E-Commerce Sales Tax
E-commerce sales tax is charged and collected from customers when they make a purchase online. Learn more about how it can impact your business and beyond.
Learn MoreZamp Learnings:
- E-commerce sales tax is charged and collected from customers when they purchase from your online store or storefront.
- You only have to pay sales tax if you have a physical presence in a state or hit an economic nexus threshold. This is generally $100,000 or 200 transactions.
- Being sales tax compliant is essential for companies to avoid hefty penalties, fines, and even jail time from states where they’ve reached a threshold.
E-commerce, or buying and selling online, is growing faster than ever. With this boom, understanding sales tax has become more critical for businesses. As more people shop online, companies face new challenges in keeping up with sales tax laws that can change from place to place.
This guide will explore the ins and outs of e-commerce sales tax, covering sales tax exemption, marketplace facilitator laws, and how sales tax software can benefit your company.
Book a call today
30-minute call
sales tax expert
off your plate
What Is E-Commerce Sales Tax?
E-commerce sales tax, also called online sales tax, is charged and collected from your online customers on your website or the platforms you sell on. It’s generally a percentage of the price of the items that you sell and can be compared to the tax you’d charge a customer at a brick-and-mortar store.
However, sales tax isn’t just reserved for online sales or across platforms like Amazon, Shopify, and Etsy. Sales tax laws have become more complicated since being updated in the South Dakota v. Wayfair Supreme Court case.
The Supreme Court ruled that each state can require sellers with no physical presence to collect and remit sales tax for goods sold to customers in that state. This requirement kicks in if the retailer's sales reach a certain threshold, which varies by state—for instance, $500,000 in New York and California, but only $100,000 in Alaska.
How Nexus Affects E-Commerce Sales Tax
Nexus refers to a connection with a state that requires a business to track and pay sales tax. It can be established through a physical presence, such as a store or warehouse, or having employees there. However, it’s different from state to state.
Economic nexus is based on the amount or how much revenue you make in sales in a state. You must collect and remit sales tax if you reach a state’s threshold (which we cover below).
Marketplace Facilitator Laws in E-Commerce
Marketplace facilitator laws add another layer of complexity to e-commerce taxation. These laws designate online platforms like Amazon or eBay as responsible for handling sales tax collection and remittance on behalf of third-party sellers.
What does this mean for e-commerce businesses? In states where marketplace facilitator laws are in effect, businesses leveraging these platforms may be relieved of the burden of managing sales tax obligations individually.
However, while these laws may offer some respite, they also underscore the importance of understanding the broader sales tax nexus landscape. After all, even with marketplace facilitator laws in place, businesses still need to understand state sales tax rules to make sure they’re in compliance. Staying informed and proactive is key to avoiding any sales tax-related headaches down the line.
Why Is E-Commerce Sales Tax Important?
It’s no secret that sales tax is complicated. It can be hard to keep track of your sales manually and whether you’ve reached nexus. This is among the many other things you need to remember as you run an e-commerce business. Here are the main reasons why e-commerce sales tax is essential.
1. Missing your sales tax obligations can negatively impact your business
You'll have to register for a sales tax permit when your business reaches nexus in a new state, whether through physical or economic nexus. This will allow you to collect sales taxes in the state so you can file returns and pay any sales tax you may owe.
If you miss these steps, you may be subjected to an audit and have to pay hundreds to thousands of dollars in past-due sales tax and interest. Some states also have criminal penalties for failure to file or pay sales tax.
2. Doing sales tax right is good for business
When managing sales tax correctly, you charge the right amount of sales tax every time at checkout. Businesses that don’t charge customers the right amount of sales tax may have to ask for additional payments, which can put their trust in you at risk. This can make retaining customers and building your brand’s reputation harder.
3. Sales tax fuels growth in states
States and local sales tax authorities use these taxes to raise revenue for communities and improve roads, schools, and libraries.
How Does E-Commerce Sales Tax Work?
Figuring out the ins and outs of e-commerce sales tax can seem challenging, especially when you’re unsure how it works. Essentially, when someone buys a product online, the store usually adds extra money to the price as sales tax. The amount added depends on the rules of the state where the business is and where the customer is located.
For online store owners, you must be up-to-date on the sales tax laws in each state you sell to. This is crucial for correctly charging sales tax and keeping accurate records. This whole task is known as multi-state sales tax compliance.
How to Set Up E-Commerce Sales Tax for Your Business
So, launching an online store without a clear grasp of each state's sales tax compliance requirements could lead to serious headaches. Understanding these regulations is key to ensuring your online shop operates smoothly and legally.
1. Identify Where You Have Sales Tax Nexus
The first step in managing sales tax compliance is determining the states where you do business and how to collect taxes from them.
Most states tax online businesses based on the buyer’s location. That means you set and collect taxes based on the rates of their state. These are called destination-based states.
So, if you operate in Maryland but sell to customers in other states, set your taxes based on the rates of your customers’ states.
Origin-based states, like Arizona, tax businesses based on their location. So, collect taxes based on the rates of the state where your business is running.
2. Securing Your Sales Tax Permit
Once you've identified how to charge your sales taxes, you need to register for a sales tax permit (a seller's permit) in each state.
Valid sales tax permits allow you to collect sales tax from your buyers legally. The application process and permit costs vary, but some states offer online registration to simplify the process.
Remember to keep track of your permit’s expiration date to avoid potential disruptions in your sales tax collection.
3. Collecting and Reporting Sales Tax
With your permit obtained, you want to implement an effective sales tax collection system. Most e-commerce platforms allow you to use automatic sales tax calculations based on your customer's location and the applicable rates.
That prevents you from overcharging your customers with these taxes. Now, you want to report and file the sales tax returns for each state you do business with.
Sales tax reporting deadlines differ from one state to another. The frequency of sales tax filing (monthly, quarterly, or annually) usually depends on your sales volume in that state. And, even if you haven't collected any sales tax in a particular state during a filing period, you still need to submit a zero return report.
Zamp Tip
4. Using Automated Sales Tax Software
No matter how organized you are, managing sales tax compliance manually can be overwhelming. It also takes too much time, time that you can spend growing your business. What should you do? Use sales tax compliance software. These tools' built-in sales tax features will do all the work for you. That includes simplifying the calculations, filing procedures, and tracking sales tax reports.
Free Download: Sales Tax Guide for E-Commerce
State-by-State Economic Nexus Laws
In this section, you’ll find information on the economic nexus thresholds for each of the 50 states. If you don’t have a physical presence in a state but sell to customers there and need to know what triggers your need to collect, file, and remit sales tax, this is what you need to know.
Keep in mind that different types of products and services are exempt from sales tax. Everything differs from state to state, so we recommend speaking with an expert if you’re unsure if you need to file sales tax.
Alabama
The economic nexus threshold in Alabama is $250,000 in retail sales during the previous calendar year.
Alaska
Alaska does not have a statewide sales tax, but some local municipalities charge a local sales tax. The economic nexus threshold in those cases is $100,000 in gross annual sales and 200 transactions.
Zamp Tip
Arizona
Arizona’s economic nexus threshold is $100,000 in gross sales or more in the previous or current calendar year.
Arkansas
In Arkansas, the economic nexus threshold is having taxable sales of more than $100,000 or more than 200 transactions during the previous or current calendar year.
California
California is one of the states with a higher economic nexus threshold. The threshold is sales of tangible personal property exceeding $500,000 during the preceding or current calendar year.
Colorado
The economic nexus threshold in Colorado is more than $100,000 in retail sales in the preceding or current calendar year.
Connecticut
Connecticut is one of the few states with both a transaction- and revenue-based threshold. In the state, sellers reach economic nexus when they have retail sales of at least $100,000 and 200 transactions during a 12-month period.
Florida
In Florida, tangible retail sales of tangible personal property exceeding $100,000 during the previous calendar year will require sellers to register and collect sales tax from customers.
Georgia
Georgia requires sellers and businesses with gross revenue from retail sales of tangible personal property exceeding $100,000 or if retail sales of tangible personal property is 200 transactions or more to register and file sales tax.
Hawaii
Hawaii is also a state that looks at both transactions and revenue amounts to determine its economic threshold. Sellers with gross proceeds of $100,000 or more or 200 separate transactions in the preceding or current calendar year.
Idaho
In Idaho, businesses with sales exceeding $100,000 in the previous or current calendar year must register, collect, file, and pay sales tax.
Illinois
Illinois’ economic nexus threshold is $100,000 or more from the sale of tangible personal property or the seller's 200 or more separate transactions during the previous 12-month period.
