Part 3: Sales Tax - The Compliance Minefield

What Sales Tax Actually Is and Why It Exists

Sales tax is a consumption tax levied at the point of sale on the purchase of tangible personal property and, in many states, certain services. It is a state and local tax — there is no federal sales tax in the United States. The revenue goes to the state and, where applicable, to local jurisdictions within the state.

The economic logic is straightforward. Government services — roads, schools, emergency services, infrastructure — are used in part by people when they consume goods and services. A sales tax connects consumption to the funding of those services. The person who buys more pays more tax. The person who buys less pays less.

From the seller’s perspective, sales tax is not your cost. You are not paying a tax on your sales. You are collecting a tax on your customers’ purchases, holding it in trust on behalf of the state, and remitting it to the relevant tax authority on a regular schedule. The economic burden falls on the buyer. Your obligation is administrative: collect the right amount, keep records, file returns, and remit on time.

That administrative obligation is where the complexity lives. The United States has no unified sales tax system. It has a patchwork of 45 state-level sales tax regimes (plus the District of Columbia), each operating independently under its own statutes, regulations, rulings, and administrative guidance. Below the state level, thousands of counties, cities, municipalities, and special tax districts impose additional local sales taxes on top of the state rate — sometimes at significantly varying rates across very short geographic distances.

Five states have no state-level sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon. Alaska, however, allows local jurisdictions to impose their own sales taxes, which means sellers making sales into certain Alaskan communities may still have collection obligations despite the absence of a state tax.

The result is a compliance landscape of genuinely extraordinary complexity. A seller making sales across the entire United States is potentially navigating 45 state tax systems and thousands of local jurisdictions, each with its own rules about which transactions are taxable, at what rate, under what conditions registration is required, how frequently returns must be filed, and what the penalties are for non-compliance.

Understanding this landscape begins with understanding nexus.

The Pre-Wayfair World vs the Post-Wayfair World — Why Everything Changed in 2018

To understand the current sales tax landscape for e-commerce sellers, you need to understand what came before it — because the contrast explains why so many sellers are operating with outdated assumptions.

Prior to 2018, the foundational rule of US sales tax law was established by the Supreme Court’s 1992 decision in Quill Corp. v. North Dakota. The Quill decision held that the Commerce Clause of the US Constitution prevented states from imposing sales tax collection obligations on sellers who had no physical presence — no office, no warehouse, no employees, no property — in the state. An out-of-state seller could make unlimited sales into a state, and as long as it had no physical presence there, it had no obligation to collect that state’s sales tax.

This rule made sense in the catalog-order era of 1992. It became increasingly strained as e-commerce grew through the 2000s and 2010s. States watched enormous volumes of online sales flowing to their residents untaxed. Brick-and-mortar retailers complained that the rule gave online competitors an effective price advantage equal to the sales tax rate. State revenue authorities estimated billions of dollars in uncollected tax each year.

Many states attempted workarounds. They passed “click-through nexus” laws, asserting that an out-of-state seller had physical nexus if it had in-state affiliates (websites that linked to the seller in exchange for commissions). They passed “economic nexus” laws, asserting that sufficient economic activity alone created a tax collection obligation — then waited for the Supreme Court to revisit Quill.

The challenge came through South Dakota v. Wayfair. South Dakota passed a law in 2016 requiring out-of-state sellers with either $100,000 in annual sales into South Dakota or 200 or more separate transactions into the state to collect and remit South Dakota sales tax, regardless of physical presence. South Dakota knew the law violated Quill. That was the point — to force a Supreme Court challenge.

On June 21, 2018, the Court ruled 5-4 to overturn Quill. The majority opinion, written by Justice Kennedy, held that the physical presence rule was “unsound and incorrect” in the modern digital economy and that South Dakota’s economic nexus threshold was a constitutionally valid basis for imposing sales tax collection obligations.

The practical aftermath was swift. Within months of the decision, virtually every sales tax state had enacted or was enacting its own economic nexus legislation. The thresholds and structure varied by state, but the principle was now settled: a seller’s economic activity in a state — measured by sales volume, transaction count, or both — is sufficient to create a sales tax collection obligation, without any physical presence required.

For e-commerce sellers, the Wayfair decision fundamentally transformed the compliance landscape. A seller who had been making $500,000 per year in online sales distributed across thirty states, with no physical presence in most of them, and who had built their business on the assumption that the Quill rule meant they had no multi-state obligations — that seller went from having a narrow compliance footprint to having potential obligations in a large number of states almost overnight.

This is why Wayfair matters for sellers who were already operating when it was decided, and why understanding economic nexus is essential for every seller operating today.

Physical Nexus Explained: What Creates It, How Inventory Triggers It, Why Your Home Office Counts

Nexus, in the context of sales tax, refers to a sufficient connection between a seller and a state that justifies imposing a tax collection obligation on that seller. Before Wayfair, only physical nexus existed as a recognised basis for this obligation. After Wayfair, economic nexus was added. Both types remain relevant, and for many e-commerce sellers, both apply simultaneously in different states.

Physical nexus is created by a tangible connection between your business and a state. The following activities or presences typically create physical nexus:

A business location. If your business has an office, store, showroom, warehouse, or any other facility in a state, you have physical nexus there. This includes your home if you operate your business from it — your home state almost certainly treats your home office as creating nexus in your home state.

