Sales Tax Basics for Online Sellers and Small Businesses

Background: why sales tax matters now

Sales tax is a state and local consumption tax applied to retail sales of tangible goods and, in many states, certain services or digital products. The U.S. sales tax system is administered at the state and local level, so rules and rates vary widely. A pivotal change occurred with the U.S. Supreme Court decision South Dakota v. Wayfair, Inc. (2018), which allowed states to require remote sellers to collect sales tax even without a physical presence — ushering in the modern “economic nexus” era.

Because e-commerce crosses state lines easily, many small businesses and online sellers now face multistate obligations they didn’t have a decade ago. Noncompliance can lead to back taxes, penalties, and interest, so understanding the basics protects cash flow and reputation.

(Author note: In my practice advising small online retailers, the most common surprise is failing to monitor where sales exceed state nexus thresholds. Early registration and proper bookkeeping eliminate a majority of post-audit headaches.)

How sales tax works in practice

• Nexus: A seller only collects sales tax for jurisdictions where it has an obligation — known as nexus. Nexus can be established by physical presence (storefront, office, warehouse, employees) or economic activity (sales revenue or transaction counts within a state).
• Registration: Once nexus exists, you must register for a sales tax permit with the state (and sometimes local) tax agency before collecting tax.
• Collection: Charge the correct tax rate based on the buyer’s delivery address (destination-based states) or sometimes origin-based rules. Rates often combine state, county, and city taxes.
• Filing & Remittance: File returns and remit collected taxes on the schedule assigned by the state (monthly, quarterly, or annually). Keep accurate records to match collections with filings.

Common nexus triggers to watch for

• Physical presence: storefront, office, warehouse, inventory stored in a third-party fulfillment center (including many FBA/fulfillment warehouses).
• Employees, sales reps, or contractors working in a state.
• Economic nexus: crossing a state’s revenue threshold or transaction count. Many states set a $100,000 sales or 200-transaction threshold, but amounts vary — check each state’s rules.
• Affiliate or click-through nexus: referrals by in-state affiliates can create nexus in some jurisdictions.

For an overview of state nexus rules and thresholds, see FinHelp’s guide on State Nexus Rules: When Your Business Owes State Taxes and the Wayfair Nexus primer.

Marketplace facilitator rules — why they matter

Since Wayfair, most states adopted marketplace facilitator laws. Under these laws, large marketplaces (e.g., Amazon, Etsy, eBay) are required to collect and remit sales tax on behalf of third-party sellers for sales made through the marketplace. That can simplify compliance for sellers who only sell on those platforms — but it doesn’t always eliminate the seller’s obligations: you may still need to register in the state, file returns reporting exempt sales, or collect tax for off-marketplace sales.

Always confirm a marketplace’s collection policy and whether you are liable for sales outside that channel.

What to register and when

1. Monitor sales and transactions by state monthly.
2. When you hit a state’s nexus threshold, register for that state’s sales tax permit immediately.
3. Update registrations if you open a location, store inventory in a new state, or hire remote workers there.
4. If you use third-party warehouses (e.g., Amazon FBA), assume those locations may create nexus until confirmed otherwise.

Read FinHelp’s Multi-State Sales Tax Registration: When You Need to Register for a step-by-step walkthrough.

Sales tax on different product types

• Tangible personal property: generally taxable in most states.
• Services: taxation varies widely; many states exempt most services but tax specific categories (e.g., digital services, laundry, certain professional services).
• Digital goods: some states tax downloads, streaming, or digital subscriptions—others do not. See FinHelp’s Sales Tax Compliance for Digital Products for state-specific considerations.

Because taxation of services and digital products is inconsistent across states, classify your offerings carefully and check state definitions.

