Sales Tax Compliance for Online Sellers: Registration, Filing, and Reporting

Quick overview

Online sellers must determine where they have sales tax nexus, register in those states, collect the right tax at the point of sale, file returns according to each state’s schedule, and remit payments on time. Failure to follow these steps can create interest, penalties, and the risk of a state audit (IRS: Sales Taxes, https://www.irs.gov/businesses/small-businesses-self-employed/sales-taxes).

Background and why it matters

The legal landscape for remote sellers changed after the U.S. Supreme Court decision in South Dakota v. Wayfair, Inc. (2018). That ruling allowed states to require out-of-state sellers to collect sales tax based on economic nexus—typically measured by sales dollars or transaction counts rather than physical presence. As a result, many online merchants now face multistate registration and filing obligations. States continue to set their own nexus thresholds and rules; common thresholds used by many states are $100,000 in sales or 200 transactions, but a number of states use different tests or levels (see Tax Foundation state-by-state summaries and state revenue sites).

Step-by-step compliance checklist

The practical workflow for compliance breaks down into clear steps you can follow.

1. Determine nexus (where you must register)

• Physical nexus: employees, inventory in a warehouse (including third-party logistics providers), offices, or regular business travel into a state create physical presence nexus. See our guide on physical presence nexus for details: Physical Presence Nexus.
• Economic nexus: most states now use economic thresholds tied to sales revenue or number of transactions (Wayfair nexus). Check each state’s threshold and look for retroactivity rules. For an overview of nexus rules for remote sellers, see: State Sales Tax Nexus: When Remote Sales Require Registration.
• Marketplace facilitator rules: if you sell through Amazon, Etsy, eBay or similar marketplaces, many states shift the collection/remittance responsibility to the marketplace under marketplace facilitator laws. Confirm whether the marketplace collects tax for you before registering separately in that state (see Marketplace Facilitator Rules: https://finhelp.io/glossary/marketplace-facilitator-rules-who-collects-and-remits-sales-tax/).

1. Register with each state where you have nexus

• Use the state Department of Revenue website to register for a sales tax permit—do not assume seller registration is automatic. Keep your account IDs and usernames secure. Most states permit online registration and provide confirmation or permit numbers you should store in your compliance records.

1. Collect the correct tax at the point of sale

• Apply the correct state and local rates (many states have county/city add-ons). If you use a shopping cart or marketplace, enable automatic rate lookup based on buyer shipping address. If you sell tax-exempt items (e.g., certain groceries, digital products in some states), ensure the cart handles taxability rules correctly.

1. Maintain exemption and resale documentation

• When a purchaser claims a resale or exemption certificate, keep a valid, filled-out certificate in your records. Most states require these to be stored (often for several years) and produced in an audit.

1. File returns and remit collected taxes

• Filing frequency is state-dependent: monthly, quarterly, or annually. States often set filing frequency based on your annual tax liability. File on time and remit the tax when the return is due. Late returns and late payments trigger interest and penalties.

1. Keep complete records

• Retain sales invoices, exemption certificates, tax collected by jurisdiction, software logs, and nexus analyses. Typical retention is 3–7 years; follow the state’s statute of limitations.

1. Monitor changes

• Tax law and nexus rules evolve. Re-check thresholds and marketplace rules at least annually, or when you open new fulfillment locations or expand sales territory.

Practical examples and common scenarios

• Example: Seller with inventory in a third-party warehouse. If you store goods in an Amazon FBA warehouse in a state, that usually creates physical nexus and requires registration in that state. Confirm warehouse addresses and register promptly.
• Example: High-volume remote seller. A business that sells $150,000 into State X with a $100,000 economic threshold must register and begin collecting sales tax once the threshold is met. Keep a rolling 12-month sales total to track thresholds.
• Marketplace sales. If you sell through a marketplace that collects and remits tax on your behalf, you may not need to register in that state for sales collected by the marketplace, but you could still need to register for other activities (e.g., selling off-platform or holding inventory).

Filing frequencies, due dates, and returns

States assign filing frequency based on your liability or projected liability. Common schedules:

• Monthly: for higher-volume sellers.
• Quarterly: common for medium-volume sellers.
• Annually: small sellers with low tax liability.