Employees or agents. If you have an employee, contractor, sales representative, or any other agent working in a state on your behalf — even part-time, even temporarily — that presence typically creates physical nexus. An employee who lives in a different state from your business and works remotely can create nexus in their state of residence.

Inventory stored in the state. This is the nexus trigger that catches most Amazon FBA sellers off guard. When you send inventory to Amazon’s fulfilment network, Amazon distributes that inventory across its warehouse network based on its own logistics optimisation. You typically have no control over which specific warehouses receive your stock. The result is that your inventory may sit in fulfilment centres in states you have never visited, never chosen, and never intended to do business in. The physical presence of your inventory in those states creates physical nexus in those states under the laws of most states that impose sales tax.

Trade shows and temporary presence. Attending a trade show, pop-up market, or other temporary sales event in a state can create nexus in some states, particularly if you make sales at the event. The rules vary by state — some states have de minimis exemptions for brief or occasional physical presence, others do not.

Drop-shipping arrangements. If a supplier ships products to your customers on your behalf from a warehouse in a particular state, that activity can create nexus for you in that state in certain circumstances, though the analysis depends on the specific nature of the arrangement.

The important nuance for FBA sellers specifically: physical nexus created by inventory in a fulfilment centre means you have a sufficient connection to that state’s tax system to be subject to its laws. What it actually requires you to do — whether you need to register, whether you need to collect tax, whether you need to file returns — depends on that state’s specific rules, including whether it has marketplace facilitator laws that shift some or all of those obligations to Amazon. This is a state-by-state analysis, not a uniform rule. We address the marketplace facilitator interaction in detail shortly.

To find out which states currently have your FBA inventory, you can access the Inventory Event Detail report through Amazon Seller Central. This report shows inventory movements, including transfers between fulfilment centres. Running this report periodically is an important part of monitoring your physical nexus exposure.

Economic Nexus Explained: Thresholds by State, How They’re Measured, and How Quickly You Can Cross Them

Economic nexus is the post-Wayfair concept that a seller’s sales activity into a state — without any physical presence — can be sufficient to require sales tax collection and remittance. Every sales tax state has now enacted some form of economic nexus rule, though the specific thresholds and measurement methodologies differ.

The most common threshold: $100,000 in sales. Following the South Dakota model, many states use $100,000 in gross sales into the state as the economic nexus threshold. Some states combine this with a transaction count threshold — 200 separate transactions is common — and trigger nexus when either the sales threshold or the transaction count threshold is reached. Others have since eliminated the transaction count entirely and use only the dollar threshold.

States with higher thresholds. Not all states use the $100,000 / 200-transaction model. Texas is the most prominent example: its economic nexus threshold is $500,000 in total Texas sales in the preceding twelve calendar months. Kansas originally enacted economic nexus with no de minimis threshold — meaning any amount of sales created nexus — before revising this approach. California uses $500,000 as its threshold. Sellers focused on high-revenue states need to verify the specific threshold for each relevant state rather than assuming the common $100,000 baseline applies universally.

Measurement period. Most states measure the economic nexus threshold over either the current calendar year, the preceding calendar year, or both — triggering nexus when either period crosses the threshold. Some states use a rolling twelve-month lookback. The practical implication: a seller who crosses a state’s threshold in November of one year may have a nexus obligation beginning January 1 of the following year, or may have an immediate obligation, depending on that state’s specific rule. Understanding when nexus begins — not just whether it exists — is important for determining when registration and collection should begin.

What counts toward the threshold. In most states, the threshold is measured against gross sales into the state — total revenue before deductions for returns, discounts, or excluded transactions. Some states count only taxable sales. Some count marketplace sales alongside direct sales; others count only sales made directly by the seller (not through a marketplace facilitator). These distinctions matter for sellers whose total sales volume is near the threshold — a seller who appears to have crossed a threshold based on gross sales might not have done so based on the state’s specific counting methodology.

How quickly thresholds can be crossed. An e-commerce seller running paid advertising campaigns or benefiting from a viral moment can cross a state’s economic nexus threshold very quickly — sometimes within a single month of strong sales. A seller who crosses the $100,000 threshold in a state in February and does not address the nexus until the end of the year has accumulated ten months of potential liability during which they were required to collect but did not. The obligation does not wait for you to notice it. It begins when the threshold is crossed.

The states without sales tax. Alaska, Delaware, Montana, New Hampshire, and Oregon have no state-level sales tax. Economic nexus in these states creates no state sales tax obligation. Alaska, however, allows local jurisdictions to impose their own sales taxes and has a remote seller regime administered by the Alaska Remote Seller Sales Tax Commission — sellers making significant sales into Alaska may have local sales tax collection obligations even without a state-level tax.

The comprehensive state-by-state analysis of economic nexus thresholds is available through the Streamlined Sales Tax Governing Board, which publishes up-to-date information for member states. For non-SST states, each state’s department of revenue publishes its specific nexus rules. Given how frequently thresholds and rules are updated, relying on information published more than twelve months ago carries risk.

The Critical Distinction: Amazon Collecting Sales Tax vs You Having Nexus

We addressed this in Part 1, but because it is so frequently misunderstood and because its implications run throughout everything in this section, it deserves thorough treatment here.

Amazon, as a marketplace facilitator, is legally required under marketplace facilitator laws enacted in virtually every sales tax state to collect, report, and remit sales tax on transactions it facilitates through its marketplace. When a customer buys your product on Amazon, Amazon collects the applicable state and local sales tax from the customer, and Amazon remits that tax to the relevant state. You, as the third-party seller, do not receive the tax, do not hold it, and are not responsible for remitting it. Amazon handles the mechanics of collection and remittance on marketplace transactions.

