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The Basics of E-Commerce Sales Tax
Sales tax for e-commerce businesses primarily centers around economic nexus. Online sellers must collect and remit sales tax in states where they exceed specific transaction or revenue thresholds, regardless of whether they have a physical presence in those states.
The basic steps to take if you’ve reached nexus involve:
- Registration: Once you’ve exceeded a state’s threshold, you must register with that state’s authority. After you’ve registered, you’ll then be able to collect and remit sales tax.
- Calculation: Determine the appropriate sales tax rates based on your buyer’s location.
- Collection: Ensure you add the correct tax during checkout.
- Filing: Submit sales tax returns and remit collected taxes on the state’s required schedule.
When it comes to calculation and collection, you must determine whether the states you’re selling in or to have an origin-based or destination-based approach. For most interstate (between two states) online sales, the sale is taxed at the buyer’s ship-to address, which is called destination-based sales tax sourcing. Origin-based sourcing requires e-commerce sellers to charge sales tax at the rate where the sale originates.
When and Where to Collect: Economic Nexus Explained
Most states require e-commerce businesses to begin collecting sales tax after exceeding one of two types of economic nexus thresholds:
- Revenue thresholds: These are typically between $100,000 and $500,000 in annual sales to customers in that state.
- Transactions: This is usually between 100-200 separate sales transactions to the state’s residents.
Once you trigger a state’s economic nexus threshold, you’ll typically have a fixed amount of time to register with state tax authorities and begin collecting. Keep in mind that this period of time can vary based on the state.
There are five states that do not collect statewide sales tax—Alaska, Delaware, Montana, New Hampshire, and Oregon. Though, Alaska does allow local jurisdictions to charge sales tax.
Economic Nexus Threshold Example
*New York requires the seller to have a revenue threshold of $500,000 and 100 transactions in the state for economic nexus.
Marketplace vs. Direct Sales: Different Tax Responsibilities
How your e-commerce business handles sales tax depends significantly on your sales channels:
Marketplace Facilitator Sales
Marketplace facilitators like Amazon, Etsy, and Walmart must handle tax collection and remittance for third-party sellers in all states with sales tax. If you sell exclusively through these platforms, much of your sales tax burden is managed for you.
However, you should still:
- Keep records of all collected taxes
- Be aware that marketplace sales may count toward your economic nexus thresholds for direct sales
- Understand that marketplace facilitator laws vary by state
- Use an automated sales tax solution to verify that everything has been collected and remitted (especially if you sell across multiple platforms)
Direct Website Sales
Sales through your own website or through platforms that don’t qualify as a marketplace facilitators require you to handle all aspects of sales tax compliance yourself, including:
- Tracking economic nexus thresholds
- Registering in states where you have nexus
- Calculating, collecting, and remitting the correct tax
Special Product and Service Considerations
Not all products and services are taxed equally across states, creating another layer of complexity for e-commerce sellers.
Digital Products
Digital goods, software subscriptions, and services face significantly varying tax treatment:
- Streaming services have their own classification in many states
- Digital products are taxed differently in every state, and there is discussion on whether it is a tangible personal product or not
Common Tax Exemptions
Certain product categories often receive special treatment (aka exemption from sales tax:
- Clothing (exempt with exceptions in states like Minnesota and New Jersey)
- Grocery food items (exempt in some states, but taxable in others)
- Educational materials (varying exemptions by state)
- Medical products (typically exempt but with varying definitions)
The Sales Tax Filing and Remittance Process
Once you’re collecting sales tax, you’ll need to file returns and send the collected tax to each state where you have nexus.
Filing Frequencies
When you register for sales tax, you will be given a filing schedule, which varies based on your sales volume. It could be:
- Monthly: Typically required for larger sellers
- Quarterly: Common for medium-sized operations
- Annually: Sometimes permitted for smaller businesses
Most states now require electronic filing through their Department of Revenue (DoR) website. Paper returns are still accepted in some jurisdictions but often incur additional processing fees.
Deadlines and Penalties
Due dates vary by state but commonly fall on the 20th of the month following the filing period. Late filing penalties generally range from 5-25% of the tax due, plus interest.
Many states offer amnesty programs for businesses that voluntarily register after discovering they’ve established nexus, but these programs are typically time-limited.
Technology Solutions and Automation
Given the complexity of multi-state sales tax compliance, technology has become essential for most e-commerce operations. Automated sales tax solutions combine innovative technology with expert service to handle every aspect of sales tax compliance for your business.
Features of an Automated Sales Tax Solution
Here’s a look at how an automated sales tax solution can help your business:
Wrapping Up
E-commerce is continuing to evolve in 2025, requiring sellers to maintain vigilant sales tax compliance practices. While economic nexus has become the standard nationwide, differences in thresholds, product classifications, and filing requirements create significant complexity.
Successful e-commerce businesses typically combine automated tax solutions with regular compliance reviews to avoid penalties. That’s why we’ve partnered with Zamp, a managed solution that combines intelligent software with expert service to completely handle your sales tax compliance.
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