Quick overview

Online sellers face a patchwork of state and local sales tax rules that change frequently. The 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. expanded states’ ability to require sales-tax collection from remote sellers, which made compliance a multi-jurisdictional problem for many e-commerce businesses (South Dakota v. Wayfair, 138 S. Ct. 2080 (2018)). The practical result: sellers must routinely confirm nexus, taxability, and filing obligations in each state and locality to avoid costly mistakes.

Below I outline the most common errors I see in practice, why they matter, and specific steps to fix them. This is educational content — consult a tax professional for personalized advice.

Common sales tax mistakes (and why they matter)

  1. Neglecting to determine or monitor nexus
  • Mistake: Treating nexus as only physical presence (store, warehouse, employees).
  • Reality: Most states now use economic nexus (sales dollars and/or transaction counts). Thresholds vary — commonly $100,000 in sales or 200 transactions, but several states use different dollar or transaction tests. Check state rules periodically (NCSL maintains up-to-date summaries).
  • Consequence: Late registration, back tax assessments, penalties and interest.
  1. Assuming marketplace platforms handle all obligations
  • Mistake: Relying entirely on Amazon, Etsy, eBay, etc., to collect and remit sales tax.
  • Reality: Marketplace facilitator laws differ by state. Many platforms collect tax on marketplace sales, but not always on services, bundled items, or certain transaction types. The seller remains responsible for confirming platform treatment and collecting where required.
  • Consequence: Missed tax collection when marketplace rules don’t apply.
  1. Misclassifying products or services
  • Mistake: Treating a product as taxable or exempt without checking state-specific rules.
  • Reality: Taxability differs by state for clothing, food, digital goods, SaaS, shipping charges, and bundled transactions. Even states that exempt certain items may have dollar thresholds or seasonal rules.
  • Consequence: Over-collecting (customer complaints/refunds) or under-collecting (liability on audit).
  1. Poor exemption-certificate management
  • Mistake: Accepting resale or exemption claims without valid certificates or failing to retain certified documentation.
  • Reality: To exempt a sale for resale or exempt organization, you must collect a valid certificate (state-specific forms are common) and store it securely. Certificates often require periodic renewal.
  • Consequence: No defense during an audit; seller remains liable for unpaid tax plus penalties.
  1. Filing frequency and payment mistakes
  • Mistake: Using the wrong filing frequency or missing a payment deadline.
  • Reality: States assign filing frequencies (monthly/quarterly/annual) based on sales volume; filing requirements can change after registration or growth.
  • Consequence: Late-filing penalties, interest, and administrative headaches.
  1. Incorrect handling of shipping and origin/destination rules
  • Mistake: Charging tax based on the seller’s location rather than the customer’s.
  • Reality: Most states use destination-based sourcing (taxed where the buyer receives the goods), but a minority use origin sourcing. Shipping, handling, and delivery fees have different tax treatments by state.
  • Consequence: Misapplied tax rates and potential liability in destination states.
  1. Weak bookkeeping and reconciliation
  • Mistake: Not reconciling sales tax collected with remittances and accounting records.
  • Reality: Regular reconciliation catches system errors, rounding issues, or skipped remittances and creates an audit trail.
  • Consequence: Unexplained variances during an audit and difficulty substantiating collections.
  1. Ignoring local taxes and special district levies
  • Mistake: Collecting only statewide rates and ignoring city or county surtaxes, business district taxes, or lodging/meal taxes.
  • Reality: Local rates can add materially to the total tax due and are often administered by the state tax agency but must be accounted for on returns.
  • Consequence: Under-collection and back taxes.

Real examples and typical audit triggers

  • Example (anonymized): A clothing retailer based in Ohio expanded to multiple states but didn’t register for economic nexus in California. After a buyer complaint flagged the missing tax, the retailer faced multiple years of uncollected tax, plus interest and penalties. This is a typical audit trigger: sudden increases in out-of-state sales or marketplace notices.
  • Audit triggers I’ve seen: large sudden spikes in out-of-state sales, repeated incorrect exemption certificates, mismatches between platform reporting and state returns, and late or missing filings.