This is a significant administrative convenience. But it is not a compliance strategy, and it does not substitute for understanding your own nexus position.

Nexus is not eliminated by marketplace facilitator collection. The fact that Amazon collects and remits sales tax on your Amazon marketplace sales does not change whether you have nexus in a given state. If your FBA inventory sits in an Ohio fulfilment centre, you have physical nexus in Ohio regardless of whether Amazon is collecting Ohio sales tax on your Amazon transactions. Nexus is a legal status — a connection between you and the state — and it exists regardless of who is handling the mechanics of tax collection on a particular channel.

Your non-marketplace sales are your responsibility entirely. Amazon’s marketplace facilitator collection covers only sales made through the Amazon marketplace. If you also sell through your own Shopify store, through your own website, at wholesale to retailers, at trade shows, through subscription channels, or through any other direct channel, the sales tax on those sales is entirely your responsibility. Amazon’s collection does not extend beyond Amazon. A seller who is diligently collecting and remitting for their Shopify store is handling their direct-channel obligations correctly. A seller who assumes Amazon’s marketplace collection covers everything — including their Shopify store — is exposed on every direct sale they make.

Registration obligations may persist even for marketplace-only sellers. As noted in Part 1, state treatment of whether marketplace-only sellers must register is inconsistent. Some states require registration even when a marketplace facilitator is handling all collection. Others do not impose a registration requirement on marketplace-only sellers with nexus in their state. The Streamlined Sales Tax Governing Board publishes state-by-state guidance on “Marketplace Seller” treatment that maps these distinctions. Your specific obligation in each state depends on your fact pattern — whether you sell only through Amazon, whether you also sell through other channels, and what each state’s specific rules say for sellers in your position.

Income tax nexus is a separate question entirely. Having physical nexus through FBA inventory in a state creates a connection to that state for sales tax purposes. It may also create income tax nexus — a requirement to file an income tax return in that state and pay state income tax on the portion of your business income attributable to that state’s activities. Income tax nexus is governed by different rules from sales tax nexus, varies by state, and is not affected at all by marketplace facilitator laws. We address income tax nexus in Part 4. The point here is simply that Amazon’s marketplace facilitator collection addresses none of your income tax obligations.

Marketplace Facilitator Laws — What They Require Amazon, Etsy, eBay, and Walmart Marketplace to Do

Marketplace facilitator laws are state statutes that shift the sales tax collection and remittance obligation from individual sellers to the marketplace platform that facilitates their sales. These laws exist in virtually every sales tax state and have been enacted or expanded substantially in the years since the Wayfair decision.

Under a marketplace facilitator law, the marketplace — Amazon, Etsy, eBay, Walmart Marketplace, TikTok Shop — is treated as the seller of record for sales tax purposes on transactions it facilitates. The marketplace is required to collect the applicable sales tax from the buyer, report it to the relevant state, and remit it. The individual third-party seller on the platform is relieved of those specific obligations for those specific transactions.

The rationale for these laws is administrative efficiency. Rather than requiring every individual seller on a platform to register in every state, collect the right rate, and file returns in every jurisdiction, the state can deal with a single large platform that has the technology, resources, and motivation (compliance enforcement) to get it right at scale.

The practical effect for e-commerce sellers: for the sales you make through covered marketplace platforms, the collection and remittance mechanics are handled by the platform. You will see this reflected in your Amazon reports — the sales tax collected from customers is not included in your payouts, because Amazon has collected it and will remit it directly. It does not flow through your hands.

The major marketplace platforms covered by facilitator laws in all or substantially all sales tax states include Amazon (including FBA sales by third-party sellers), Etsy, eBay, Walmart Marketplace, Target Plus, and most other significant multi-seller online marketplaces. TikTok Shop has also been operating under marketplace facilitator status in most states since its US launch.

What marketplace facilitator laws do not cover is at least as important as what they do cover.

What Marketplace Facilitator Laws Do NOT Cover

Your own website or direct e-commerce store. If you sell through your own Shopify store, WooCommerce site, BigCommerce store, Squarespace store, or any other direct-to-consumer channel that is not a marketplace platform, marketplace facilitator laws do not apply. You are the seller. You are responsible for determining nexus in each state, registering where required, collecting the right rate from each customer, filing returns on schedule, and remitting to each state. There is no platform to delegate this to. The compliance obligation sits entirely with you.

Wholesale and B2B sales. Sales you make directly to retailers, distributors, or other businesses — whether through your own invoicing, through a trade show, or through a wholesale platform that is not itself a marketplace facilitator — are your direct responsibility. Many wholesale transactions may be exempt from sales tax if the buyer provides a valid resale certificate, but obtaining and retaining those certificates, verifying their validity, and managing exempt transactions correctly is your obligation.

Direct social media sales and invoiced sales. Sales made through direct messaging, invoicing, or any channel that does not go through a registered marketplace facilitator’s checkout system are not covered by marketplace facilitator collection. If you invoice a customer directly from your own billing system, process the payment through your own Stripe or PayPal account, or sell through a social channel that is not itself a marketplace facilitator, the sales tax obligation is yours.

