Before 2018, businesses generally only owed sales tax in states where they had a physical presence, such as an office, a warehouse, or an employee. The Supreme Court's 2018 decision in South Dakota v. Wayfair changed this. States can now require online businesses to collect and remit sales tax based on economic nexus: the volume of sales or transactions into a state, regardless of whether the business has any physical presence there. Most states have set the threshold at one hundred thousand dollars in annual sales or two hundred transactions into the state.
Tracking nexus across dozens of states manually is not realistic for a small business. The right solution is sales tax automation software. TaxJar, Avalara, and Vertex all integrate with major e-commerce platforms including Shopify, WooCommerce, and Amazon, and handle nexus tracking, rate calculation, and return filing automatically. TaxJar is the most accessible for small businesses, with pricing starting around twenty-two dollars per month. It monitors your sales into each state, alerts you when you are approaching nexus thresholds, and files returns on your behalf when you have obligations in a given state.
Your home state is your first obligation. If you are selling taxable goods in your state of residence, you are almost certainly required to collect and remit sales tax there regardless of whether you have any other nexus. Register with your state's revenue department before your first sale, charge the appropriate rate at checkout, and file returns on the schedule your state requires, which is typically monthly, quarterly, or annually depending on your sales volume.
Not all products are taxable in all states. Food, clothing, prescription medicine, and digital products have varying tax treatment across different states. Clothing is exempt from sales tax in New York below a certain price threshold but taxable in Texas. Digital downloads are taxed in some states and exempt in others. If you sell products in categories with variable taxability, your sales tax software needs to handle product tax codes that allow it to apply the correct rate for each product in each jurisdiction rather than defaulting to a single rate.
Marketplace facilitator laws have simplified online sales tax for many businesses. If you sell exclusively through Amazon, Etsy, or another qualifying marketplace, the marketplace is required to collect and remit sales tax on your behalf in most states. This does not eliminate your nexus obligations for sales through your own website, but it means you do not need to handle marketplace sales separately. Confirm whether each marketplace where you sell has marketplace facilitator status in the states where you have customers.
Sales tax compliance for online businesses is a genuinely complex area where the cost of getting it wrong, in the form of back taxes, penalties, and interest, is significantly higher than the cost of implementing compliant systems before the liability accumulates.