are a few states that do not impose sales tax nexus if your only presence in the state is inventory in a third-party warehouse. This is where working with a sales tax consultant to get clear can be helpful.
In addition, if you are sending those marketplace orders into your direct-to-consumer channel, there’s the potential for sales tax to be paid twice, once because the transaction is happening within the marketplace and a second time because it’s happening within Shopify. This could be a really big problem for a lot of companies that are using automated sales tax software because they’re paying that tax out of pocket when they shouldn’t be.
Most tangible personal property is taxable. But some states will legislate that some items – usually necessities like groceries or clothing – are not taxable. As with everything related to sales tax, this varies by state. For example, clothing is not taxable in the state of Pennsylvania. If you had nexus in Pennsylvania and sold clothing to a buyer in Harmony, PA then you would not charge sales tax. You can check here for information about what products are and are not taxable in each U.S. state.
Pro Tip: Contact a qualified tax accountant or a sales tax advisor for a sales tax analysis to understand what states apply to your business and why. Once you’ve identified that there’s a requirement to collect, you must register in those states and immediately begin collecting sales tax from those customers to avoid any fines or penalties.
Collecting sales tax
Once you have your state sales tax permit, your next step is to ensure that you are collecting sales tax from buyers in your nexus state (or states.) If you sell on multiple sales channels (ex, Shopify, Amazon, or through Salesforce Commerce Cloud), make sure you are collecting sales tax from all of your buyers in your nexus states on all of your sales channels.
Most online shopping carts and ERPs have a setting to allow you to automatically collect sales tax from your customers. That said, some shopping carts and ERPs have more robust sales tax collection engines than others. This arguably the most important step because one mistake in setting you tax calculations could result in major under collections. It is important to not only configure your products, but also run test orders to ensure the tax is calculating correctly, especially in states where you believe an exemption should apply.
Origin v. Destination Sales Tax
Once you’ve determined your business’s “nexus” status, you’ll need to know the difference between origin and destination sales tax. Some U.S. states have “origin-based sales tax sourcing” and some have “destination-based sales tax sourcing” for online sellers.
For the vast majority of businesses, you won’t need to worry about this because your shopping cart or tax calculation software should be taking this into account. This is also why ensuring that ship-from address information is listed correctly within sales channels.
However, here is a quick rundown.
Essentially, if your home state is origin-based, you’ll need to charge everyone in your state the rate for where your business is located. In origin-based states, like Tennessee, an online seller based in the state charges the sales tax rate at the origination points of a shipment (i.e. your home or warehouse.)
If your home state is destination-based, then you’ll need to charge everyone in your state the tax rate where the item is being delivered. Keep in mind that states have different rules for out-of-state sellers. In a destination-based state (and most U.S. states are destination-based), you, as an online seller, are required to collect sales tax at your buyer’s ship-to address. This means keeping track of sales tax rates all around a state. And states can have hundreds of sales tax rates.
Do you charge a shipping charge to your customers? If so, you may have to think about sales tax on shipping charges, too. Some states consider shipping charges a part of the taxable sale (and thus, you should charge sales tax on the shipping charges), and others consider shipping charges separate from the taxable sale (thus, you do not have to charge sales tax on those charges.)
Notice and Report Laws
Some U.S. states have “notice and report” laws, which are similar to states with economic nexus laws. The difference is they require sellers to collect sales tax for their state when they meet certain thresholds instead of simply having a physical location in their state.
For example, the state could require sellers that do $100,000 or more in revenue in their state to register for sales tax even if they don’t have a physical presence in their state.
Retailers often have the opportunity to buy items to resell without paying sales tax at the time of purchase. Resale certificates, otherwise known as a reseller’s permit, are presented to the vendor at checkout. As a seller, you may also accept a certificate from another retailer.
Reporting and filing
When your state sales tax filing due date rolls around (remember, this will usually be either every month, every quarter, or once per year), then it’s time to report how much sales tax you’ve collected.
In a handful of states with no local tax rates, this is fairly easy. They merely want you to report how much sales tax you’ve collected from buyers in that state. However, in most states, reporting sales tax is a complicated and time-consuming hassle.
