Online Sales Tax: What Sellers Should Know

Online sales taxes are a growing concern for businesses. Learn how to stay on top of changing regulations and to minimize the burden on your business.

Online sales tax plays an interesting and complex role in the tax world. To determine which sales are taxable to your customer and collectible by your business, you must understand what the point of origin is. Think of sales taxes as being a reasonable charge for reimbursing the government for a variety of costs it incurs during the sales process. Costs include contracts, sales tax law enforcement, and specific public goods.

What Is Online Sales Tax?

Online sales tax is a form of taxation for goods and services purchased on the internet. When businesses operate in a state that requires them to collect sales tax, they must do so whether the sales are made in physical (brick-and-mortar) or digital (online) locations. Collecting sales tax for online businesses can also be required if the goods are sold to individuals who live in a state with sales tax requirements, even if the business doesn't have a physical presence there. Online business taxation regulations were introduced to level the playing field between e-commerce companies and traditional brick-and-mortar retailers, which were already required to collect and remit sales tax.

Do I Need to Collect Sales Tax for Selling Online?

Whether you are selling goods or services online, it's important to consider tax obligations for online sales. Depending on the state or territory where your business is based, you may be liable to collect and remit local or state sales taxes from customers whenever you make a sale.

Businesses should familiarize themselves with their potential tax obligations before they engage in online sales transactions to ensure compliance with all relevant authorities.

Businesses are required to collect tax from online sales:

• If a customer is located in the same state as your business, then the tax for online sales must be collected and sent to the local agency per local regulations.
• If you do not have a physical presence in another state, you still may need to collect sales taxes from customers who live there because all states possess different laws concerning when sales tax needs to be collected and paid.

Understanding the Nexus

A nexus is the legal term used to describe the connection between a business and a state that creates tax obligations. In the context of online sales, nexus determines whether a business must collect and remit sales tax to that state. This became especially important after the 2018 Supreme Court ruling, which expanded the definition beyond physical presence. Knowing where a nexus exists is essential for online retailers, since it establishes when sales tax rules apply.

A business is generally considered to have a nexus — and is therefore required to collect online sales tax — when:

• It has a physical location in the state.
• It has employees, affiliates, or independent contractors living in the state.
• Its sales to residents of the state exceed a certain threshold, often referred to as the economic nexus.

Most states have adopted economic nexus laws, which set minimum levels of sales activity that trigger tax obligations. For example, a state may require sales tax collection if a business exceeds $100,000 in annual sales or completes 200 separate transactions with customers in that state. These thresholds vary, making it essential for companies to track their sales by state to avoid penalties for non-compliance.

How Much Is Online Sales Tax?

For online businesses, sales tax works differently than it does for brick-and-mortar stores. Generally, businesses are expected to collect sales tax online for any state where they have nexus, which can include a physical presence or ties to an affiliate. The rate of tax varies from state to state, though typical sales tax rates range between 5 and 7% in many states.

Some states may also require other taxes on online purchases, such as use taxes or gross receipts taxes. When operating online, businesses are expected to know which laws apply to customers in any state, and they must follow changing tax regulations at the state and local levels to stay compliant with taxation laws.

How Does Online Sales Tax Work?

A Supreme Court ruling in 2018 fundamentally changed the way online sales tax works. Before the ruling, online businesses only needed to collect sales tax in states where they had a physical presence. The Court recognized this gave out-of-state retailers an unfair advantage and ruled that states could now require sales tax collection if a business has a significant connection, or "nexus," to the state.

When a nexus exists, businesses must comply with all applicable state and local taxes. That means calculating the correct tax at the point of sale, recording it, and remitting it to the appropriate authorities.

Online Sales Tax Laws, Rules, and Regulations

The Supreme Court ruling in South Dakota v. Wayfair, Inc. changed the legal landscape around the laws and regulations that affect sales tax requirements for online retailers. Over the past decade, states have increasingly passed laws that require businesses to collect sales taxes, even if they do not have a physical presence in the state. For companies that choose to operate fully or partially online, the responsibility falls on the business owner(s) to stay up to date on the current tax laws and how any state or local regulations impact the online business sales tax rules that may apply to the business.

For the business owner, many of these rules center around understanding some key terms:

Point of Origin-Based Tax Laws

In non-technical terms, the point of origin means you are responsible for collecting and submitting sales taxes in the state where you physically operate your business. For instance, if you make a sale in Illinois, you need to collect and remit sales taxes on items sold in Illinois. While this tax structure was popular in many states before 2012, most states have since adopted a tax model that allows them to more fairly benefit from businesses that generate a significant amount of sales revenue within the state.

Destination-Based Tax Laws

Many states, including Washington and Texas, choose to use a destination-based sales tax structure. This requires businesses to collect sales taxes based on the delivery location of their customer, or the destination of the product. Certain wholesale sales are not affected, however. These include vehicle sales, aircraft, boats, mobile homes, services, florists, and towing companies.

The Marketplace Fairness Act of 2013

In today's digital age, many consumers visit brick-and-mortar stores to research products in person. Then, they use their mobile devices to purchase the item online. Usually, companies offer online specials as a sales tool.

A bill titled the Marketplace Fairness Act of 2013 attempted to level the playing field between traditional retail stores and online merchants. The bill sought to minimize the burden of collecting and remitting taxes to over 9,000 localities — including local, county, and state taxing authorities. Instead of considering all these localities, the bill imposes taxes only at the merchant-based point of origin. A key argument against the bill is the fact that it lacks complete guidance on collecting and submitting appropriate taxes. This legislation has not yet been passed into law and is still ongoing.

