How do I set up collecting sales tax? The moment you realize you’re legally required to collect, this question shifts from theoretical to urgent. Getting it wrong means audits, back taxes, and penalties. Getting it right protects your business and keeps customers happy.
The process involves determining where you have nexus, registering with state tax authorities, configuring systems to calculate correct rates, and establishing filing procedures. Each state operates differently, with unique thresholds and compliance rules across 45+ jurisdictions.
Hands Off Sales Tax (HOST) removes the guesswork entirely. From nexus analysis to registration, automated filings, and software configuration, we handle the operational complexity so you can focus on growth. Understanding the setup process helps you appreciate what’s involved—and why professional support delivers peace of mind.
What Is Sales Tax Nexus and Why Does It Matter?
Before setting up your collection, determine where you’re legally required to collect. Nexus is the connection between your business and a state that creates tax obligations.
Physical nexus occurs when you have tangible presence: office, warehouse, employees, inventory in fulfillment centers. Amazon FBA inventory sitting in Texas warehouses? You have Texas nexus. Even temporary presence (like attending trade shows) can create nexus if you exceed state thresholds (typically 15 days or $100,000 in revenue from events).
Economic nexus triggers when sales volume exceeds state-specific thresholds, even without physical presence. The 2018 South Dakota v. Wayfair Supreme Court decision authorized states to require collection based purely on sales activity.
Most states set economic nexus at $100,000 in annual sales or 200 transactions. However, thresholds vary. California and Texas both require $500,000 in sales with no transaction threshold. Some states measure by calendar year, others by trailing twelve months.
Why nexus matters: Collecting sales tax without proper nexus wastes time and money. Not collecting when nexus exists exposes you to audits, back taxes, penalties, and interest. States have grown increasingly aggressive pursuing revenue from remote sellers post-Wayfair.
HOST’s comprehensive nexus analysis service evaluates your sales data across all states, identifying exactly where obligations exist and when you crossed thresholds.
Step 1: Determine Where You Have Nexus
Audit your business footprint systematically:
Review physical presence: List all locations where you have offices, warehouses, employees, contractors, or inventory. Include third-party fulfillment centers.
Analyze sales data: Pull reports showing total sales and transaction counts by state for the past 12-24 months. Compare against each state’s economic nexus thresholds.
Check marketplace sales: Amazon, eBay, Etsy, and Walmart Marketplace collect sales tax on your behalf under marketplace facilitator laws. However, you may still have obligations for sales through your own website.
Track inventory movement: FBA or third-party logistics can move inventory between states without your knowledge. Amazon’s Inventory Event Detail report shows where inventory has been stored.
This analysis reveals your nexus landscape. Most growing e-commerce businesses find obligations in 5-15 states initially, expanding as sales grow.
Step 2: Register for Sales Tax Permits in Each State
Once you’ve identified nexus states, register before collecting. Each state requires a separate permit with varying requirements.
Gather required information:
- Federal EIN
- Business legal name and DBA names
- Business structure (LLC, Corporation, Sole Proprietor)
- NAICS code
- Ownership information (names, addresses, SSNs)
- Expected monthly sales volume by state
- Start date of nexus
Navigate state-specific processes: Some states offer online registration. Others require paper applications mailed in. Processing times range from immediate to 4-6 weeks.
Meet registration deadlines: States impose different timelines after you exceed thresholds. Texas requires registration by the first day of the fourth month after exceeding $500,000. Some states demand immediate registration. Missing these deadlines triggers retroactive liability.
Understand filing frequencies: During registration, states assign filing frequencies: monthly, quarterly, or annually. Higher-volume sellers typically file monthly.
Maintain compliance calendars: Each state has different due dates. California requires filing by the last day of the month following the reporting period. Texas uses the 20th. Missing deadlines triggers penalties immediately.
The complexity multiplies quickly. Registering in ten states means ten different applications, ten sets of requirements, ten filing schedules. One missed deadline creates penalties that compound monthly.
HOST’s registration service handles all paperwork, follow-up, and state communications across every jurisdiction. We ensure you’re properly licensed before you collect your first dollar.