Most states provide an online portal with due-date calendars. If a state requires electronic filing or payment above a threshold, comply to avoid penalties. Always confirm filing frequency after you register—states may update your frequency over time.

Common mistakes and how to avoid them

• Assuming a single rule applies to every state. Each state sets its own taxability rules and rates. Use authoritative state resources and the IRS sales tax page as starting points (IRS: Sales Taxes).
• Ignoring marketplace facilitator rules. Marketplaces collect for many states; relying on the marketplace without confirming can leave you unregistered for taxable sales not covered by the marketplace.
• Poor recordkeeping. Not keeping exemption certificates or proof of shipment invites audit risk and penalties.
• Missing retroactive obligations. Some states apply nexus rules retroactively to the date you triggered nexus; this can create unexpected back taxes. Consider voluntary disclosure agreements (VDAs) with states to limit exposure—VDAs often reduce or eliminate penalties for previously unregistered sellers who come forward voluntarily.

Using technology and professional help

• Sales tax automation software (TaxJar, Avalara, Sovos, etc.) can calculate the right rate by jurisdiction, update taxability rules, manage filings, and produce nexus reports. Automation reduces manual errors but does not replace the need to make nexus and registration decisions.
• Consult a state sales tax specialist or CPA when crossing thresholds, storing inventory out-of-state, or facing an audit. In my practice helping small e-commerce businesses, early advice on nexus and inventory location prevented six-figure liabilities for one client.

Audits, penalties, and voluntary disclosure

• States audit sellers to verify tax collection and remittance. Common audit triggers include sudden growth, mismatched tax returns, or third-party reporting discrepancies.
• Penalties and interest accrue for late payment or late filing. Penalties vary by state and can include percentages of unpaid tax.
• Voluntary disclosure programs let unregistered sellers reduce penalty exposure by registering voluntarily and negotiating look-back periods and waivers—contact the state revenue department or a tax professional to explore this option.

Checklist for first-time or scaling sellers

• Review sales by state for the last 12 months and track rolling totals.
• Identify physical presence points (warehouses, employees, offices).
• Check marketplace facilitator coverage for each marketplace you use.
• Register where nexus exists; save confirmation numbers.
• Configure your e-commerce platform or tax software to collect correct rates and exemptions.
• Establish filing calendar and payment processes.
• Create a secure, indexed folder for exemption certificates and nexus analyses.
• Schedule a yearly compliance review or trigger-based review when you add a fulfillment location.

Who should be especially careful

• Sellers using multiple marketplaces and fulfillment centers.
• Sellers expanding into new states or using multi-state warehouses.
• Sellers of mixed taxability items (tangible goods, digital goods, services) where rules differ by state.

Professional tips

• Reconcile tax collected vs. tax remitted monthly. Variances may indicate configuration errors.
• Use shipping address as the primary basis for tax calculation unless a state uses a different sourcing rule; most states use destination-based sourcing but check state positions.
• Keep an audit-ready digital file of receipts and exemption certificates for at least the state’s required retention period.

Resources and authoritative guidance

• IRS — Sales Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/sales-taxes (overview of federal considerations and links).
• Tax Foundation — state-by-state analyses of sales tax and nexus (https://taxfoundation.org).
• Marketplace and compliance vendors for automation: TaxJar (https://www.taxjar.com), Avalara (https://www.avalara.com).
• FinHelp internal guides: State Sales Tax Nexus: When Remote Sales Require Registration (https://finhelp.io/glossary/state-sales-tax-nexus-when-remote-sales-require-registration/), Marketplace Facilitator Rules (https://finhelp.io/glossary/marketplace-facilitator-rules-who-collects-and-remits-sales-tax/), Sales Tax Basics for Online Sellers (https://finhelp.io/glossary/sales-tax-basics-for-online-sellers-and-small-businesses/).

Professional disclaimer
This article is educational and does not constitute tax, legal, or accounting advice. Rules vary by state and often change. Consult a licensed tax professional or attorney for guidance tailored to your facts and to confirm current rules before taking action.