Overview

State sales tax is a state-level consumption tax that many states impose on retail sales of tangible goods and, in some cases, services and digital products. For online sellers the question is not whether sales tax exists — it does in most states — but where you must collect it, how much to charge, and how to report and remit it correctly.

This entry explains the core rules every online seller should know, practical steps to comply, common pitfalls I see in practice, and resources for next steps. I’ve worked with small businesses for over 15 years and regularly help clients avoid surprises during state audits.

(Authority: Supreme Court, South Dakota v. Wayfair, Inc., 2018; check state departments of revenue for current rules.)

How state sales tax rules apply to online sellers

Key concepts that determine your obligations:

  • Nexus: the connection between your business and a state that requires you to collect sales tax. Nexus can be physical (employees, inventory, offices) or economic (sales volume or number of transactions). After South Dakota v. Wayfair (2018), states can require collection from remote sellers that meet their economic thresholds.

  • Thresholds: many states set economic nexus thresholds, commonly $100,000 in sales or 200 transactions, but thresholds vary by state and change over time. Always verify the exact number with the state Department of Revenue before assuming you’re below a threshold.

  • Sourcing rules: whether tax is based on the seller’s location (origin sourcing) or the buyer’s delivery address (destination sourcing) affects the rate you must charge. Most states use destination-based sourcing, but a few are origin-based. See FinHelp’s deeper explainer on sourcing: State Sales Tax Sourcing Rules: Where Sales Are Taxed and Why It Matters.

  • Taxability of products and services: states differ on which goods and services are taxable. Examples: some states tax digital goods and downloads; others exempt groceries, clothing, or certain services.

  • Marketplace facilitator rules: major online marketplaces (Amazon, Etsy, eBay, Walmart Marketplace) are often required by state law to collect and remit sales tax on behalf of marketplace sellers. That shifts the collection burden, but not always reporting obligations — check state rules and the marketplace’s policies. See our guide: Marketplace Facilitator Rules: Who Collects and Remits Sales Tax?.

(Authority: state Departments of Revenue; see also FinHelp glossary entries linked above.)

Step-by-step compliance checklist for online sellers

  1. Map where you do business
  • Identify every state where you have physical presence: offices, employees, contractors, trade shows, or inventory (including third-party fulfillment centers).
  • Review storage/fulfillment locations (FBA, 3PL warehouses). If inventory is stored in a state, that often creates physical nexus.
  1. Calculate economic nexus exposure
  • Pull rolling 12-month sales and transaction counts by state from your sales platform and accounting system.
  • Compare totals to state thresholds. If you meet or exceed a threshold, you must register and begin collecting sales tax in that state.
  1. Confirm sourcing rules for each state
  • Determine whether the state is origin- or destination-based and apply the correct rate. For multi-jurisdiction states, local surtaxes may apply.
  • For complicated shipping (multi-stop orders, drop shipments), document the shipping flow.
  1. Register for sales tax permits
  • Register with each state’s Department of Revenue once nexus exists. Do not delay — some states require registration within a short window after crossing the threshold.
  1. Configure collection and checkout
  • Use platform settings or a tax engine to calculate and display the correct tax during checkout. Test several shipping addresses to confirm rates.
  1. File and remit on time
  • Frequency varies (monthly, quarterly, annually) based on your volume and state rules. Filing late leads to penalties and interest.
  1. Maintain solid records
  • Save sales invoices, exemption certificates, resale certificates, shipping records, and registration confirmations for at least 3–7 years, depending on the state.
  1. Monitor law changes
  • States update rules frequently. Subscribe to the DOR notices for states where you sell or use a tax compliance service.

In my practice I emphasize steps 2–4: sellers often undercount transaction volume or overlook inventory in a third-party warehouse and later face back taxes and penalties.

Examples that show how the rules work

  • Example A — Fulfillment center creates nexus: A Texas seller stores goods in a California fulfillment center. Even without employees in California, the stored inventory creates physical nexus and requires registration with California’s Department of Tax and Fee Administration for sales to California customers.