Step 3: Configure Your E-Commerce Platform or POS System
With registrations complete, configure sales systems to calculate and collect correct sales tax at checkout.
Choose your approach:
Most modern e-commerce platforms include basic sales tax functionality. Shopify Tax, WooCommerce Tax, and BigCommerce automate calculations based on customer location.
For complex operations or high-volume businesses, dedicated solutions like TaxJar or Avalara offer advanced features: product taxability rules, exemption certificate management, and automatic rate updates.
Configure tax settings correctly:
Enable tax collection in nexus states only: Collecting where you lack nexus creates unnecessary complications.
Set up correct tax rates: Sales tax isn’t just state rates. Counties, cities, and special districts add percentages. Over 13,000 tax jurisdictions exist in the U.S. Address-level validation ensures accuracy.
Understand sourcing rules: Most states use destination-based sourcing: tax is based on where your customer receives the product. However, some states like California use origin-based sourcing for in-state sellers, meaning you charge your location’s rate. Remote sellers typically use destination-based everywhere. If you’re using Shopify, configure this in Settings > Taxes and duties > United States.
Apply product-specific rules: Clothing is exempt in some states but taxable in others. Pennsylvania exempts clothing entirely; New York exempts items under $110. SaaS is taxable in 25+ states but exempt in California. Digital downloads vary wildly, being taxable in Washington, exempt in others. Food, prescription drugs, and manufacturing equipment often receive special treatment.
Handle wholesale and B2B sales: If you sell to resellers or tax-exempt organizations, you must collect and store valid exemption certificates or resale certificates. These documents allow buyers to purchase tax-free because they’ll resell items or qualify for exemptions. Without proper certificates on file, you’re liable for uncollected tax during audits. Certificates must be valid for the state where the sale occurs.
Handle shipping correctly: Some states tax shipping charges, others don’t. Rules vary based on whether shipping is mandatory or optional, separately stated or included in price.
Common configuration mistakes:
- Overtaxing exempt items
- Missing required local taxes
- Double-taxing due to platform and third-party software overlap
- Incorrectly handling wholesale transactions
- Failing to update rates when jurisdictions change
One misconfiguration compounds across thousands of transactions. Overcharging damages relationships and creates refund headaches. Undercharging leaves you liable for the difference.
HOST offers a free sales tax software review to audit your configuration and identify costly errors before they impact your bottom line.
Step 4: Test Your Collection Setup
Before going live, thoroughly test your configuration:
Create test orders: Place orders from addresses in different states, counties, and cities within your nexus jurisdictions. Verify correct combined rates apply.
Test exempt scenarios: If you sell to wholesale customers or tax-exempt organizations, verify that exemption certificates properly suppress tax collection.
Check edge cases: Test orders with shipping to different states, mixed taxable and exempt items, and transactions with discounts.
Verify reporting: Ensure your system generates reports showing collected tax broken down by jurisdiction.
Review customer experience: Confirm that tax displays clearly during checkout, avoiding surprise increases that trigger cart abandonment.
Testing prevents costly mistakes from compounding across your entire customer base.
Step 5: Establish Filing and Remittance Procedures
Collecting sales tax creates an ongoing obligation: filing returns and remitting collected tax to states on schedule.
Understand filing requirements: Each state has different forms, filing portals, and procedures. Due dates vary by state and by your assigned frequency.
Track what you’ve collected: Maintain accurate records of sales tax collected by jurisdiction.
File returns on time: Late filing triggers penalties immediately, typically 5-10% of tax due, plus interest. Many states require “zero returns” even if you owe nothing.
Remit collected funds: Sales tax isn’t your money, it’s held in trust for states. Failing to remit collected tax constitutes serious violations.
If you have nexus in 10 states, you’re potentially filing 30-40 returns annually (monthly filers), each with different requirements and due dates. This administrative burden drains 30+ hours monthly for most businesses, which is time that generates zero revenue.