The majority of U.S. states want you to break down how much sales tax you collect from buyers in each county, city, and other special taxing jurisdiction. This can be difficult if you have a high volume of sales, sell on multiple channels, or simply because your customer’s county and special taxing district can be difficult to determine.
That’s why, at the bare minimum, you should use automated sales tax software like Zamp, which can connect with all the channels on which you sell, pull in all of your transactions, and provide you with a sales tax return-ready report. All you need to do is fill in the info from your report and you’re ready to file.
All you need to do is fill in the info from your report and you’re ready to file.
There are a few important considerations to remember when you file sales tax:
- File on time – Penalties and interest are generally 20%-30% of the original tax due.any late payment.
- File “zero returns” – File a sales tax return on your due date even if you don’t have any sales tax due. Most states require this and will levy a penalty if you fail to file, no matter if you have collected sales tax over the taxable period or not.
- Don’t discount sales tax discounts – About half the states with a sales tax will allow you to keep a small percentage of the sales tax you’ve collected. While this amount is usually around 1% of the sales tax you collected, it is still free money.
A Note on Sales Tax Filing for Non-U.S. Sellers
Most states require that you pay via automated clearing house (ACH) transfer from a U.S. bank account. We recommend checking out this guide or contacting a good CPA or tax attorney if you need help getting set up to collect sales tax in the U.S.
Additional best practices when filing sales tax reports
Get familiar with the reporting and filing frequency in each state where you have “nexus”
Reporting and sales tax filing frequency can vary from state to state, but it’s often related to the volume of sales instead of state “nexus.” For example, smaller sellers with lower volumes of sales will generally file quarterly taxes. Larger sellers would be responsible for filing and reporting their sales tax on a monthly basis. It’s still important to check with your individual state for sales tax regulations and requirements for paying sales tax.
Review your sales tax reports regularly
Automated tax software is capable of generating a variety of useful reports. Two important numbers to look at during reporting include what the sales were for the period and the amount of sales tax collected. Reports will often go by state, but there are different tax rates for various counties and cities. For this reason, you should go through an accountant or use automated tax software (for smaller businesses), which are capable of generating these reports.
These reports should be reviewed on a monthly basis at a minimum.
Pro Tip: It’s important to be mindful of what your own specific trends look like within one jurisdiction from one period to the next. This helps to ensure you aren’t paying a consistent amount to a specific jurisdiction, and all of a sudden, the amount is two or three times more without a shared influx in sales. Paying close attention to your numbers will help prevent costly mistakes like this.
Understand employment taxes
When hiring someone to join your team, you need to understand the capacity the person is working at.
Should they be classified as a full-time employee, part-time employee, or freelancer?
If you hire an employee, you’re responsible for a portion of their taxes, whereas contractors and freelancers are responsible for withholding their own taxes.
This also means that you now have nexus in the state where your new employee lives.
Pro Tip: The distinction between an employee and a freelancer is nuanced. We recommend chatting with an employment attorney or accountant if you have any questions.
3 biggest sales tax mistakes that eCommerce entrepreneurs make
As you can see, sales tax is nuanced and can get complicated fast. Here are some ways where eCommerce businesses can get it wrong and how to fix it.
You can be personally liable for sales tax obligations
As a business owner, you can become personally liable for all sales tax obligations in an audit. In some states like Washington, your spouse and any additional owners or officers can be liable as well. The government can put not only your business assets but also your personal assets, like your personal bank account or your home, at risk. They can put liens on your business and personal property and you can literally wake up to your business account or your personal account having money drafted directly from the State Department of Revenue.
It is not just about economic nexus
There are so many ways that your business can create a sales tax collection responsibility such as having a physical presence by storing inventory. So if you’re storing inventory in a 3PL warehouse or maybe you’re selling on Amazon FBA, that inventory will create a physical presence and, therefore, a sales tax collection requirement.
There’s also advertising Nexus. So there are some states where if you are simply advertising on Facebook or Google, in print or in mail, the states also say that’s going to create sales tax.
Or if you’re exhibiting at a trade show, that can also create a sales tax Nexus.
