Online Sales Tax for Ecommerce: The Definitive Guide for Online Sellers

1. Introduction: The Ever Changing Landscape of Ecommerce Sales Tax

OK. Let’s face it. Tax isn’t the most sexy of topics, and ecommerce sales tax definitely isn’t up there. However, it actually impacts pretty much everyone selling online. As such, buckle up and get ready for quite a ride (at least figuratively).

As some of you may know, the world of online sales tax has transformed dramatically in recent years. For online sellers, understanding these requirements is no longer optional—it's essential for business survival. And for all of us tax geeks out there, this is actually pretty interesting. Or at least not entirely boring.

Before 2018, online sellers generally had to collect sales tax only in states where they maintained a physical presence. However, the landmark South Dakota v. Wayfair (Wayfair) decision fundamentally changed the rules, enabling states to impose tax collection requirements based on economic activity alone. This goes hand in hand with the global trend of taxing based on economic activity, which in today’s day and age, doesn’t necessarily depend on physical presence.

Today's online sellers face unprecedented challenges such as tracking nexus across states, understanding marketplace facilitator laws, and navigating complex product taxability rules.

This guide covers everything online sellers need to know about online sales tax compliance in 2025. Let’s dive right in.

2. Understanding Sales Tax Nexus

Nexus represents a connection between your business and a state that's substantial enough to allow that state to require you to collect and remit sales tax.

Physical Nexus

The fact that economic nexus (see more below) has become the norm, doesn’t make physical nexus irrelevant, as it still creates sales tax obligations through:

• Office locations or retail stores
• Employees or sales reps
• Warehouses or inventory storage (which could include Amazon FBAs in certain states, but not in others, such as Pennsylvania)
• Trade show participation (in some states)
• Affiliate relationships with in-state businesses

Just as an aside, it is worth mentioning that running an online store means juggling a lot of financial moving parts. That's where ecommerce accountants come in handy - they pull together all your sales data from places like Shopify and Amazon into your accounting software so you can see the full picture. They're especially helpful when it comes to figuring out sales tax across different states vis a vis physical nexus and keeping you on the right side of the tax authorities.

Your eCommerce inventory management and setup matters more than you might think for taxes too. For example, if you store products in Amazon warehouses across different states, you could end up owing taxes in all those places. Smart inventory planning helps you avoid unnecessary tax headaches while making sure you're not running out of popular items or wasting money on excess stock. When your inventory management and tax strategy work together, your whole operation runs more smoothly and profitably.

Economic Nexus Thresholds

Sales tax moved way beyond physical nexus, into the realm of economic nexus, when the monumental case of Wayfair occured.

3. South Dakota v. Wayfair

The 2018 Supreme Court ruling in South Dakota v. Wayfair, Inc. represents the most significant change to sales tax laws in decades.

Understanding the Ruling

In a 5-4 decision, the Supreme Court overturned the physical presence standard established in Quill Corp. v. North Dakota (1992). The Court found that the physical presence rule created market distortions and was not necessary to prevent undue burdens on interstate commerce.

The case centered on South Dakota's law requiring out-of-state sellers to collect sales tax if they:

• Delivered more than $100,000 of goods or services into South Dakota, or
• Engaged in 200 or more separate transactions (later dropped in 2023)

This effectively established a new standard based on economic presence rather than only a physical presence.

Following the decision, states rapidly enacted economic nexus laws. For example, many states have implemented economic nexus laws based on sales volume or transaction count:

For example, Alabama has a $250,000 threshold and no transaction threshold, Florida has a $100,000 threshold and no transaction threshold, Illinois has a $100,000 threshold or a 200 transaction threshold and New York has a $500,000 plus 100 transaction threshold.

Many states initially adopted South Dakota's model of $100,000 in sales OR 200 transactions but have since modified their requirements.