The Hidden Complexity Most Businesses Discover Too Late
Local jurisdictions operate independently: Colorado requires marketplace facilitators to file with the state but businesses to file directly with home-rule cities. Louisiana has unique parish rules. Alaska has no state sales tax but over 100 local jurisdictions with individual requirements.
Rules change constantly: States adjust rates, nexus thresholds, and filing requirements regularly. Sales tax holidays (with temporary exemptions for back-to-school shopping or disaster preparedness) add seasonal complexity. Staying current requires constant monitoring.
Audits happen: State tax authorities conduct routine audits, especially targeting online sellers post-Wayfair. Audits examine 3-5 years of transactions.
Voluntary disclosure agreements limit exposure: If you discover past obligations, proactively filing a VDA with affected states limits lookback periods and often abates penalties.
HOST: Your Partner for Complete Sales Tax Setup
Setting up sales tax collection correctly requires expertise across 45+ state tax codes, registration procedures, software configuration, and ongoing compliance. The cost of mistakes far exceeds the investment in doing it right.
What HOST delivers:
Nexus Analysis: We analyze your complete sales footprint, identifying exactly where you have obligations.
Sales Tax Registration: We handle all applications, paperwork, and state communications across every jurisdiction.
Software Configuration and Review: We set up or audit your tax settings to calculate correctly and avoid costly errors.
Comprehensive Filing Services: We file all your returns. Monthly, quarterly, annually, including local and special district returns.
Notice Management: We interpret and respond to confusing state notices, resolving issues before they escalate.
Audit Defense: We’re your trusted partner in resolving audits, organizing documentation and defending your position.
VDA Support: We file voluntary disclosure agreements to limit lookback periods and abate penalties.
We’ve been 100% focused on sales tax since 1999. Over 25 years helping businesses navigate compliance. Founded by Mike Espenshade, with parent company TaxMatrix serving North America’s largest companies, we bring enterprise expertise to e-commerce sellers of all sizes.
Ready to Set Up Sales Tax Collection the Right Way?
You handle the sales, we handle the tax. Every hour spent researching registration requirements, configuring software, or filing returns is an hour not spent growing your business. Professional support eliminates guesswork and prevents costly mistakes.
Whether you’re just crossing your first nexus threshold or managing obligations across dozens of states, the right partner makes compliance seamless. At HOST, we combine deep technical expertise with transparent communication and personalized support.
When you’re ready to set up sales tax collection correctly, or fix existing issues before they become audit problems, we’re ready to help. Contact HOST today to discuss your specific needs or schedule a free consultation.
Want to avoid common pitfalls? Get our “10 Sales Tax Mistakes E-Commerce Sellers Make” e-book.
Frequently Asked Questions
How long does it take to set up a sales tax collection?
Registration processing varies by state, from immediate to 4-6 weeks. Software configuration takes 1-3 days depending on complexity. The entire process typically spans 2-6 weeks if handled efficiently. Begin collecting as soon as registration is approved.
Can I start collecting sales tax before I’m registered?
No. You must be registered in a state before collecting tax there. However, obligations begin accumulating the moment you trigger nexus. Prompt registration is crucial because delays create past liability exposure.
What happens if I charge the wrong sales tax rate?
Overcharging means you owe refunds to customers. Undercharging means you’re liable for the difference, and states expect the correct amount regardless of what you collected. Accurate configuration prevents these costly errors.
Do I need separate registrations for my website and marketplaces like Amazon?
Marketplace facilitator laws require platforms like Amazon to collect sales tax on your behalf for marketplace sales. However, you still need separate registrations for sales through your own website or non-marketplace platforms.
How much does sales tax software cost?
Basic platform features (Shopify Tax) are often included. Dedicated solutions like TaxJar start around $19-99/month for lower volumes, scaling to $200-500+/month for high-volume or complex businesses.
Can I handle sales tax setup myself or do I need professional help?
Simple scenarios (one or two states, straightforward products) can be DIY’d. However, multi-state operations, complex product mixes, or high volumes benefit significantly from professional support. The cost of mistakes typically exceeds professional service fees, and time savings let you focus on revenue-generating activities.