States where the marketplace facilitator law has specific carve-outs or limitations. A small number of states have enacted marketplace facilitator laws with specific scope limitations. The details vary and are updated periodically as states amend their legislation.

The most important practical implication: as your business diversifies beyond a single marketplace platform, your direct sales tax compliance obligation grows. Sellers who begin on Amazon and then expand to Shopify, add a wholesale channel, and begin making direct B2B sales have layered in new compliance obligations with each expansion. Each channel needs to be evaluated separately.

Amazon FBA and Physical Nexus: How Amazon Storing Your Inventory Creates Nexus in States You’ve Never Visited

The Amazon FBA model is one of the most powerful fulfilment systems available to e-commerce sellers. It is also one of the most consistent sources of unexpected sales tax nexus.

When you enrol in FBA, you send your inventory to Amazon’s fulfilment network. Amazon’s systems then distribute that inventory across its warehouse network based on proximity to demand, fulfilment capacity, and its own logistics optimisation. You have no meaningful control over where your inventory ends up. Amazon’s algorithms decide. Your stock may sit in a fulfilment centre in Pennsylvania, Texas, Kansas, or Washington — states you have never consciously chosen to operate in.

The physical presence of your inventory in a state is physical nexus in that state for most states’ purposes. This is not a new concept — goods stored in a warehouse have always created nexus under traditional physical presence rules. What is new — and what many sellers failed to appreciate when they first enrolled in FBA — is the scale and geographic breadth of the nexus exposure. Amazon’s fulfilment network spans dozens of fulfilment centres across the country. Depending on your product category and sales volume, your inventory may be stored in anywhere from three or four states to fifteen or more at any given time.

The nexus created by FBA inventory is physical nexus — it does not depend on your sales volume in those states, and it is not governed by the Wayfair economic nexus thresholds. Even if you have sold only $5,000 worth of products into a state through Amazon, if your inventory is sitting in a fulfilment centre there, physical nexus exists.

What this means for your compliance depends on two things: (1) whether that state has marketplace facilitator laws that shift the collection obligation to Amazon for your Amazon sales, and (2) whether you have any non-Amazon sales in that state. If Amazon collects and remits for all your sales in a state under marketplace facilitator rules and you have no non-marketplace sales there, your practical compliance burden for that state may be limited — though you should verify whether the state requires registration even for marketplace-only sellers. If you have non-Amazon sales in that state, the physical nexus creates a direct obligation for those sales.

How to determine which states currently have your FBA inventory. Amazon provides several reports in Seller Central that show inventory location data. The most useful is the Inventory Event Detail report, which shows inventory transfers between fulfilment centres. The FBA Inventory Health report and the Manage FBA Inventory report show current inventory levels but may not always show the specific warehouse location. Third-party sales tax software — TaxJar, Avalara, and similar tools — can integrate directly with Amazon’s data and automatically identify the states where your FBA inventory creates nexus, which is one of the most practical uses of automation for FBA sellers specifically.

Amazon’s fulfilment network continues to expand. New fulfilment centres open periodically, and inventory may be redistributed into newly opened facilities. Monitoring your nexus position is not a one-time exercise — it requires periodic review as the network evolves and as your inventory levels change.

Economic Nexus Thresholds State by State — The Full Breakdown

Rather than reproduce a static table that will become outdated as states revise their rules, this section explains the framework and directs you to authoritative sources.

The Streamlined Sales Tax Governing Board (streamlinedsalestax.org) publishes comprehensive, regularly updated information about economic nexus rules for its member states. The SST currently includes 24 full member states and several associate member states. For non-SST states, each state’s department of revenue website publishes its economic nexus rules, typically under a “remote seller” or “economic nexus” section.

The key variables to verify for each state where you may have or approach economic nexus:

The threshold amount. Most states use $100,000 in gross sales. Notable exceptions include Texas ($500,000), California ($500,000), and any state that has revised its threshold since the initial wave of post-Wayfair legislation.

Whether a transaction count threshold applies. Many states originally included a 200-transaction threshold alongside the dollar threshold, triggering nexus when either was reached. A growing number of states have since repealed the transaction count, leaving only the dollar threshold. Verify the current rule for each relevant state.

The measurement period. Most states measure over the current or prior calendar year, or the preceding twelve months on a rolling basis. Some states have specific rules about when a threshold crossing triggers the obligation — immediately, at the start of the following month, or at the start of the following quarter.

What sales count toward the threshold. Some states count all gross sales, including sales through marketplace facilitators. Others exclude marketplace-facilitated sales from the seller’s threshold calculation, on the basis that the marketplace facilitator is the responsible party for those transactions.

When the obligation begins. Nexus typically begins when the threshold is crossed, not at the start of the following year. Sellers should be prepared to register and begin collecting promptly once a threshold is crossed, not wait until the end of the year.

For sellers who want a current, comprehensive, and state-specific analysis of their economic nexus exposure, this is one of the areas where professional support or specialised software adds the most value. The rules are updated frequently enough that relying on a static resource published more than a year ago carries meaningful risk.

Product Taxability — Why Not Everything You Sell Is Taxable Everywhere

One of the most consequential — and most frequently overlooked — dimensions of sales tax compliance is product taxability. Not all products are subject to sales tax in all states. The exemptions vary enormously, and applying the wrong taxability determination to a product can mean either over-collecting (charging customers more than required, creating a competitive disadvantage and a customer service problem) or under-collecting (creating an uncollected tax liability).

