Do I need to collect sales tax for selling online? If you’re running an e-commerce business in 2025, the answer is almost certainly yes, but where and when depends on economic nexus thresholds you’ve crossed in each state.
Before 2018, online sellers only collected sales tax where they had warehouses, offices, or employees. South Dakota v. Wayfair changed everything. Now, hit $100,000 in sales or 200 transactions in a state, and you’ve triggered collection obligations, even if you’ve never been there.
That’s where Hands Off Sales Tax (HOST) comes in. We handle nexus analysis, registrations, and filings across every jurisdiction so you stay compliant without losing focus on growth.
The Short Answer
Yes, you likely need to collect sales tax when selling online, but not everywhere. You must collect in:
- Your home state (where your business operates)
- Any state with physical presence (inventory, employees, offices)
- Any state exceeding economic nexus ($100,000 in sales or 200 transactions in most states)
The complexity comes from tracking which states you’ve triggered obligations in, what products are taxable, and staying current with constantly changing rules.
What Sales Tax Means for Online Sellers
Sales tax is a consumption tax that state and local governments impose on retail transactions. When you sell online, you collect a percentage of the purchase price and remit it to the appropriate tax authority.
Currently, 45 states and Washington D.C. impose sales tax. Delaware, Montana, New Hampshire, Oregon, and Alaska have no statewide sales tax (though Alaska allows local jurisdictions their own).
For online sellers, sales tax operates on destination-based sourcing in most states. You charge the rate where your customer lives. A customer in Los Angeles pays 9.5%, while someone in rural Montana pays nothing.
With over 13,000 tax jurisdictions nationwide, each with unique rates combining state, county, city, and special district taxes, manual calculation is impossible.
The Wayfair Decision: How Everything Changed
Before June 21, 2018, online retailers had a competitive advantage. The Quill Corp. v. North Dakota decision (1992) established that businesses needed physical presence before states could require sales tax collection.
Most e-commerce sellers only collected tax in their home state. No California warehouse? No obligation there, even with millions in California sales.
What Wayfair Changed
South Dakota v. Wayfair, Inc. overturned Quill, ruling that physical presence was no longer required. States could now impose collection obligations based on economic activity whether it is sales volume or transaction count within their borders.
The Supreme Court’s reasoning focused on fairness. Brick-and-mortar retailers collecting sales tax competed against online sellers who didn’t, creating a 5-10% price advantage unrelated to efficiency or service.
Within months, nearly every state with sales tax enacted economic nexus laws. E-commerce businesses that previously collected tax in one state suddenly faced obligations in 20, 30, or 45+ states.
The compliance burden multiplied. Each state has unique thresholds, registration requirements, filing frequencies, exemption rules, and audit procedures.
For rapidly growing businesses, crossing new thresholds happens constantly. You might hit Colorado’s threshold in March, Texas in April, Pennsylvania in May, each triggering separate obligations.
Understanding Economic Nexus: When You Must Collect
Economic nexus means sufficient economic presence in a state triggers sales tax obligations, regardless of physical presence. States measure this through sales thresholds.
Standard Economic Nexus Thresholds
Most states use similar thresholds:
- $100,000 in gross sales to customers in the state during the current or previous calendar year, OR
- 200 separate transactions to customers in the state during the same period
These are “or” conditions, meeting either or triggers nexus. California and Texas use $500,000 sales thresholds without transaction counts. New York uses $500,000 in sales AND 100 transactions.
States measure differently. Most count total gross sales when determining thresholds, regardless of taxability. Some look at the current calendar year, others the previous 12 months, some either period.
Once you exceed thresholds, collection typically starts the first day of the next month or when you first exceed the threshold, depending on state law.
Physical Nexus Still Matters
Economic nexus didn’t eliminate physical nexus rules. Having inventory, employees, offices, or even temporary presence (trade shows lasting multiple days) creates a physical nexus, requiring collection regardless of sales volume.
Many e-commerce sellers using Fulfillment by Amazon (FBA) have physical nexus in multiple states where Amazon stores their inventory, often without realizing it. Amazon’s fulfillment network spans dozens of states, and your products may be distributed to various warehouses based on logistics algorithms.
Do You Need to Collect? A Step-by-Step Analysis
Step 1: Identify Where Your Customers Are
Pull sales reports showing customer shipping addresses by state. Most e-commerce platforms provide geographic sales breakdowns. You need total sales and transaction counts for each state during the current year-to-date and the previous 12 months.