Indiana
In Indiana, sellers with gross revenue exceeding $100,000 in the previous or current calendar year must register and file sales tax.
Iowa
Iowa sellers must register, collect, and file sales taxes if their gross revenue exceeds $100,000 or more in the previous or current calendar year.
Kansas
In Kansas, sellers with gross sales exceeding $100,000 or more in the previous or current calendar year must register, charge, and remit taxes to the state.
Kentucky
In Kentucky, the economic nexus threshold is gross receipts from sales exceeding $100,000 or the seller making 200 or more separate transactions in the previous or current calendar year.
Louisiana
In Louisiana, sellers with gross revenue from sales exceeding $100,000 in the previous or current calendar year must file and remit sales tax.
Maine
The economic nexus threshold in Maine is the total gross sales of tangible personal property or taxable services exceeding $100,000 in the previous or current year.
Maryland
Maryland sellers must charge and remit taxes if their gross revenue from sales exceeds $100,000 or the number of transactions is 200 or more during the previous or current calendar year.
Massachusetts
Massachusetts set its economic nexus threshold at $100,000 for sales in the previous or current taxable year.
Michigan
In Michigan, the economic nexus threshold is taxable and nontaxable gross sales in the prior year exceeding $100,000 or the number of transactions over 200.
Minnesota
Minnesota sellers must collect and remit sales tax if their retail sales exceed $100,000 or if they have had 200 or more retail sales in the previous 12 months.
Mississippi
The economic nexus threshold in Mississippi is sales of more than $250,000 in the previous 12 months.
Missouri
Missouri’s economic nexus threshold is gross receipts from taxable sales of tangible personal property that exceed $100,000 annually.
Nebraska
In Nebraska, the economic nexus threshold requiring sellers to collect and remit taxes is retail sales of more than $100,000, or if the number of separate transactions is 200 or more during the previous or current calendar year.
Nevada
Businesses that sell in Nevada must collect and remit sales tax if their retail sales are more than $100,000 or the number of separate retail transactions is 200 or more in the previous or current calendar year.
New Jersey
New Jersey has a revenue and transaction threshold for economic nexus that can be triggered. The thresholds are gross revenue from sales of tangible personal property, specified digital products, or taxable services exceeding $100,000 or the number of separate transactions being 200 or more in the previous or current calendar year.
New Mexico
In New Mexico, having taxable gross receipts of at least $100,000 in the previous calendar year qualifies you for economic nexus in the state.
New York
New York's economic nexus thresholds are similar to California's. Sellers must file sales tax and remit it to the states if their gross receipts from sales of tangible personal property exceed $500,000 and they made more than 100 sales of tangible personal property in the previous four sales tax quarters.
North Carolina
In North Carolina, businesses must remit sales tax collected from customers if their gross sales exceed $100,000 in the previous or current calendar year.
North Dakota
North Dakota’s economic nexus threshold is taxable sales exceeding $100,000 in the previous or current calendar year.
Ohio
Sellers in Ohio with gross receipts exceeding $100,000 or making 200 or more separate transactions in the previous or current calendar year will be required to remit sales tax.
Oklahoma
Oklahoma requires sellers and businesses to collect and remit tax if their taxable merchandise sales exceed $100,000 in the previous or current calendar year.
Pennsylvania
Pennsylvania’s economic nexus threshold is gross sales exceeding $100,000 in the previous or current calendar year.
Rhode Island
The economic nexus threshold in Rhode Island is gross revenue from sales of $100,000 or more or the number of separate transactions is 200 or more in the previous calendar year.
South Carolina
South Carolina requires businesses to collect and remit sales tax if their gross revenue from sales of tangible personal property, products transferred electronically, and services delivered into the state exceeds $100,000 in the previous or current calendar year.
South Dakota
E-commerce businesses selling in South Dakota must collect and remit tax if their gross revenue from sales exceeds $100,000 in the previous or current calendar year.
Tennessee
Tennessee requires businesses to charge and remit sales tax in the state if they have retail sales of $100,000 or more in the previous 12-month period.
Texas
In Texas, businesses must file and remit sales tax if their revenue totaled $500,000 or more during the preceding 12 calendar months.
Utah
Utah’s economic nexus threshold is gross revenue from sales of tangible personal property, products transferred electronically, or services exceeding $100,000, or the seller made 200 or more separate transactions in the previous or the current calendar year.
Vermont
In Vermont, the economic nexus threshold is a minimum of $100,000 in sales or at least 200 individual sales transactions during the preceding 12-month period.
Virginia
Businesses selling in Virginia must file and remit sales tax if their annual gross retail sales exceed $100,000 or the seller makes 200 or more sales transactions in the previous or current calendar year.
Washington
Washington’s economic nexus threshold is more than $100,000 in cumulative gross receipts in the current or prior year.
West Virginia
West Virginia requires businesses to file and remit taxes if they have gross sales of $100,000 or more or if the number of separate transactions for goods or services is 200 or more in the preceding or current calendar year.
Wisconsin
Businesses that sell in Wisconsin must collect and remit sales tax if their gross sales exceed $100,000 in the previous or current calendar year.
Wyoming
Wyoming’s economic nexus threshold is gross revenue from the sale of tangible personal property, admissions, or services delivered exceeds $100,000 in the preceding or current calendar year.
Exemptions and Exceptions in E-Commerce Sales Tax
Not all products are taxable. A few items get a tax exemption. Understanding these exemptions can reduce your sales tax burden and ease compliance efforts.
Product Exemptions | Survival items are exempt from sales tax. Because they are essential to our everyday lives, some states prevent sellers from imposing sales taxes on them. These include groceries, medicine, clothing, and certain digital products. Of course, these laws vary across the country. For example, not all clothes in New York get a sales tax exemption. Alabama and South Dakota don’t exempt groceries from sales taxes. So, take your time and research exempted items in the states you work with and operate in to avoid collecting unnecessary sales tax from your customers. |
Non-Profit Exemptions | Schools, churches, clubs, and civic groups are considered non-profit organizations. So, they are exempt from enforcing sales taxes through the 501(c)(3) tax exemption. Of course, exemption rules for non-profits are state-specific. |
Sales Tax Holidays | A sales tax holiday is exactly what it sounds like. Some states prevent online sellers from collecting sales taxes during specific days of the year. For example, school supplies under $50 and clothes under $100 are tax-free in Alabama from July 15th to 17th. Diapers and children’s clothes are non-taxable in Florida during June. |
How to Apply for/Document Tax-Exempt Sales Online
Applying for a sales tax exemption certificate is a simple but long process. Here’s how to do it:
- Start by researching the specific exemptions offered by the states you have nexus in to ensure you meet their standards.
- Register your online business with the state it’s located in or with the local authorities.
- Apply for a federal tax-exempt status from the IRS by filling out form 1023 or 1024 from their website.
- Processing your application can take a few months, so be patient.
- Some states require a state-specific exemption. In that case, enter your state’s Department of Revenue website and fill out the exemption form.
Documenting Tax-Exempt Sales Online
You want to keep detailed records of all the tax-exempt sales you make. These should include the customer's exemption certificate, the items they bought, and the reason.
See Zamp in action
The Role of Marketplaces in Sales Tax Compliance
The rise of online marketplaces like Amazon, eBay, and Etsy has revolutionized the e-commerce industry, allowing small business owners to reach wider audiences.
Unfortunately, that only makes sales tax compliance more troublesome for remote sellers. Well, you don’t have to worry about that with marketplace facilitator laws. These laws shift the responsibility of sales tax collection and remittance from individual sellers to the online marketplace.
That means you no longer need to calculate and collect sales tax in each state where you do business. Of course, nothing is ever that simple.
Potential Risks
Would you trust someone you don’t know with your sales tax collection? Of course not! What if they make a mistake? That will be a hassle to solve.
Well, that could happen with these marketplaces. For the most part, these platforms are competent enough to collect all the taxes without any issues.
That said, nobody's perfect. There’s always room for error.
Best Practices to Stay Compliant in These Platforms
Now that you understand the risk of these facilitator laws, what can you do to stay in the safe zone?
Provide Accurate Product Information
Even though the marketplace handles the collection, sellers are still responsible for providing accurate product information.
That ensures the marketplace calculates the correct sales tax rate for each transaction. Providing false information results in miscalculating sales taxes and facing the risk of being audited.
Keep Your Sales Tax Permit
Just because the marketplace collects your taxes for you doesn’t mean you can throw away your tax permit. Why?
Let’s say Amazon is collecting sales taxes on your behalf in California. What about other states?
