How does sales and use tax compliance work for online sellers?

Online sellers must follow a multi-step process to comply with sales and use tax laws in the United States. The process starts with determining whether a seller has “nexus” (a sufficient connection) to a state, then moves to registration, collection, filing, and recordkeeping. The Supreme Court’s 2018 decision in South Dakota v. Wayfair, Inc. allowed states to require out-of-state sellers to collect sales tax based on economic activity, which dramatically expanded compliance obligations for remote sellers (see the Court opinion: https://www.supremecourt.gov/opinions/17pdf/17-494_3jfm.pdf).

Below I walk through the practical steps every online seller should know, with examples drawn from client engagements in my tax advisory work.

1) Identify nexus: where you may owe sales tax

Nexus is the legal link that gives a state the authority to require you to collect sales tax. Historically, physical presence (inventory, employees, office) created nexus. After Wayfair, most states added economic nexus rules that reach remote sellers based on sales volume or number of transactions. Many states use thresholds such as $100,000 in sales or 200 transactions, but thresholds vary—check each state’s rules before assuming a single standard (see National Conference of State Legislatures summaries for updates: https://www.ncsl.org).

Common nexus triggers:

  • Physical presence: inventory stored in a state (including third-party warehouses or fulfillment centers such as Amazon FBA), employees, contractors, or a storefront.
  • Economic presence: reaching a state’s sales or transaction thresholds.
  • Click-through or affiliate nexus: referrals from in-state affiliates may create nexus in some states.
  • Marketplace nexus: if you sell on a marketplace, marketplace facilitator laws may shift collection responsibility to the platform (more below).

In my practice I often see small sellers unaware that using a fulfillment network creates nexus in multiple states. For example, storing merchandise in an Amazon fulfillment center in Texas or Illinois generally creates physical nexus for that state.

2) Register to collect tax and set up systems

Once you determine you have nexus in a state, register for a sales tax permit with that state’s department of revenue. Registration timelines vary; some states require registration within a short time after the nexus trigger. For practical guidance on registration steps and required information, see the FinHelp guide on State Sales Tax Registration: When and How to Register.

Key setup tasks:

  • Obtain state sales tax permit(s).
  • Configure your e-commerce platform or payment processor to collect tax by jurisdiction.
  • Categorize products correctly: states often tax goods and some services differently.

3) Charge the correct tax at checkout (sourcing rules)

States use sourcing rules to determine which state’s tax rate applies to a sale. Destination sourcing (tax based on the buyer’s address) is common, but sourcing rules can vary for certain goods, services, and shipping arrangements. Accurate address-level tax calculation is essential; many states levy combined state, county, and local rates.

Mistake I frequently see: stores that use a single statewide rate instead of address-level rates, leaving the seller under- or over-collecting tax for many transactions.

4) Marketplace facilitators and third-party marketplaces

Most states now have marketplace facilitator laws requiring platforms (Amazon, Etsy, eBay, Shopify) to collect and remit sales tax for sales processed through the marketplace. If you sell through a marketplace, determine whether the marketplace collects tax on your behalf; if it does, you may not need to register in that state for marketplace sales, but you might still have filing responsibilities for other sales channels.

FinHelp has a detailed piece on Sales Tax Compliance for Marketplace Sellers that explains how registration and reporting differ when marketplaces are involved.

5) Filing, remittance, and recordkeeping

States set filing frequencies—monthly, quarterly, or annual—based on your volume. File timely returns and remit collected tax. Keep records for at least three to seven years (state requirements vary) including invoices, exemption certificates, resale certificates, and marketplace reports. During an audit, clear records distinguish collected tax from business income and help substantiate exempt sales.

In audits I’ve handled, sellers with complete exemption certificates and a robust audit trail obtained favorable resolutions; disorganized sellers typically faced assessments and penalties.

6) Product taxability and exemptions

Taxability depends on the product or service and the buyer’s use. Common exemptions include resale (purchase for resale), manufacturing, nonprofit, and certain digital goods—rules differ dramatically by state. Maintain valid exemption certificates and review them regularly. For digital products and subscriptions, consult state-specific rules, because treatment can vary widely across jurisdictions.

Practical tools and automation

Manual tax calculations do not scale. Tax automation services integrate with shopping carts and marketplaces to apply accurate, address-level rates, manage exemption certificates, and prepare filing data. Popular solutions include Avalara, TaxJar (now part of Stripe), and Vertex. For small sellers, cloud-based options reduce human error and save time; see our FinHelp article on Sales Tax Compliance Automation: Tools for Small E-commerce Businesses.

When I implemented automated tax calculation for a mid-market client, it reduced refund requests by 60% and cut tax research time by more than half.

Marketplace vs. direct sales — why it matters

If a marketplace collects tax, your administrative burden for those transactions is lower, but you still must manage sales outside the marketplace and monitor thresholds that create nexus. Some states require marketplace sellers to register even when the marketplace collects tax—confirm requirements with the state.

Common mistakes and how to avoid them

  • Assuming no nexus because you don’t have a physical store. Economic nexus and fulfillment networks can create obligations.
  • Using incorrect product taxability rules and applying a flat tax rate.
  • Failing to collect or retain resale/exemption certificates.
  • Ignoring marketplace reports and failing to reconcile amounts the platform remitted on your behalf.

To avoid these errors, keep a checklist, use automation, and perform quarterly reviews of nexus and registration coverage.

Responding to audits and notices

Don’t ignore notices. If a state contacts you about uncollected sales tax, gather your records, review nexus triggers, and consult a tax professional. States may offer voluntary disclosure programs that limit penalties and interest if you come forward before an audit. I’ve guided clients through voluntary disclosures that reduced total exposure by negotiating lookback periods and waiving penalties.

Quick compliance checklist (Action steps)

  • Map where you have physical presence and fulfillment locations.
  • Review sales by state against economic nexus thresholds.
  • Register in states where you have nexus and obtain sales tax permits.
  • Configure your cart for address-level tax sourcing and product tax codes.
  • Implement automation for tax calculation and certificate management.
  • Reconcile marketplace reports with your books monthly.
  • Keep exemption certificates and sales records for the state’s required retention period.

Further reading and FinHelp resources

Internal FinHelp links:

When to get professional help

If your business sells into many states, uses fulfillment networks, or receives a state notice, consult a CPA or tax attorney who specializes in state and local tax (SALT). In my practice, complex multi-state exposure almost always benefits from specialized counsel to limit back taxes and structure operations to reduce future nexus risk.

Disclaimer

This article explains general principles of U.S. sales and use tax compliance for online sellers and provides practical tips based on professional experience. It is educational only and does not constitute legal or tax advice for any specific business. For tailored guidance, consult a licensed tax professional or an appropriate state tax authority.

If you’d like, I can convert the checklist into a downloadable action plan tailored to your sales channels (marketplace vs. direct sales) or review a short list of your states of operation to identify likely nexus exposures.