Practical 90‑day plan to fix common mistakes

Week 1–2: Nexus and registration

  • Map customers by state and total sales/transactions for the prior 12 months.
  • Compare totals to state economic nexus thresholds (use NCSL or state websites for current rules).
  • Register where thresholds were met; if uncertain, register voluntarily to limit exposure.

Week 3–4: Product taxability and platform review

  • Create a product/service taxability matrix by state.
  • Review your marketplace seller agreements and determine which transactions the platform collects for.

Month 2: System and documentation

  • Implement or optimize sales tax automation (see automation options below).
  • Establish an exemption-certificate binder (digital or physical) and collect certificates before exempting sales.

Month 3: Reconciliation and controls

  • Reconcile sales tax collected to state returns for the past 12 months.
  • Set up recurring reviews: monthly remits, quarterly nexus checks, and an annual tax compliance audit.

Sales tax automation and tools (non-promotional)

Automation reduces manual errors and helps scale. Common tools include TaxJar, Avalara, and other compliance platforms — each varies on pricing and features (rates, returns, filing, exemption management). For a comparison and setup guide, see our internal guide on Sales Tax Compliance Automation: Tools for Small E-commerce Businesses.

If you sell through marketplaces, review our guide to Sales Tax Compliance for Marketplace Sellers: Registration and Reporting and perform a marketplace mapping exercise.

For an in-depth look at nexus rules and practical tests for remote sellers, consult our piece on State Sales Tax Nexus: Practical Tests for Remote Sellers in 2025.

How to prepare for a state audit

  • Keep clean, dated records: invoices, exemption certificates, shipping records, and platform reports.
  • Reconcile monthly and retain supporting documentation for at least 3–5 years (states vary; many audit periods are 3–4 years but can extend longer in cases of fraud).
  • If audited: respond promptly, know what the auditor requests, and consider professional representation. In my practice, timely organization and an honest, documented position often shorten audits and reduce assessments.

Common fixes and protective steps

  • Create a central compliance owner in your business with clear responsibilities for registration, returns, and certificate management.
  • Use product taxability codes tied to your catalog and platform SKUs to avoid ad-hoc determinations.
  • Limit voluntary self-assessments to situations with clear risk — discuss with a tax advisor before making retroactive filings.

When to call a tax professional

  • Multi-state expansion where annual remote revenue exceeds common thresholds.
  • Complex product bundles, digital services, or SaaS offerings with unclear taxability.
  • Receipt of a notice from a state tax agency or marketplace facilitator about a mismatch.

Helpful authoritative sources

  • IRS — Sales and Use Tax information (note: the IRS provides federal guidance; state rules govern sales tax). See IRS resources at IRS.gov.
  • National Conference of State Legislatures (NCSL) — for state-by-state nexus and economic presence summaries.
  • State tax departments — for registration portals, thresholds, and filing procedures.

Final checklist (monthly/quarterly items)

  • Monthly: reconcile sales, remit owed tax, and verify marketplace reports.
  • Quarterly: review nexus exposure and renew or validate exemption certificates.
  • Annually: full compliance audit (registrations, filings, product taxability matrix).

Professional disclaimer
This article provides general information and does not constitute tax advice. For guidance tailored to your business, consult a qualified tax professional or state tax authority.

Author note
In my decade-plus advising e-commerce clients, the single biggest mistake I see is underestimating how quickly nexus can appear as a business scales. Small preventive steps — monthly reconciliations, automation, and documented exemption certificates — often prevent the largest liabilities and keep audits manageable.

References

  • South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
  • National Conference of State Legislatures — state sales tax and economic nexus summaries (NCSL.org).
  • IRS — Sales and Use Tax information (IRS.gov).