If you have a website where you sell products to customers in other states, you’re responsible for collecting, remitting, and filing those taxes yourself. You’ll need a tax permit for that.
E-Commerce Sales Tax: Conclusion
Adapting to the ever-changing landscape of e-commerce sales tax can often feel like an uphill battle. That doesn’t mean you can’t take a few steps to simplify the process and achieve sales tax compliance.
Here are some steps to ensure your e-commerce business is protected against any sales tax pitfalls.
Using Sales Tax Software
Sales tax software can do all your calculations in seconds, saving valuable time and minimizing unwanted errors. It can also handle sales tax reporting and generate and file reports electronically with the appropriate state authorities.
Ultimately, sales tax software for e-commerce can reduce the administrative burden of sales tax compliance, giving you more time to focus on growing your business.
If you don’t know what software to choose, get in touch with us to see the results for yourself.
Staying Informed on the Latest Regulations
While using sales tax software can make your job easier, you must stay informed about the latest sales tax changes that might impact your business.
Monitor Industry News and Publications
Industry publications and online resources dedicated to e-commerce often provide valuable insights on sales tax trends and legislative changes. Regularly checking these resources keeps you informed about potential future challenges and opportunities.
Consult a Tax Professional
Consider consulting a tax professional if you have specific questions about your business's sales tax obligations. They can provide tailored guidance and ensure you're on the right track towards sales tax compliance.
Book a call today
30-minute call
sales tax expert
off your plate
Sales Tax for E-Commerce: FAQ
In our research, we found that California has the highest sales tax rate of 7.25%. It’s closely followed by Indiana, Mississippi, Rhode Island, and Tennessee at 7%.
Most state laws require companies to register for a sales tax permit. This authorizes online sellers to collect sales tax on purchases within that taxing jurisdiction. You should not collect sales tax without a permit.
In general, yes, you should be charging sales tax on your online store if you have a physical presence in a state or hit an economic nexus threshold. This is typically a minimum of $100,000 in sales or 100 transactions, although this differs by state.
E-commerce sales tax refers to the tax applied to goods and services sold online. This tax is governed by the tax laws of the jurisdiction where the buyer is located, meaning online sellers need to collect and remit sales tax based on the rules of each state or country where they have a tax presence or nexus.
The requirement to register for sales tax varies depending on the presence and activity of your business in each state. Generally, businesses with nexus in a state are required to register for sales tax and collect tax on transactions conducted within that state. It’s essential to understand the nexus requirements of each state where you conduct business to determine your registration obligations.
Any online retailer that sells goods or services to customers in states where they have a nexus, which is a physical or economic connection, is typically required to collect sales tax. This includes businesses selling through their own websites, marketplaces, or other e-commerce platforms.
Sales tax nexus refers to the connection or presence a business has within a state that requires it to collect and remit sales tax on transactions conducted in that state. This connection can be established through various factors such as physical presence, economic activity thresholds, or marketplace facilitator laws.
The Wayfair decision, issued by the Supreme Court in 2018, expanded states’ authority to collect sales tax from online retailers. It overturned the previous requirement for sellers to have a physical presence in a state before being subject to sales tax obligations. This decision significantly impacts e-commerce businesses by allowing states to enforce economic nexus laws based solely on a seller’s economic activity within the state.
A nexus is established through physical presence, such as having an office, warehouse, or employees in a state, or through economic activity, like reaching a set amount of sales or transactions in that state. The specific criteria for what constitutes a nexus vary from state to state.
Marketplace facilitator laws designate online platforms like Amazon or eBay as responsible for handling sales tax collection and remittance on behalf of third-party sellers. These laws relieve individual sellers of the burden of managing sales tax obligations in states where marketplace facilitator laws are in effect.
Yes, sales tax rates can vary significantly across different jurisdictions. Within the United States, for example, each state, county, and city can set its own sales tax rate, and these rates can change. It’s important for e-commerce businesses to stay updated on these rates to ensure they’re collecting the correct amount of sales tax.
There are several sales tax automation tools and software platforms available that integrate with e-commerce systems to help manage the complexities of sales tax compliance. These tools can automatically calculate the correct sales tax rate for each transaction, generate reports, and even file sales tax returns on behalf of the business. Zamp’s fully managed solution combines the best of both worlds with sales tax software and a readily available team of sales tax experts, so you don’t have to deal with sales tax yourself.