Groceries and food. Most states exempt grocery items from sales tax, though the definition of “grocery” varies. Some states distinguish between food for home preparation (typically exempt or reduced rate) and prepared food (typically taxable). The line between a qualifying grocery item and a taxable prepared food can be surprisingly contested — candy and confectionery are treated differently from other food items in many states, often being taxable even when other food is not. Soft drinks are frequently treated differently from juice or water. Dietary supplements occupy a complex middle ground between food and medicine.

Clothing and apparel. Several states exempt clothing and apparel from sales tax, or exempt clothing below a certain per-item price threshold. Pennsylvania, New Jersey, Minnesota, and New York (with limitations) are examples. What constitutes “clothing” versus a taxable accessory or protective equipment differs by state. Athletic uniforms, protective gear, and specific categories of footwear may be treated differently from ordinary clothing in the same state.

Prescription and over-the-counter medicines. Prescription drugs are exempt from sales tax in virtually every state. Over-the-counter medicines are more variable — some states exempt them, others tax them. Vitamins, supplements, and health products that are not technically medicines but are marketed for health purposes occupy an especially uncertain taxability position that varies significantly by state and by product.

Digital goods and software. States have dramatically inconsistent approaches to digital products, software-as-a-service, and downloadable content. Some states tax digital goods at the same rate as physical goods. Others do not tax them at all. Others have enacted specific digital economy legislation that taxes some categories of digital goods but not others. For sellers of digital products or subscription services, taxability is often one of the most complex determinations they face.

Exemption certificates and product classification. In states where a product may be exempt, the seller typically needs to verify that the transaction qualifies for the exemption — either through the nature of the product itself or through the buyer providing an exemption certificate. We cover exemption certificates in the next section. The key point here is that product taxability is not a single universal answer. It requires a product-by-product, state-by-state analysis — and getting it wrong in either direction creates problems.

Sales Tax Exemptions — Resale Certificates, Exempt Buyers, Exempt Product Categories

Not all sales are taxable, even in states where a seller has nexus and the product is generally subject to sales tax. Sales tax exemptions fall into three broad categories: exempt products (covered above), exempt buyers, and resale transactions.

Exempt buyers. Certain types of buyers are exempt from sales tax on some or all purchases. The most common categories include:

Governments — federal, state, and local government agencies are typically exempt from sales tax on their purchases. Hospitals, schools, and other government entities often qualify.

Non-profit organisations — qualifying 501(c)(3) and similar non-profit entities are exempt in most states, though the specific exemption requirements vary and many states require the non-profit to apply for and obtain a state-issued exemption certificate.

Agricultural buyers — purchases of equipment, supplies, or materials used in agricultural production are exempt in many states.

Industrial buyers — purchases of machinery, equipment, and materials used directly in manufacturing or industrial production are exempt in many states under “manufacturing exemptions.”

To claim an exemption, the exempt buyer typically provides the seller with an exemption certificate. The seller retains the certificate as documentation that the sale was exempt. If the seller accepts a certificate in good faith and retains it properly, the seller is generally protected from liability if the certificate later turns out to be fraudulent or invalid.

Resale certificates. A resale certificate (also called a reseller permit or reseller’s exemption) is provided by a buyer who is purchasing goods for resale rather than for their own use. A retailer buying inventory from a wholesaler, for example, is not the end consumer — they will collect sales tax when they sell the goods to their own customers. To avoid double-taxation, the retailer provides a resale certificate to the wholesaler, and the wholesaler does not charge sales tax on the transaction.

For e-commerce sellers who sell wholesale — supplying other retailers with goods for resale — collecting and retaining valid resale certificates from your buyers is essential. Selling without collecting a certificate means you may be liable for the sales tax yourself if the buyer does not properly collect it on resale.

For e-commerce sellers who buy inventory for resale — which is virtually every product seller — providing your resale certificate to your suppliers allows you to purchase inventory tax-free. The tax is collected when you sell to your end customer.

Resale certificates are state-specific. A certificate issued in one state is generally not automatically valid in another state, though several states have reciprocal agreements. Multi-state sellers who buy from suppliers in multiple states need to manage resale certificates on a state-by-state basis. The Streamlined Sales Tax programme uses a uniform exemption certificate (the MTC Uniform Sales and Use Tax Exemption/Resale Certificate) that is accepted by many SST member states.

Use tax. When a seller purchases goods that would be subject to sales tax but does not pay sales tax at the point of purchase — because they provided a resale certificate, or because the seller was in a state with no sales tax, or for any other reason — and then uses those goods for their own consumption rather than reselling them, they owe “use tax.” Use tax is the counterpart to sales tax, imposed on the buyer rather than the seller, at the same rate. E-commerce sellers who purchase supplies, equipment, or other items tax-free but use them in their business rather than reselling them may owe use tax on those purchases.

How to Register for a Sales Tax Permit — State by State Process Overview

Before you can legally collect sales tax in a state, you generally need to be registered with that state’s tax authority and hold a valid sales tax permit (also called a seller’s permit, sales tax licence, or similar — the name varies by state). Collecting sales tax without a valid permit, or failing to collect when you have nexus and an obligation to collect, are both compliance failures with different consequences.

The general process for registering in a state:

Most states now allow online registration through their department of revenue website. The process typically requires: the legal name and address of your business entity, your EIN, the entity type (LLC, corporation, sole proprietor), the date you first had nexus in the state, a description of what you sell, an estimate of your expected sales volume, and bank account information for ACH remittance (in some states).

