Common Sales Tax Compliance Issues for Online Sellers

Background and why this matters

The U.S. sales tax landscape changed after the Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc., which allowed states to require remote sellers to collect sales tax even without physical presence. That ruling expanded states’ ability to impose economic nexus rules and increased the multistate compliance burden for online businesses (South Dakota v. Wayfair, 2018). State thresholds and local rates continue to vary, so a seller selling nationwide can face dozens of different rules and filing schedules.

How sales tax compliance typically works for online sellers

• Nexus: States establish nexus (the connection that creates a sales-tax duty) through physical presence, sales volume, number of transactions, third-party inventory, or economic activity.
• Sourcing: Most states tax sales based on the delivery location (destination-based sourcing), though a few use origin-based rules. This determines which state/local rates apply.
• Registration & collection: Once nexus exists, sellers must register with that state, collect the correct tax, and remit on the state’s schedule.
• Filing & recordkeeping: Sellers must file returns (monthly, quarterly, or annual) and keep supporting records for audits.

(For state-specific filing rules and schedules, consult the state revenue department or a multistate guide.)

Common real-world examples

In my work helping online sellers, I frequently see:

• A seller using default platform settings that didn’t include local district taxes, resulting in under-collection and a notice from the state.
• A merchant who thought marketplace platforms were always responsible for collection; in some states, the seller—not the marketplace—remains liable for certain product types.
• A retailer failing to register after exceeding a state’s economic threshold, later owing back tax, interest, and penalties.

Who is affected

• Small direct-to-consumer stores and large marketplaces alike. Any seller with customers in multiple states should evaluate nexus and collection obligations.
• Sellers using third-party warehousing (FBA, 3PL) can trigger nexus in states where inventory is stored.
• Sellers of digital goods and services should check state rules—taxability varies by product and state.

Practical steps to reduce risk

1. Run a nexus review at least annually and when you add channels, warehouses, or significant sales in a state. Thresholds vary by state; many states use economic thresholds (sales amount or transaction count). Consult state rules.
2. Use a reputable sales tax automation tool to apply correct rates, taxability rules, and exemption handling. Automation reduces calculation errors but doesn’t replace registration and filing.
3. Register promptly where nexus exists and keep registration evidence (confirmation emails, permit numbers).
4. Maintain clear records: invoices, exemption certificates, marketplace reports, and shipping/return documentation for at least the period a state requires (often 3–7 years).
5. If uncertain, obtain written advice from a tax professional or consider voluntary disclosure/amnesty programs before a state discovers unpaid tax.

Common mistakes and misconceptions

• Underestimating nexus: Economic nexus rules mean no physical presence is required. Regularly reassess after Wayfair.
• Relying solely on marketplaces: Marketplace facilitator laws shift collection responsibility in many states, but exceptions exist—don’t assume uniform treatment.
• Ignoring local rates: City and district taxes can change the total rate; sourcing rules matter.
• Using generic software without rules updates: Tax laws change; old rate tables or misconfigured tax rules cause errors.

Short FAQ

Q: What should I do if I’ve underpaid sales taxes?
A: Contact a qualified tax advisor. Many states offer voluntary disclosure programs that reduce penalties; timely action can limit interest and enforcement.

Q: How do I determine if I have nexus?
A: Analyze your sales, inventory locations, employees/contractors, and marketplace activity. Economic thresholds differ by state—review each state’s nexus rules or consult multistate guidance.

Helpful internal resources

• Read our state audit preparation checklist: How to Prepare for a State Sales Tax Audit: A Pre-Audit Checklist.
• If you sell through marketplaces, review marketplace rules: Understanding State Sales Tax on Marketplace Facilitators.
• For broader multistate context: Multistate Sales Tax Basics for Online Sellers.

Professional disclaimer

This article is educational and does not provide tax, legal, or accounting advice for specific situations. For tailored guidance, consult a licensed tax professional or state revenue department.

Authoritative sources

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018).
• Internal Revenue Service, Sales and Use Tax (overview for businesses).
• National Conference of State Legislatures (NCSL) and state revenue departments for current nexus thresholds and taxability rules.

By proactively reviewing nexus, automating rate and product taxability, and maintaining clear records, online sellers can reduce their exposure to audits, back taxes, and penalties while focusing on growth.