Step 2: Compare Against Thresholds
Cross-reference your sales against each state’s economic nexus threshold. Remember thresholds vary. Most states at $100,000 or 200 transactions, California and Texas at $500,000, New York at $500,000 AND 100 transactions.
Step 3: Assess Physical Nexus
Determine if you have a physical presence creating a nexus independent of sales: inventory in warehouses (including FBA), remote employees, offices or facilities, third-party fulfillment partners storing your products, or trade show attendance.
Step 4: Understand Product Taxability
Product taxability varies dramatically by state. What you sell determines whether you even need to collect tax on certain transactions.
Common Exemptions by Product:
- Groceries: Exempt in 32 states
- Prescription medications: Exempt in most states
- Clothing: Exempt in some states, or only items under certain dollar amounts
- Digital products: Taxable in approximately 25 states (SaaS, ebooks, streaming)
California treats most cloud-based access as exempt, but bundled with hardware or certain services, taxability changes. Understanding product-specific rules across all nexus states requires ongoing monitoring.
Step 5: Register Where You Have Nexus
Once you’ve identified nexus states, register for sales tax permits before collecting. Each state has unique registration processes, paperwork, and timelines.
Critical: Never collect sales tax before registering for a permit. Why? It’s illegal in most states. Equally problematic: having nexus, not registering, and not collecting creates back-tax liability plus penalties.
When Do I Start Collecting?
You should begin collecting sales tax on your first sale in your home state. For other states, you start collecting once you:
- Meet economic nexus thresholds
- Register for a sales tax permit in that state
- Configure your software for collection
Timing matters. Once you exceed a state’s threshold, collection typically starts the first day of the next month. Some states allow a grace period for registration, but most don’t.
This is where HOST’s Sales Tax Registration service eliminates headaches. We handle registrations in all required states, managing paperwork and communications so you focus on growth.
The Consequences of Not Collecting
Back Taxes and Penalties
States have lookback periods. Typically 3-4 years, sometimes longer. To assess unpaid sales tax. If you had nexus but didn’t collect, you’re liable for the tax you should have collected, plus penalties and interest.
Sales tax is a trust tax. When you should have collected but didn’t, states view you as responsible for remitting the amount regardless of whether you actually collected it. You’re essentially paying tax out of pocket on past sales.
Technically, customers owe “use tax” on untaxed purchases.but consumer compliance rates are notoriously low (under 5%). This is why states aggressively pursue sellers rather than individual buyers.
Audits and Enforcement
State revenue departments have become increasingly aggressive pursuing online sellers. They use sophisticated data analysis, monitor marketplace sales, and cross-reference shipping data to identify businesses with uncollected obligations.
Penalties for non-compliance range from 5-25% of unpaid tax, with interest accruing monthly. Combined, these quickly turn manageable amounts into business-threatening assessments.
Voluntary Disclosure Agreements
If you discover past nexus obligations, Voluntary Disclosure Agreements (VDAs) offer a path to compliance with reduced penalties. States typically limit lookback periods to 3-4 years and often waive penalties if you voluntarily come forward.
HOST facilitates VDAs with states, negotiating to minimize liability and create manageable payment structures.
How to Start Collecting: Practical Steps
Choose Sales Tax Automation Software
Manual calculation across 13,000+ jurisdictions isn’t feasible. Most businesses use automation tools like TaxJar, Avalara, or TaxCloud that connect to your store, calculate correct rates at checkout, and track taxable sales by jurisdiction.
However, software alone isn’t enough. Configuration still matters. Common mistakes include treating non-taxable items as taxable, double-taxing due to system overlap, or incorrectly handling wholesale transactions. HOST offers a Free Sales Tax Software Review to audit your configuration and identify costly issues.
Configure Your Platform and Begin Collecting
Integrate software with your shopping cart. Install plugins, map products to correct tax categories, set up nexus states where you’ll collect, configure exemption certificate handling, and test checkout thoroughly.
After registration and configuration, start collecting from customers in nexus states. Display tax separately on invoices and receipts so customers understand what they’re paying.
File Returns and Remit Tax
Collection is only half. You must file returns and remit collected tax based on assigned filing frequencies. Monthly by the 20th of the following month, quarterly by the 20th of the month following quarter-end, or annually by January 20th.
States assign filing frequency based on expected tax liability. Missing deadlines triggers penalties, even if you owe zero tax. Each state has unique filing portals, forms, and local breakdown requirements.
Managing this across dozens of states consumes 30+ hours monthly, which is time generating zero revenue. HOST’s filing services eliminate this burden, preparing and filing returns across all jurisdictions so you remain compliant without diverting focus.