Major Changes for Remote Sellers

The Wayfair decision triggered many effects (which some would call unfortunate):

1. Expanded Registration Requirements: Most sellers now need to register in multiple states
2. Increased Compliance Burden: Businesses need to track sales by state and understand varied filing requirements
3. Technology Investment: Many businesses have implemented tax automation solutions
4. Small Seller Exceptions: Most states provide some threshold before requiring registration
5. Increased Audit Risk: States have more legal authority to pursue out-of-state sellers

Marketplace Facilitator Laws

Marketplace facilitator laws place tax collection responsibility on the marketplace (like Amazon, eBay, or Etsy) rather than individual sellers. For marketplace sellers, this means:

• The marketplace handles tax collection in states with these laws
• Sellers may still need to register and file returns
• Sales through marketplaces may count toward economic nexus thresholds
• Different rules may apply across marketplaces

4. Sales Tax Collection Requirements by State

Each state has unique rules regarding registration, filing frequencies, and special jurisdictions.

Economic Nexus Thresholds

States differ in how they measure thresholds:

• Some count only taxable sales
• Others count all sales, including exempt sales, such as Nebraska
• Some include marketplace sales in calculations, such as Alaska
• Others exclude marketplace sales if the marketplace collects tax, such as Oklahoma.

Registration and Filing

Once you determine nexus in a state, registration typically involves:

• Online registration through the department of revenue
• Potential separate local registrations
• Possible fees 

States assign filing frequencies based primarily on sales volume:

• Monthly filing (typically due by the 20th of the following month), such as Texas.
• If sales volume is relatively low, certain states have quarterly or even annual filing requirements.

Special Jurisdictions

Several states have particularly complex sales tax structures, for example:

• Alaska: No state sales tax, but localities can impose local sales taxes
• Colorado: State tax plus numerous home-rule cities that administer their own taxes
• Missouri: Numerous special taxing districts with varying rates

5. Marketplace Seller Considerations

The rise of marketplace facilitator laws has simplified some aspects of sales tax compliance while complicating others.

Amazon FBA Tax Implications

For Amazon FBA sellers:

• Amazon collects and remits sales tax in states with marketplace facilitator laws
• Storing inventory in Amazon fulfillment centers can create physical nexus, depending on the state
• This physical nexus may require tax collection on sales through other channels
• Some states require marketplace sellers to register even when Amazon collects the tax

Platform-Specific Considerations

Different marketplaces handle sales tax differently:

• Shopify: Typically isn't considered a marketplace facilitator
• Etsy: Collects and remits sales tax in states with marketplace facilitator laws
• eBay: Generally handles sales tax collection in facilitator states
• Walmart Marketplace: Collects tax in all facilitator states

Seller Responsibilities

Even when marketplaces collect tax, sellers can have certain responsibilities:

• Maintaining records of all sales and collected taxes
• Filing returns in states where registered (often zero-liability returns)
• Collecting tax on direct sales not made through marketplaces
• Tracking nexus thresholds across all sales channels

6. Product Taxability Issues

Not all products are taxed equally across jurisdictions.

Digital Products and Services

Digital products face particularly complex taxation:

• Quite a few states tax digital products like eBooks and software
• States often distinguish between permanently owned digital goods and subscription access
• SaaS has different taxability rules than downloadable software

Clothing and Food Exceptions

Clothing taxation varies widely:

• Some states exempt clothing
• Others exempt certain clothing but not others

Food products have complex rules:

• Grocery food is exempt in many states but taxed in others
• Prepared food is generally taxable

State-Specific Exemptions

Beyond these categories, states have numerous product-specific exemptions for items like medical devices, educational materials, and agricultural products.

7. Tax Calculation and Collection Tools

Given the complexity of ecommerce sales tax requirements, automation has become essential for most sellers.

Leading Tax Automation Solutions

Several providers dominate the tax automation market:

• Avalara: Comprehensive solution with address validation, rate calculation, and filing services
• TaxJar: Popular with mid-sized sellers for its user-friendly interface
• Zamp: Zamp offers an easy-to-use sales tax solution with simple integration and basic reporting tools, making it ideal for smaller businesses.
• Numeral: Numeral provides advanced tax analysis using machine learning to automate tax calculations and help businesses make data-driven decisions.