  • Example B — Economic nexus from remote sales: A small apparel seller in Ohio has no physical presence in Florida but exceeds Florida’s economic threshold in the last 12 months. The seller must register with Florida and collect sales tax on Florida sales.

  • Example C — Marketplace sales: A craft seller uses an online marketplace that collects sales tax at checkout under state marketplace facilitator laws. The marketplace remits tax for those sales, but the seller still needs to track these sales for reporting and exemption certificate purposes.

Common mistakes I see and how to avoid them

  • Mistake: Relying on a single state threshold example. Solution: Check every state’s current thresholds. Many follow the $100,000/200 transactions model, but not all.

  • Mistake: Forgetting third-party inventory. Solution: Regularly reconcile inventory locations and consult with fulfillment partners about their tax nexus implications.

  • Mistake: Assuming marketplaces handle everything. Solution: Verify which sales are covered by marketplace facilitator laws and which require your registration and collection.

  • Mistake: Poor recordkeeping. Solution: Keep digital copies of exemption certificates, shipping logs, and filing confirmations. Good records shorten and simplify audits.

Practical software and process tips

  • Use a tax calculation engine or integrated e-commerce tax tool to apply correct rates by jurisdiction. Examples of commonly used services include TaxJar and Avalara; these can automate nexus tracking, rate application, and filing. (This is educational — evaluate providers for your needs.)

  • Set up internal controls: reconcile tax collected vs. tax remitted, review sales tax reports monthly, and assign responsibility for sales tax filing.

  • Automate exemption handling: store and manage resale and exemption certificates electronically; require valid certificates for tax-exempt sales.

  • When scaling, budget for multi-state registrations and potentially hiring a sales-tax specialist or CPA familiar with multi-state issues.

(See also: How to Maintain Sales Tax Compliance When Selling Online Nationwide.)

Audit preparedness and remedies

If a state opens an audit, common triggers include rapid growth in a state, mismatch between what marketplaces report and what you report, or large changes in inventory locations. Prepare before an audit by keeping:

  • Sales journals, invoices, and bank deposits
  • Shipping records and bills of lading
  • Exemption certificates and resale documentation
  • Copies of registration certificates and returns filed

If you find uncollected tax after the fact, contact the state promptly. Many states offer voluntary disclosure programs that limit penalties and allow you to become compliant for prior periods under negotiated terms. For more detail on audit triggers and responses, see FinHelp’s guide on responding to audits: Responding to a State Sales Tax Audit: Triggers and Best Responses.

Short FAQ (quick answers)

  • Do I need to collect sales tax in every state? Only if you have nexus in that state, which may be economic or physical.

  • How often must I remit? Filing frequency depends on state rules and your volume — monthly, quarterly, or annually.

  • Are digital products taxable? It depends on the state. Some states tax downloads, streaming, or SaaS; others exempt them.

  • Does a marketplace collect tax for me? Often yes under marketplace facilitator laws, but sellers must still track marketplace sales and confirm reporting details.

Authoritative sources and further reading

  • South Dakota v. Wayfair, Inc., 2018 — U.S. Supreme Court decision allowing states to require remote sellers to collect sales tax.
  • State Departments of Revenue — definitive source for registration, thresholds, and filing rules (search the DOR website for each state).
  • IRS — general business tax guidance; the IRS does not administer state sales tax but offers small-business resources (IRS: Sales and Use Tax).

Final practical advice

Start with accurate data: export your sales by shipping state for the last 12 months and compare to each state’s threshold. If you cross a threshold, register quickly, configure your checkout to collect the correct tax, and maintain records. In my practice, early registration and automated tax calculation reduce audit exposure and free sellers to focus on growth.

Professional disclaimer: This article is educational and does not constitute tax or legal advice. For advice tailored to your situation, consult a licensed tax professional or state Department of Revenue.

Internal FinHelp resources referenced: