Do You Have to Collect Sales Tax for Online Sales?

Online sales have transformed commerce, but unlike brick-and-mortar stores, online sellers navigate complex sales tax rules. There is no single federal law; compliance is governed by varying state laws. Businesses must understand when they are required to collect sales tax to ensure compliance and avoid penalties.

Understanding Sales Tax Nexus

Sales tax nexus determines if an online seller has a sufficient connection to a state, obligating them to collect sales tax there. This connection triggers registration with the state’s tax authority and sales tax collection. Without nexus, a business generally has no collection obligation in that state.

Physical presence nexus is the traditional standard, based on a business having a tangible link to a state. This includes maintaining an office, store, or warehouse. Employees, agents, or contractors working in a state also establish physical presence. Storing inventory in a third-party fulfillment center also creates this obligation.

Economic nexus is a modern concept, allowing states to require out-of-state businesses to collect sales tax without physical presence, provided they meet economic activity thresholds. It is triggered when an online seller surpasses a specific sales revenue or transaction count into a state within a defined period, usually the current or preceding calendar year.

Economic nexus thresholds vary considerably by state, ranging from $100,000 to $500,000 in sales, or a combination of sales volume and transaction count. Some states have eliminated transaction count thresholds, focusing solely on sales volume. Businesses must monitor sales activity to identify when these thresholds are met, as exceeding them triggers a collection obligation.

Other less common types of nexus exist, including affiliate nexus (agreement with in-state referrers for commission) or click-through nexus (referrals from in-state websites). Temporary business activities, like attending a trade show or in-person sales calls, can also establish physical presence nexus. Understanding these triggers is important.

Applying Sales Tax Rules to Transactions

Once nexus is established, businesses must apply sales tax rules to individual transactions. This involves determining which products or services are taxable and at what rate, as not all items are subject to sales tax in every state. Taxability varies, requiring research of state-specific regulations.

Most tangible personal property, like physical goods, is generally taxable. However, certain items such as food products, digital goods, or some services may be exempt depending on state laws. Some states exempt necessities or streaming services. Online sellers must verify the tax status of each product sold in every state where they have nexus.

Sales tax rates are complex, varying significantly within a single state due to local taxes. These include county, city, and special district rates, added to the statewide rate. A single state might have hundreds of different tax rates depending on the buyer’s location.

States generally follow origin-based or destination-based sourcing rules to determine the correct sales tax rate. Origin-based states use the seller’s business location. Destination-based states use the buyer’s location, based on where the product is delivered or service performed. Most states use destination-based rules for remote sellers, requiring online sellers to identify the precise rate for the customer’s delivery address, often involving multiple layers of state and local taxes.

Taxability of shipping and handling charges varies by state. In many states, if the product is taxable, associated shipping and handling charges are also subject to sales tax, even if itemized separately. Some states exempt shipping charges if separately stated and avoidable by the customer. If an order contains both taxable and non-taxable items, some states may require sales tax to be applied proportionally to delivery charges based on the taxable portion.

Some buyers, like resellers, non-profits, or government entities, may be exempt from sales tax. To facilitate these sales, sellers must obtain a valid sales tax exemption certificate from the buyer. This document proves the purchase is exempt, protecting the seller during an audit. Certificates vary by type (entities, specific usage, resale). Sellers are responsible for collecting, validating, and storing these certificates.

Registering, Collecting, and Remitting Sales Tax

After establishing nexus and understanding taxability, businesses must register, collect, and remit sales tax. Before collecting any sales tax, a business must register with the tax authority in each state where nexus is established. This typically involves applying for a sales tax permit or license through the state’s Department of Revenue website.

Registration requires specific business information, including EIN, legal name, address, and business activity details. Completing registration before collecting sales tax is crucial, as collecting without a permit can be illegal. While some states allow a grace period after economic nexus is established, prompt registration is advised.

Once registered, online sellers must configure e-commerce platforms to accurately calculate and collect sales tax. Most platforms, like Shopify or Amazon, offer built-in functions or integrations with sales tax software to automate this. These systems apply the correct rate based on buyer location and seller nexus, ensuring compliance. Accurate record-keeping is important, detailing all sales and collected tax.

The final step is filing sales tax returns and remitting collected funds to the state tax authority. States assign filing frequency (monthly, quarterly, semi-annually, or annually) based on sales volume or collected tax. New businesses often start with monthly filing, adjustable later based on reported activity.

Sales tax returns are generally filed online via the state’s tax portal, reporting collected sales tax and remitting payment. Due dates vary by state, often around the 20th of the month following the reporting period, with extensions for weekends or holidays. Failure to file or pay by the due date can result in penalties and interest. Due to multi-state complexity, many businesses use sales tax automation software or services. These tools streamline rate calculation, exemption certificate management, nexus tracking, and return filing, reducing errors and ensuring timely compliance.