Cost Considerations

Tax automation costs vary based on transaction volume and features needed:

• Basic calculation services: $20-$100/month for smaller sellers
• Mid-market solutions with filing services: $200-$1,000/month
• Enterprise solutions: $1,000+/month

When evaluating solutions, consider:

• Current nexus footprint and growth projections
• Integration capabilities with existing systems
• Product complexity and exemption certificate needs
• Return filing and remittance capabilities

8. Registration and Compliance Process

Once you've determined where you have nexus, registration involves several key steps:

1. Conduct a nexus study to identify states where you have obligations
2. Prioritize registrations based on sales volume and risk
3. Gather required information (business entity details, EIN, etc.)
4. Complete registration applications
5. Set up filing calendars based on assigned frequencies
6. Configure tax collection in your sales systems
7. Begin collecting tax on the effective date

Voluntary Disclosure Agreements

If your nexus study reveals past non-compliance, voluntary disclosure agreements (VDAs) offer a path to compliance with reduced penalties:

• Most states offer formal VDA programs
• Benefits include waived or reduced penalties
• Limited look-back periods (usually 3-4 years)
• Anonymous initial discussions through representatives

VDAs require disclosure before any contact from tax authorities—once an audit notice is received, VDA benefits are typically unavailable.

9. Record-Keeping and Audit Preparation

Proper record-keeping is essential both for compliance and for defending your business in an audit.

Essential Records

Critical records include:

• Transaction-level data showing sales by location
• Exemption certificates for all non-taxed sales
• Product taxability determinations
• Filed returns and supporting worksheets
• Nexus documentation
• Marketplace sales reports
• Registration certificates

Audit Prevention

Common audit triggers could include:

• Industry targeting by states
• Late or inconsistent filing patterns
• Large refund requests
• Whistleblower reports
• Mismatches between federal and state reporting

To minimize audit risk:

• File returns accurately and on time
• Respond promptly to state notices
• Maintain consistent practices
• Document unusual transactions or adjustments
• Conduct periodic self-audits

In addition to record keeping, Ecommerce accounting is the backbone of your business's financial health and tax compliance. By integrating platforms like Amazon, Shopify, and Etsy with Finaloop, you create a seamless financial ecosystem that captures every transaction detail.

Tools like Avalara and TaxJar simplify tax automation and reconciliation, reducing errors and saving time. This integrated approach not only ensures compliance but also provides valuable insights into profitability and cash flow, driving sustainable growth and business success.

10. Future Trends in Ecommerce Taxation

The ecommerce sales tax landscape continues to evolve and is not at all remaining static. For example, there have been multiple attempts to pass comprehensive sales tax legislation. However, despite these attempts, the U.S. has yet to pass federal legislation addressing online sales tax. In the past, there were attempts to create a minimum economic nexus threshold, have standardized filing requirements and look back periods etc.

Technology Advancements

Technological innovation is reshaping tax compliance:

• AI and machine learning improving jurisdiction determination accuracy
• API-based integrations replacing batch processing
• Real-time compliance solutions replacing periodic filing models
• Enhanced analytics for audit risk assessment

These innovations promise to reduce compliance costs while improving accuracy.

Creating Your Ecommerce Sales Tax Strategy

Navigating ecommerce sales tax compliance doesn't require perfection—it requires strategy:

1. Understand your current position: Conduct a thorough nexus study
2. Prioritize compliance efforts: Focus first on high-volume, high-enforcement states
3. Leverage technology: Implement appropriate tax automation
4. Document your approach: Maintain clear records of compliance decisions
5. Stay informed: Subscribe to updates or engage professional support
6. Consider voluntary disclosure for past non-compliance
7. Plan for growth: Build scalable processes

Remember that sales tax compliance is a journey, not a destination (how poetic). As your business evolves, so will your compliance needs and strategies. So get started with this folks.