Which States Require Sales Tax for Online Purchases?

In the U.S., states have widely different requirements for collecting online sales tax, depending on the type of product or service. While nearly all states have some kind of online sales tax requirements (only four states — Delaware, Montana, New Hampshire, and Oregon — do not have any laws governing the collection of sales tax), different states have different definitions of what creates a "nexus" and when a business meets the threshold for when sales tax is required to be collected.

Here is a detailed overview of the sales tax requirements for each state if your company does not have a physical presence within the state, effective as of September 21, 2025.

Online Sales Tax Risks

Failing to comply with online sales tax rules can quickly create serious financial and legal consequences for a business. States are increasing enforcement efforts, and even small oversights may trigger notices, audits, or unexpected liabilities. Understanding the risks helps businesses see why accurate collection and timely filing are not optional but essential to long-term success.

• Penalties: States often impose strict penalties for not registering, collecting, or remitting sales tax when required. These can be flat-dollar amounts or percentage-based and may escalate if non-compliance continues. Penalties not only drain revenue but also damage a company's reputation with tax authorities.
• Late Fees: Missing sales tax filing deadlines typically results in late fees. Even if a business ultimately pays the correct tax, late submission means added costs that chip away at profit margins. Consistent lateness can also increase the likelihood of closer scrutiny by state revenue departments.
• Interest: On top of penalties and late fees, unpaid tax balances accrue interest until resolved. Interest can grow quickly, particularly when liabilities stretch across multiple filing periods or states. This makes catching up on past-due sales tax significantly more expensive than staying compliant from the start.

Online Sales Tax Exemptions

Not every online purchase is subject to sales tax. States carve out exemptions to encourage certain types of commerce or provide relief to specific groups. Sellers need to know when these rules apply so they don't overcharge customers or miss required documentation.

• Sales Tax Holidays: Many states suspend sales tax for a limited time on certain goods, such as back-to-school supplies or disaster preparedness items.
• Resellers: Businesses that purchase goods strictly for resale may qualify for an exemption when they provide a valid resale certificate.
• Manufacturers: In some states, purchases of raw materials or equipment used directly in the manufacturing process are exempt from sales tax.
• Nonprofits: Qualifying nonprofit organizations can often make exempt purchases, provided they have state-issued exemption certificates.

Even when sales are exempt, sellers remain responsible for following the rules carefully. Documentation is critical — most states require a valid exemption or resale certificate to back up the tax-free transaction. If that paperwork is missing or incomplete, the tax liability can fall back on the seller rather than the buyer.

Exemptions also vary widely across states, which adds another layer of complexity for online businesses. A product that is exempt in one state may be taxable in another, so sellers must stay current with each jurisdiction's requirements. This is especially important for multistate sellers that operate across different tax jurisdictions.

Finally, sellers must be ready for audits that test whether exemptions were correctly handled. Keeping accurate records of exemption certificates, purchase orders, and related documentation helps protect the business in the event that state authorities review past transactions. Treating exemptions with the same care as taxable sales can save significant time and money down the road.

How To Calculate, Charge, and Collect Sales Tax for Your Online Business

Business owners must follow state-specific regulations to ensure sales tax is calculated, charged, and remitted correctly. Because rules differ from state to state, compliance requires careful attention to where sales take place, what is being sold, and which thresholds apply. By breaking the process into clear steps, online sellers can reduce mistakes and stay on top of their obligations.

1. Register with each state. Research the specific sales tax filing requirements for each jurisdiction and obtain proper registration to collect sales tax where required. Each state sets its own registration process for remote sellers, and many require you to register before you collect a single dollar of sales tax. Researching these rules upfront helps avoid penalties for unregistered collection. Registration also ensures you're reporting to the correct authority, whether that's a state revenue department or a local taxing jurisdiction.
2. Identify the correct tax rate. Determine the applicable internet sales tax amounts for each state in which a transaction occurs, based on product type. Some items, like groceries or clothing, may be taxed differently from other goods depending on the state. In addition, localities may add their own surtaxes on top of state rates. Identifying the correct rate for each sale is critical so customers are charged accurately and your business stays compliant.
3. Collect and keep records. For each applicable sale, collect the appropriate tax from customers and keep accurate records of all taxes collected. Once you know the correct rate, apply it at checkout and display the amount clearly to your customers. Accurate recordkeeping of every transaction — including what was sold, to whom, and the tax collected — is essential. These records form the basis of your sales tax filings and protect your business if questions arise during an audit.
4. File and pay on time. File returns according to applicable deadlines established by each taxing authority and pay any due taxes within the specified timeframe. Most states require monthly, quarterly, or annual filings depending on sales volume. Filing on time and remitting full payment reduces the risk of penalties, late fees, and interest. Many businesses use payroll or accounting software to automate this process and keep deadlines on track.

If implemented correctly, following these steps can help ensure businesses are compliant with their respective state's online sales tax regulations.

Correctly Collecting Online Sales Tax Is Key

Online sales taxes are a complex issue that all businesses must understand. Laws must equally satisfy tax policy principles, fairness, and simplification. For business owners who are unsure about payroll taxes or other complex business processes that can have negative consequences when done incorrectly, partnering with a trusted vendor can help give you peace of mind with critical business-related matters.