U nderstanding e-commerce sales tax is important for any business hoping to sell goods or services across state lines.
With 50 states and hundreds of local jurisdictions across the country, trying to understand sales tax for e-commerce businesses can quickly confuse even the most sophisticated businesspeople. As such, it is key to have a good knowledge of tax essentials for startups.
In this article, we explore how e-commerce sales tax works across state lines. We address when you must collect sales tax, procedures for collecting and remitting that tax, and how to ensure your business complies with federal, state, and local tax laws.
How Does Sales Tax Work for E-Commerce?
So, how does sales tax work for e-commerce? In short, sales delivered to customers in particular jurisdictions—the area where certain laws apply, often a state or municipality—may be subject to the taxes that jurisdiction imposes. Once a business establishes a “nexus” with a jurisdiction, it gains the responsibility to collect and remit sales tax to the appropriate place.
How Sales Tax Works Without a Nexus
Customers who purchase goods or services from businesses without a nexus to the jurisdiction are supposed to remit sales tax themselves. Given that only the rare customer will actually collect and pay sales tax if the business does not, all states have established laws extending their reach and expanding the circumstances where a business establishes a nexus.
Physical Presence As Nexus
Businesses are typically subject to the laws of the jurisdiction where they have a physical presence, which may mean:
Physical locations
A representative or agent operates under the business’s authority
One or more employees work
Inventory or other business properties are stored
Before 2018, businesses only established a nexus based on physical presence.
Nexus for Online Sales Taxes Not Based on Physical Presence
Because the federal government has the exclusive authority to make rules related to interstate commerce—i.e., commerce between states—the laws each state can make are limited. A state may only tax commerce that crosses state lines if the out-of-state entity has availed itself of the privilege of doing business in that state.
The U.S. Supreme Court case, South Dakota v. Wayfair, Inc., established new rules for online sales taxes. The case involved a South Dakota law that declared a business created a nexus with a state—i.e., availed itself of the privilege of doing business there and could thus be taxed—if it delivered $100,000 or more of goods or services into the state or completed 200 or more separate transactions there.
After the Supreme Court concluded that South Dakota’s law was valid, many states adopted similar laws. State laws now generally declare that a business establishes a nexus with the state based on the following:
Number of transactions, typically 200 or more
Gross or net sales, typically in the $100,000 to $500,000 range
Therefore, a business must fulfill one or both of the above qualifiers to establish a nexus. The nexus can be established either through a physical presence in the state or by doing a high enough volume of business in a state. If your company meets either test, you should collect and remit sales tax at the state level. If applicable, you must also submit sales tax at the local level.
Although it is not common, there is potential for certain transactions to be taxed in two states because of how nexus is defined within those states. Therefore, it is crucial for taxpayers to understand how taxes are imposed and administered.
Identifying Possible Taxes
Five states do not impose statewide sales tax, including:
Of those five states, only Alaska allows local jurisdictions to impose taxes on certain goods and services.
All other states and Washington D.C. impose sales tax on transactions within the state’s jurisdiction. Most states that impose statewide sales tax have local jurisdictions that impose additional taxes on certain goods and services. Local laws may include regulations passed by:
Cities, towns, and other municipalities
Counties and their equivalent
Special districts
Notably, establishing a nexus in a state typically subjects you to local laws in that state regardless of how many sales you make in the local jurisdiction.
Once a business establishes a 'nexus' with a jurisdiction, it gains the responsibility to collect and remit sales tax to the appropriate place.
Ensuring E-Commerce Sales Tax Compliance
The federal government offers information about state and local tax authorities to help businesses ensure e-commerce sales tax compliance. To fully comply, your business should take the customer’s shipping address, identify the laws that apply there, and add the amount of tax due to the bill. Here’s a guide to compliance filing requirements by state.
Collecting and Paying E-Commerce Sales Tax
Generally, if you establish a nexus by doing enough business in a state or having a physical presence there, you should register to collect e-commerce sales tax in that state. Each state has its own registration process, usually online. You typically pay local and state taxes through a central state-offered website.
Filing Requirements
After you register to collect sales tax in a state, begin collecting taxes and sending them to the appropriate state agency. Even if you do not sell anything or otherwise have a reason to collect tax in that state in a given period, still file a sales tax return. The obligation to file a sales tax return exists every year you maintain your registration. Sales tax returns may be required more often than once a year, depending on the volume of sales.
Calculating Tax
Undertaking the task of ensuring compliance with every possible state and local jurisdiction’s tax laws would take significantly more time and resources than the average business owner wants to spend or, in many cases, has available. Businesses often hire help from accountants or tax lawyers or purchase software to help identify and calculate taxes.
You may also sell through an online marketplace, which will typically maintain software that identifies and calculates sales tax for you. These marketplaces include entities like:
Amazon
eBay
Etsy
Walmart online shopping
Notably, using these marketplaces may establish a nexus in the state where inventory is stored, even if the location is a third-party warehouse. In practical terms, this means you should collect sales tax for the state where the warehouse is located, even if you fall short of the state’s other nexus requirements.
Practical Summary: Do I Need to Collect Sales Tax for Selling Online?
Do I need to collect sales tax for selling online to customers in a given jurisdiction? In summary, to answer this query, you should make the following determinations. First, determine whether you have established a nexus through physical presence by asking yourself:
Where is my business physically located?
Where do my employees perform tasks related to the business?
Do I have inventory stored in any other jurisdictions? If yes, where?
Generally, you have established a nexus with any state you list in response to these questions.
For nexus unrelated to physical presence, ask:
In what state or states have I made, or do I expect to make sales?
For those states, when do their laws declare a business has established a nexus?
How many sales have I made, or do I expect to make over one year in the jurisdiction?
What value of sales have I made, or do I expect to make over one year in the jurisdiction?
For local jurisdictions, do I have a nexus in the state?
Erring on the side of caution in collecting sales tax may prove the more efficient option for businesses that could or might someday meet a given jurisdiction’s nexus rules. For more information and advice tailored to your situation, consider speaking with a tax lawyer or accountant familiar with sales across state lines.
Disclaimer: Bizee and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
Resources List:
- Jennifer W. Jensen et al., South Dakota v. Wayfair — five years later, The Tax Adviser (2023), link.
- Federation of Tax Administrators (FTA), FTA Members, link.
- Sales Tax Institute, Economic Nexus State by State Chart, link.
- Tax Foundation, State and Local Sales Tax Rates, 2024, link.
- USA.gov, How to pay and get help with state and local taxes, link.
- USA.gov, Local governments, link.