Some states charge a registration fee; many do not. Some states issue permits immediately upon online registration; others mail a physical permit after processing.

For sellers with nexus in many states — a common situation for active FBA sellers — registering individually in each state is a significant administrative undertaking. This is one area where working with a professional service or using a compliance platform that handles multi-state registration on your behalf provides real time savings. The Streamlined Sales Tax programme offers a Simplified Electronic Registration (SER) process that allows sellers to register simultaneously in all SST member states through a single application — a significant efficiency gain for sellers needing multi-state registration.

Once registered, you are committed to filing returns in that state on whatever schedule the state assigns — typically based on your expected sales volume (monthly for high-volume sellers, quarterly or annually for lower-volume sellers). You remain registered and obligated to file until you formally cancel your registration. Failing to file after registration — even if you had no sales in that state during a period — typically requires filing a “zero return” to maintain good standing. Zero returns that go unfiled generate the same late filing penalties as returns with tax due.

Collecting the Right Amount: Destination-Based vs Origin-Based Sales Tax States

Once you are registered in a state and have begun collecting sales tax, you need to be collecting the right rate. This requires understanding whether the state uses destination-based or origin-based sourcing.

Destination-based sourcing — the rule in most states — means that sales tax is calculated based on the tax rate at the delivery address: the location where the buyer receives the goods. If a customer in Chicago buys from your Shopify store and you ship to their Chicago address, you collect the applicable Illinois and Chicago rate based on the Chicago zip code. If the next customer is in suburban Cook County but outside Chicago, the rate is different. Destination-based sourcing requires that you apply the correct state and local rate for each specific delivery address — which is why sales tax rates vary across thousands of jurisdictions and why automating the rate calculation is essentially mandatory for any seller making significant volumes of sales.

Origin-based sourcing — used by a small number of states — means that sales tax is calculated based on the rate at the seller’s location, not the buyer’s location. Texas, Arizona, New Mexico, and a few others use origin-based sourcing for in-state sellers. The practical implication: if you are a Texas-based seller and you sell to a buyer in Houston from your San Antonio business location, you charge the San Antonio rate, not the Houston rate. For out-of-state sellers selling into Texas, destination-based sourcing typically applies. The interaction between origin and destination sourcing rules is an area where errors are common and where automation tools are particularly useful.

State and local rate combinations. In destination-based states, the total tax rate for a specific delivery address is typically the sum of the state rate plus all applicable local rates — county, city, transit district, and any other special taxing jurisdictions. In some areas of the country — parts of Colorado, Louisiana, and Alabama in particular — the local sales tax administration is quite complex, with locally administered taxes that require separate registration and remittance directly to local tax authorities rather than to the state.

Filing Sales Tax Returns — Frequency, Deadlines, and What Happens If You Miss Them

Once registered, you must file sales tax returns on the schedule assigned by the state. Filing frequency is typically determined by your sales volume in the state:

Monthly filing is typically required for sellers with the highest sales volumes — often those with monthly tax liability above a certain threshold, which varies by state.

Quarterly filing is the most common assignment for mid-volume sellers.

Annual filing is available in some states for sellers with very low sales volumes or minimal tax liability.

Your assigned filing frequency may be reassessed periodically as your sales volume changes. If you grow significantly, the state may move you from annual to quarterly or quarterly to monthly filing.

Filing deadlines typically fall on the 20th of the month following the end of the filing period, though this varies by state. For monthly filers in a state with a 20th-of-the-month deadline, the February return is due March 20. For quarterly filers, the first quarter return (January through March) is due April 20. Many states offer a brief discount or timely filing incentive — typically a small percentage of the tax due — as compensation for the seller’s role as unpaid collection agent.

What happens if you miss a deadline: late filing penalties and late payment interest begin accruing immediately. The specific rates vary by state but are meaningful — penalties often start at 5–10% of the tax due for the first month of delinquency and escalate for continued non-compliance. Interest on unpaid balances typically accrues at an annual rate set by the state, commonly in the range of 6–12%.

Zero returns must be filed even when you had no taxable sales in a state during the period. Failing to file a zero return generates the same late filing penalty as failing to file a return with tax due — some states impose a flat penalty regardless of the tax amount.

If you discover that you have been required to file in a state and have not been doing so, the first step is to determine your exposure — how far back your nexus existed, what your sales volume was, and what tax would have been due. The next step is to address the delinquency through either direct filing of back returns or, for more significant back periods, through a Voluntary Disclosure Agreement. We cover VDAs in detail below.

Voluntary Disclosure Agreements (VDAs) — How to Come Clean on Back Taxes Without Triggering Full Audits

A Voluntary Disclosure Agreement is a negotiated arrangement between a taxpayer and a state tax authority in which the taxpayer comes forward to disclose a previously unreported tax obligation, agrees to register and file going forward, files and pays back returns for an agreed lookback period, and in exchange receives a waiver of penalties (and sometimes a limitation on the lookback period) for the pre-disclosure liability.

VDAs are the standard mechanism for sellers who have been generating sales with nexus in a state for years without registering or filing. They allow the seller to resolve the back liability in a structured, negotiated way rather than being discovered through an audit — where penalties are not waived and the full statutory lookback period applies.