Special Considerations
Marketplace Facilitator Laws
If you sell through Amazon, eBay, Etsy, or Walmart Marketplace, marketplace facilitator laws impact your obligations. These laws require the platform (not individual sellers) to collect and remit sales tax.
All 45 states with sales tax have enacted marketplace facilitator laws. Amazon handles collections for sales through their platform, removing this burden for those transactions.
However, this doesn’t eliminate your obligations. Sales through your own website, wholesale channels, or platforms without facilitator laws still require you to collect and remit.
Drop Shipping and Third-Party Fulfillment
Drop shipping creates nexus complexity. If you sell to a Georgia customer but your drop shipper fulfills from a Georgia warehouse, you likely have physical nexus there.
Third-party logistics providers (3PLs) storing and fulfilling your products create a physical nexus in their warehouse locations. Unlike marketplace facilitators, 3PLs don’t handle tax collection—that responsibility remains yours.
HOST: Your Partner for Sales Tax Compliance
For over 25 years, Hands Off Sales Tax has focused exclusively on sales tax services, helping businesses navigate complexity so they can focus on growth rather than compliance.
Nexus Analysis: We analyze your sales data and footprint to determine precisely where you’ve met economic or physical nexus thresholds.
Sales Tax Registration: We handle registrations with every applicable state, completing paperwork and navigating each state’s unique requirements.
Automated Filing: We prepare and file your returns across all jurisdictions: monthly, quarterly, annually, including local and special district returns.
Software Optimization: We review and optimize your TaxJar, Avalara, or other automation tools to ensure correct calculation.
Audit Defense: We’re your trusted partner in resolving your sales tax audit, organizing documentation and defending your position.
Voluntary Disclosure Agreements: If you discover past obligations, we file VDAs with states to limit lookback periods and abate penalties.
Through our parent company TaxMatrix, we’ve helped North America’s largest companies manage sales tax requirements. Now we bring that expertise to e-commerce sellers of all sizes.
Get Compliant, Stay Compliant, Grow Confidently
Do you need to collect sales tax for selling online? If you’re generating significant revenue across multiple states, the answer is yes, and managing compliance across dozens of jurisdictions demands specialized expertise.
Every day without proper compliance creates liability. Every hour spent researching nexus rules or filing returns is an hour not spent growing your business.
Whether you’re crossing economic nexus thresholds, expanding into new markets, or discovering past obligations needing resolution, professional sales tax management eliminates guesswork and prevents costly mistakes.
At HOST, we combine deep technical expertise with 25+ years of specialized experience. You handle the sales, we handle the tax.
Ready to take sales tax compliance off your plate? Contact us today to discuss your needs or schedule a free consultation.
Want to learn more? Get our “10 Sales Tax Mistakes E-Commerce Sellers Make” e-book.
Frequently Asked Questions
Do I need to collect sales tax if I only sell online?
Yes, if you meet economic nexus thresholds ($100,000 in sales or 200 transactions in most states) or have physical presence in states with sales tax. The Wayfair decision eliminated the online sales tax exemption that previously existed.
How do I know which states I need to collect sales tax in?
Analyze your sales data by customer state, comparing totals against each state’s economic nexus threshold. Also assess any physical presence (inventory, employees, offices) creating nexus regardless of sales volume. HOST’s nexus analysis service identifies exactly where you have obligations.
What happens if I’ve been selling online without collecting sales tax?
You may have back-tax liability for periods when you had nexus but didn’t collect, plus penalties and interest. Voluntary Disclosure Agreements can limit lookback periods and reduce penalties if you proactively address past obligations before audit.
Do marketplace sellers on Amazon need to collect sales tax?
Marketplace facilitator laws require Amazon to collect and remit sales tax on behalf of third-party sellers for transactions processed through their platform. However, sales through your own website or other channels still require direct collection by you.
How much does it cost to manage sales tax compliance for online selling?
Costs vary based on sales volume and nexus states. DIY approaches using software alone typically cost $20-100 monthly for automation tools, plus 30+ hours monthly managing registrations, filings, and notices. Professional services like HOST eliminate the time burden and ensure accuracy across all jurisdictions.
Can I use sales tax software instead of hiring a service?
Software automates rate calculation but doesn’t handle registrations, filing, or compliance strategy. Misconfigured software creates costly errors. Most businesses benefit from combining automation tools with expert oversight. HOST reviews configurations and manages the compliance process while software handles real-time calculations.
