How to Comply with E-Commerce Sales Tax

You’re running an online store, your very own eCommerce operation as a remote seller in all fifty states of the USA. How exciting!

But eCommerce sales tax rules, not so much. We know sales tax can really kill your buzz. This post will explain the various US rules for e-commerce sales tax. We promise you’ll leave with a better understanding of where your business is liable for taxes and what to do about it.

What is e-commerce sales tax?

E-commerce sales tax is a tax that online sellers are required to collect on sales made to customers, typically based on the buyer’s location. Just like traditional retail, when you sell products or services online, you may need to charge sales tax — even if your business has no physical presence in the buyer’s state or country.

The rules vary depending on where your customers are, not just where you are. Thanks to evolving tax laws like economic nexus in the US or VAT rules in the EU, many online businesses must register, collect, and remit taxes in multiple regions.

Importance of e-commerce sales tax

E-commerce sales tax compliance isn’t just a box to tick, it’s a crucial part of running a trustworthy, legally sound online business. As governments tighten regulations around digital sales, failing to collect and remit the correct sales tax can lead to serious consequences, including audits, penalties, and back taxes that add up fast.

Beyond avoiding legal trouble, compliance also builds credibility with your customers. Displaying the right taxes at checkout shows transparency and professionalism, reinforcing that your business is legitimate and customer-focused.

Check out our in-depth guide if you want to dive deeper into cross-border ecommerce.

Step-by-step compliance with e-commerce sales tax

Sales tax compliance might sound overwhelming, but breaking it into simple steps can make the process far more manageable. Here’s a practical roadmap for e-commerce businesses:

1. Determine where you have sales tax nexus and how it works

Your eCommerce business must charge sales tax when you have nexus in a state.

What is a Sales Tax Nexus?

“Nexus” refers to a commercial connection in that state. The term essentially answers the question, “Are you doing business here?”

States have different ways of judging whether you’re “doing business” in their borders, which is to say, they have different ways of defining nexus. It could be your physical presence in a state, or your amount of transactions there, or it could even extend to your marketing practices.

Here are the most common forms of sales tax nexus that affect eCommerce businesses:

• Physical Presence Nexus – Having an office, warehouse, or employee in a state.
• Economic Nexus – Crossing a state’s threshold for sales or number of transactions.
• Click-Through Nexus – Gaining sales through affiliate links on in-state websites.
• Affiliate Nexus – Working with in-state affiliates or partners who promote your products.
• Cookie/Software Nexus – Installing cookies or tracking software on devices in a state.

Want to learn more? Check out our complete guide to sales tax nexus for a detailed breakdown of each type.

2. Register for a sales tax permit

Apply with the State Department of Revenue. You must have a valid sales tax permit before you can legally collect sales tax. The tax permit is the very first step, and it’s serious, too! If you begin collecting sales tax without the permit, some states may consider this tax fraud.The good thing is that many states allow you to register online. Usually you’ll either receive your sales tax permit number instantly, or within 10 business days. If you register via snail mail, it may take 2-4 weeks to receive your sales tax permit.

Here’s some standard information you’ll need when registering for a sales tax permit:

• Your personal contact info
• Your business contact info
• Social security number (SSN) or Federal Employer Identification Number (FEIN)
  • — also known as Employer Identification Number (EIN)
• Business entity (sole-proprietor, LLC, S-Corp, etc.)
• Your NAICS Code (The NAICS code for online stores is 454110)

Note: You can register in all 24 SSUTA streamlined states at once, with one registration process. Sounds great, but this may come with some extra tax liabilities. You’d likely end up liable for tax in some states even though you don’t have nexus there, simply because you’ve registered. Learn more on the SSUTA tax registration page.

3. Know your sales tax exemptions

Not all goods and services are taxable, and exemptions vary by state. For example, digital products, groceries, or B2B transactions might be exempt in some places. Make sure you’re charging sales tax only when required.

4. Calculate and collect sales tax

To stay compliant, you’ll need to charge sales tax on every taxable transaction in the state and set aside that amount. Here’s how to do it:

• Set up your shopping carts and online checkouts to collect sales tax.
• Configure them for “origin-based” or “destination-based” tax rates, according to state laws.
• And make sure you have the right tax rates.

Note: There could be more levels than just a statewide sales tax! There’s state, county, city and other local sales tax rates.

Ready to tackle your sales tax? Check out our step-by-step guide on How to Prepare a Sales Tax Return.

5. File and remit sales tax

All the sales tax you collect must be passed along to the appropriate state agency. Here's how to stay on track:

• Make sure to file your return on a regular schedule, typically monthly, quarterly, or annually, depending on the state.
• Report your sales tax by location. States often want to see a breakdown by county, city, and locality, not just a single statewide total.

Note: File “zero reports” if you didn’t collect anything in a certain jurisdiction where you’re registered with a tax permit. Yes, you still have to file. This is an obligatory check-in!

Ready to file? Follow our full step-by-step guide on How to File a Sales Tax Return.

6. Create a visible schedule for sales tax returns

Stay organized by setting up a calendar with key tax filing deadlines for each state. Missing a due date can lead to fines, even if no tax is owed — so don’t leave it to memory.

7. Consider automating sales tax calculations and payments

Sales tax compliance can be complex, especially across multiple states. Consider using a tool like Quaderno to automate tax calculation, filing, and reporting. This way, you’re alerted when you’re approaching a threshold. You’re also notified whenever tax policies change in any state, region, or country where you’re collecting sales tax.

Want to test it out for yourself? Sign up for a free trial with Quaderno and let our tools do the heavy lifting.