For instance, Alex says, “Pretty much every single new client that we have coming into our systems has nexus in a state somewhere because of online advertising. And then it really comes down to how much the business owner really cares. The state statute says if you’re advertising in print or digital media, you now have sales tax nexus. And so we more often get in the conversation of, ‘Yes, you technically have an obligation, but do you really want to do anything about it? Because if you’re not crossing those economic nexus thresholds, what is your overall exposure for sales tax going to be in that state?’’
Do a nexus review at least 18 months before you sell your business
Sales tax frequently comes up during the sale of a business.
The new owner will frequently, during due diligence, ask about when the last time you had a Nexus review was. Can you prove that you’re sales tax compliant? Because even with an asset purchase agreement, the sales tax liabilities are going to transfer to that new owner. So if you’re ever planning on selling your business in the future, especially in the next three to four years, because that’s typically what the statute of limitations is, and that’s what the new owners are going to be looking at typically in terms of a look back period, then you really need to make sure that you have your sales tax taken care of.
Automating the sales tax handling process
Trying to set up and manage this process manually is extremely time-consuming. We recommend using an app such as Zamp or, if your needs are extensive (20+ jurisdictions using a Sales Tax Specialist like TaxValet.
In addition to automating the sales tax compliance process, these apps can also help you find sales tax exemptions.
Sales tax exemptions are beneficial, but only if you aren’t wasting your time identifying them. If the benefits are no longer outweighing the amount of time you spend identifying and involving yourself in the task, then it’s time to outsource through software or a service provider.
Pro Tip: When looking for sales tax exemptions, such as sales tax holidays in specific states during back to school time, you can also find the information you need by going to the state agency’s Transaction Privilege Tax Reference Guides. Many amnesty days or discount days will be listed on the state’s website or email list.
Finally, you’ll want to maintain a balance and not become too hands-off. We recommend running a quality check of the data being pulled from sales channels to see that operations are running the way that you’ve set up or have been instructed by an expert to execute.
When to work with a specialized sales tax advisor vs using sales tax software
Choosing between specialized sales tax advisors, like TaxValet, and sales tax software, like Zamp, is a critical decision.
Here are some signs that you might want to work with a specialized sales tax advisor:
- Risk mitigation: You’ll get a dedicated sales tax accountant who’s an extension of your team. So whenever you need help or are unsure about something, you can message them.
- Audit protection: If there is a mistake and it’s found under sales tax audit, your sales tax advisor is going to pay for that. Considering the average sales tax audit costs over $115,000, that can offer some serious peace of mind.
- Selling on multiple, lesser-known channels: From niche ecommerce platforms to popular ones like Shopify or custom-built ERP systems, a sales tax advisor should be well-versed in how to reconcile transactions across all of your sales platforms. This level of detail and customization is often beyond the capabilities of sales tax software.
How to not let a potential sales tax issue derail the sale of your business
To prevent potential sales tax issues from derailing the sale of your business, it’s essential to be proactive.
A great first step is to work with a sales tax advisor, like TaxValet, to do a nexus review. This review will identify states where you owe sales tax but aren’t currently collecting or remitting it and assess your overall exposure within the statute of limitations, typically three to four years.
After conducting the nexus study and understanding your past, present, and potential future tax liabilities in each state, take steps to register for permits and ensure you’re set up to calculate, collect, and remit taxes appropriately. Obtaining letters of tax clearance from states where you have permits can be invaluable during the sale process.
Being aware of any tax liabilities is crucial, as it’s likely to be a point of discussion during the sale. You’ll want to be prepared to negotiate with the buyer.
Note: It’s common for the previous owner to be responsible for historical tax liabilities for three years post-sale.
As you can see, collecting sales tax for ecommerce businesses can get complicated. That’s why we recommend getting set up with automated tax software as soon as you can. (Ideally well before your first $1M in sales). As you expand into more channels and have nexus in more places, it can be a good idea to work with a sales tax advisor, like TaxValet.
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To get started, check out our free eCommerce toolkit, which can help you establish a solid foundation and understand any potential tax liabilities. Download it here.
This article was last updated by the Bean Ninjas team on February 5, 2024.