The process. VDA programmes are administered by each state independently. The general process:

The initial contact is typically made anonymously — through a tax professional acting as an agent on behalf of an unnamed client. This allows the state to confirm the terms of the disclosure before the seller is identified, which protects the seller’s ability to walk away if the terms are not acceptable.

The state responds with its standard VDA terms: the lookback period (how many years back the seller must file), the penalty waiver terms, and any specific conditions. Most states will offer to waive penalties in exchange for voluntary disclosure and timely payment of the back tax and interest. Lookback periods are typically limited — often three or four years — even if the seller’s actual nexus period extends further back.

Once terms are agreed, the seller is identified, files the back returns for the agreed period, and pays the tax and interest due. Going forward, the seller is registered and compliant.

The Multistate Tax Commission (MTC) programme. The MTC periodically runs a National Nexus Programme that allows sellers to simultaneously seek VDAs in multiple participating states through a single process. When active, this programme can significantly reduce the administrative burden of multi-state voluntary disclosure. Check the MTC’s current programme status at the time you are addressing back liabilities, as the programme is not always running and the participating states change between cycles.

When VDAs make sense. VDAs are almost always preferable to being discovered through an audit. An audit means full penalty exposure, the state’s choice of lookback period, and the cost and disruption of the audit process itself. The VDA route gives you control over timing, limits the lookback period, and eliminates penalties — in exchange for coming forward before you are found. If you have been selling with nexus in states where you have not registered, the question is not whether to address it but how. VDAs are how.

What VDAs do not cover. A VDA resolves back sales tax liability for the period covered by the agreement. It does not address income tax nexus, use tax obligations, or any other tax type. And it does not prevent future audits — though a seller who comes forward voluntarily, registers, and has been filing correctly since the disclosure is a far less attractive audit target than an unregistered seller.

Sales Tax Automation Tools: TaxJar, Avalara, and When Each Makes Sense

Manual sales tax compliance — calculating rates for every delivery address, filing returns in every registered state, managing exemption certificates by hand — is not feasible for any seller operating at meaningful volume. Automation is effectively mandatory, and the market has produced several strong tools designed specifically for e-commerce.

TaxJar is the most widely used sales tax automation platform among small and mid-sized e-commerce sellers. It integrates natively with Amazon Seller Central, Shopify, Etsy, WooCommerce, and most other major e-commerce platforms. For each transaction, TaxJar automatically calculates the applicable state and local sales tax rate based on the delivery address, records the transaction, and tracks your accumulated sales toward each state’s economic nexus threshold.

TaxJar’s AutoFile feature — available in most states — automatically files your sales tax returns and submits payment on your behalf, eliminating the need to manually log into each state’s tax portal each filing period. For sellers registered in many states, this alone saves significant time.

TaxJar’s pricing is volume-based, typically starting around $19–$99 per month depending on order volume and features needed. It is generally the most cost-effective option for sellers whose primary compliance need is automated filing across a manageable number of states.

TaxJar is not an accounting system and does not replace your bookkeeper or accountant. It does one thing — sales tax compliance — and does it well. The limitation is that it relies on the transaction data fed into it being accurate and complete. If your platform integrations are not capturing all relevant transactions, or if you have non-platform sales that are not being entered, TaxJar will not know about them.

Avalara is the enterprise-grade sales tax automation platform, used by larger businesses, mid-market companies, and organisations with complex product taxability requirements. Avalara’s AvaTax engine handles rate calculation with a more granular taxability determination capability than TaxJar — important for sellers with complex product mixes, product-level exemptions, or industry-specific taxability rules.

Avalara also handles returns filing (through Avalara Returns) and offers compliance services for international taxes including VAT, GST, and customs duties — making it a more comprehensive platform for sellers operating in multiple countries. The trade-off is cost: Avalara is meaningfully more expensive than TaxJar, with pricing that scales with transaction volume and can reach thousands of dollars per month for high-volume sellers. Implementation also requires more setup than TaxJar.

Avalara makes sense for sellers whose sales volume or product complexity has outgrown TaxJar, who need international tax compliance alongside US compliance, or who are operating at a scale where the cost differential is justified by the additional capability.

Taxify (now part of Sovos) and other platforms serve similar needs and are worth evaluating depending on your specific platform integrations and compliance requirements. The market for sales tax automation has consolidated and evolved significantly since Wayfair, and the relative strengths of different platforms continue to change.

What automation tools cannot do. Automation tools handle rate calculation and return filing. They do not determine whether you have nexus in a state — that is a legal analysis that requires understanding your business activities, inventory locations, and sales volumes in the context of each state’s specific rules. They do not handle voluntary disclosure or back tax remediation. They do not manage exemption certificates (though Avalara has a separate certificate management module). They do not advise you on entity structure, the S-Corp election, income tax nexus, or any of the other compliance dimensions covered in this guide. Automation handles the mechanics of the obligation once the obligation is understood. It does not replace the understanding.

The Total Cost of Compliance — Software, Professional Support, and Filing Fees at Different Revenue Levels

Sales tax compliance has a real cost, and understanding that cost at different revenue levels helps you plan and budget appropriately.

Early stage (under $100,000 in annual revenue, primarily marketplace sales). At this stage, marketplace facilitator laws are likely covering the substantial majority of your sales. Your practical out-of-pocket compliance cost may be minimal — primarily the time cost of understanding your nexus position and confirming that your non-marketplace sales (if any) are properly handled. A basic TaxJar subscription for nexus monitoring costs a modest monthly fee. Professional support at this stage is more about education and setup than ongoing filing management.