Practical steps to stay compliant (a checklist)

1. Map your sales by shipping destination on a monthly basis.
2. Inventory physical locations where you or third parties hold stock.
3. Track marketplace sales separately from direct sales.
4. Register for sales tax permits in states where you have nexus.
5. Collect the correct tax rate at checkout (use address-based rules).
6. File returns and remit by the required schedule — don’t hold tax dollars in operating accounts.
7. Keep 3–7 years of sales records, invoices, exemption certificates, and filing confirmations.
8. Reconcile monthly: compare collections to remittances and reconcile with accounting records.

Using automated sales tax software or a merchant provider with tax calculation helps reduce manual errors.

Recordkeeping and exemption certificates

Maintain exemption certificates for tax-exempt customers (resale, exempt organizations, government). States typically require valid certificates on file to support non-taxed sales. Keep copies for the period required by each state (often 3–7 years).

If audited, states will expect sellers to produce exemption certificates and transaction logs sorted by jurisdiction and date. Good bookkeeping is your strongest defense.

Filing frequency and penalties

States set your filing frequency (monthly/quarterly/annual) based on expected tax liability or history. Missing returns or remittances can trigger penalties and interest; in audits, states may assess tax on uncollected sales plus penalties. Voluntary registration before an audit and using voluntary disclosure agreements (VDAs) in some states can limit liability — consult a tax professional for VDA eligibility.

Pricing and customer communication

• Display whether prices include sales tax or show tax as a separate line item at checkout based on platform norms and state rules.
• If you collect tax incorrectly, be prepared to correct customer overcharges (refunds) or absorb undercollected tax — both affect margins.

Tools and software recommendations

Automated sales tax providers calculate rates, manage nexus monitoring, file returns, and help maintain exemption certificates. Popular providers include Avalara, TaxJar, and built-in merchant solutions (Stripe, Shopify tax tools). Evaluate cost, integration, and coverage for the states where you do business.

Common mistakes to avoid

• Assuming your home state rules apply everywhere.
• Neglecting marketplace sales or third-party warehouse nexus.
• Not obtaining or retaining exemption certificates.
• Failing to monitor remote hires or contract workers that may create nexus.
• Mixing collected sales tax with operational funds.

Real-world examples (short)

• Warehouse example: A seller uses a fulfillment center in State A. Inventory there creates physical nexus; the seller must register in State A and collect tax on sales shipped to State A residents.
• Economic nexus example: An online retailer’s sales into State B exceed the state’s economic threshold; after crossing it, the retailer must register and begin collecting sales tax for State B.

FAQs (brief)

• Do I pay sales tax to the IRS? No. Sales tax is collected and remitted to state and local tax agencies, not the IRS. See state tax agency websites for filing specifics.
• Are digital downloads taxable? It depends by state — treat digital goods as a distinct category and check your customer’s location.
• Will marketplaces always collect tax for me? Most marketplaces collect tax on marketplace transactions, but you should confirm which transactions are covered and whether you still need to register.

Resources and authoritative references

• South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018) — established modern economic nexus rules.
• State tax agencies — use the official revenue department website for each state to register and confirm rates.
• IRS business guidance: https://www.irs.gov/ (note: the IRS does not administer state sales taxes) — see the IRS small business pages for related tax topics.
• Consumer Financial Protection Bureau (CFPB) — consumer protection resources: https://www.consumerfinance.gov/
• For state-by-state summaries and practical tools, consult commercial resources (Avalara, TaxJar) and consider professional advice.

Internal FinHelp resources:

• Guide: Sales Tax Compliance for Digital Products
• Guide: Multi-State Sales Tax Registration: When You Need to Register
• Overview: State Nexus Rules: When Your Business Owes State Taxes

Final professional tips

• Start small and document everything: early registrations and good records limit future exposure.
• Use automation for calculation and filing where possible; manual processes break under multistate volume.
• Engage a state-experienced tax advisor if you operate in many jurisdictions or sell taxably complex products (services, digital goods, bundled offerings).

Professional Disclaimer: This article is educational and does not constitute legal, tax, or accounting advice. Requirements change by state and over time. For advice tailored to your business circumstances, consult a qualified tax professional or state tax authority.