Growing stage ($100,000–$500,000 in annual revenue). At this revenue level, economic nexus thresholds are being crossed in multiple states, especially if you have any meaningful non-marketplace sales. You are likely registered in several states. TaxJar or a similar platform is handling automated filing in registered states. Professional accountant involvement is valuable for nexus analysis, registration decisions, and annual review of your compliance footprint. Estimated annual cost of compliance at this stage: $1,500–$5,000 including software and professional fees.

Established stage ($500,000–$2,000,000 in annual revenue). Multi-state registration is now a significant part of your compliance picture. You may be registered in fifteen or more states. A more robust automation platform may be warranted. Professional support for annual nexus reviews, exemption certificate management, and response to state inquiries becomes more important. Income tax nexus in multiple states adds another compliance layer. Estimated annual cost of compliance: $5,000–$15,000 including software, filing fees, and professional support.

Scale stage ($2,000,000 and above). At this revenue level, sales tax compliance is a material business function requiring dedicated attention. Avalara or an equivalent enterprise platform is typically appropriate. Professional advisory support — ideally from a firm with deep e-commerce and multi-state tax expertise — is essential. The risk of compliance failures at this revenue level — both in terms of potential back liability and the impact on financing and exit transactions — justifies meaningful investment in getting it right. Estimated annual cost of compliance: $15,000–$50,000 or more, depending on complexity.

These are estimates that vary significantly based on your specific platform mix, product taxability, state footprint, and the rates charged by your professional advisors. They are intended to give you a realistic order of magnitude, not a precise budget.

The Most Common Sales Tax Mistakes E-Commerce Sellers Make and the Penalties That Follow

Understanding the mistakes others have made is one of the most efficient ways to avoid making them yourself.

Assuming Amazon’s collection covers everything. Covered in depth above. The most common and most expensive misconception in e-commerce sales tax. Sellers who assume marketplace facilitator collection eliminates their compliance obligation routinely discover years of liability on their non-marketplace sales — Shopify stores, wholesale channels, direct invoicing — that they never addressed.

Not tracking economic nexus thresholds. A seller who hits $100,000 in sales into a new state in September and does not realise it has crossed the threshold until the following spring has generated seven months of uncollected tax. Monitoring your accumulated sales toward each state’s threshold — which TaxJar and Avalara do automatically — is a basic compliance practice that prevents these exposures from building.

Ignoring physical nexus from FBA inventory. Sellers who have never checked which states their FBA inventory is sitting in are operating without visibility into their own nexus position. Running the Inventory Event Detail report from Seller Central, or connecting a sales tax automation tool that automatically identifies FBA nexus states, should be standard practice for every FBA seller.

Registering but not filing. Some sellers register in a state — either because a platform required it or because they knew they should — and then never configure their automation tool to file in that state, or file manually but stop. A registered seller who stops filing is in some ways in a worse position than one who was never registered: the state knows you exist, knows you are registered, and can identify the delinquency immediately.

Collecting but not remitting. Collecting sales tax from customers and then spending the money — treating the collected tax as business revenue — is one of the most serious compliance failures a seller can make. Sales tax collected from customers is held in trust for the state. It is not your money. Using it for business expenses, payroll, or any other purpose and then failing to remit it to the state exposes the seller to fraud allegations and personal liability that can pierce the corporate veil of any entity structure. In most states, responsible officers and owners can be held personally liable for collected-but-unremitted sales tax regardless of the entity’s liability protection. This is not a technical risk — it is a criminal one in egregious cases.

Applying the wrong rate. Over-collecting (charging customers too much) creates a customer service problem and may generate refund obligations. Under-collecting (charging customers too little) creates a shortfall that the seller owes to the state out of their own funds. Both errors are avoided by using automation tools that apply destination-based rates accurately for each delivery address.

Not maintaining exemption certificates. A seller who accepts resale or exemption certificates from buyers but does not retain them properly — or accepts them in states where they are not valid — is exposed to liability for the tax on those transactions if audited. Certificate management requires a systematic approach.

Missing the VDA window. Sellers who are aware of back liabilities but delay addressing them — because they are busy, because they hope the issue will resolve itself, or because they are waiting until they have more cash — allow interest to accrue and reduce the window for favourable negotiated resolution. The longer a delinquency sits, the more expensive it becomes and the more likely it is to be discovered through an audit rather than resolved through voluntary disclosure.

A Note on Keeping Current

Sales tax law is among the most dynamic areas of US tax. Economic nexus thresholds change. States revise their marketplace facilitator laws. Product taxability determinations are updated by regulation or court ruling. New platforms are brought under or excluded from facilitator status. Rate changes at the local level happen continuously.

No guide — including this one — is a substitute for staying current. The practical tools for doing so: a sales tax automation platform that updates its rate and rule engine in real time, a professional advisor who specialises in e-commerce sales tax and tracks legislative changes, and an annual review of your compliance footprint as your business grows and diversifies.

Sales tax is genuinely manageable. Thousands of e-commerce sellers navigate it successfully with the right systems and the right support. The sellers who find themselves in the most serious difficulty are almost always the ones who assumed it was simpler than it is, or who put off addressing it until addressing it became expensive. The sellers who get it right are the ones who understand the landscape — which is what this section has aimed to give you — and build their compliance infrastructure before the obligations outgrow it.

Part 4: Income Tax for E-Commerce Sellers — continues next.