How to Set Up Sales Tax
for Online Sellers

Sales tax basics for online sellers

Sales tax is a consumption tax collected by the seller at the point of sale and remitted to state and local governments. In the US, there's no federal sales tax. Each state sets its own rules, rates, and exemptions. Five states have no sales tax at all: Alaska, Delaware, Montana, New Hampshire, and Oregon.

For online sellers, sales tax got a lot more complicated in 2018 when the Supreme Court ruled in South Dakota v. Wayfair that states can require online sellers to collect sales tax even without a physical presence in the state. Before that ruling, you only had to collect sales tax in states where you had a physical location. Now, selling enough into a state is enough to create a tax obligation.

Here's the simplified version of how sales tax works for online sellers:

1. Determine where you have nexus (a tax obligation).
2. Register for sales tax permits in those states.
3. Collect sales tax from buyers in those states.
4. File returns and remit the collected tax to each state on their schedule.

It sounds straightforward, but the details are where it gets complicated. Let's walk through each step.

What is nexus and do you have it?

Nexus is the legal term for the connection between your business and a state that triggers a sales tax obligation. If you have nexus in a state, you must collect and remit sales tax on sales to buyers in that state. If you don't have nexus, you don't collect.

Physical nexus

You have physical nexus in a state if any of the following apply:

• You live or have an office in the state
• You have employees or contractors working in the state
• You store inventory in the state (including Amazon FBA warehouses)
• You attend trade shows or craft fairs in the state (temporarily, in some states)
• You have a warehouse, fulfillment center, or drop-shipping partner in the state

The Amazon FBA gotcha: If you use Amazon FBA, Amazon distributes your inventory across their fulfillment network. You may have inventory stored in 20+ states without choosing those locations. Each one potentially creates physical nexus. This is one of the most common surprises for online sellers.

Economic nexus

Economic nexus is triggered by exceeding a sales threshold in a state, regardless of physical presence. After the Wayfair decision, nearly every state with a sales tax has adopted economic nexus laws.

The most common thresholds are:

• $100,000 in sales OR 200 transactions in a state within a calendar year (or trailing 12 months, depending on the state)
• Some states only use a dollar threshold (no transaction count)
• Some states have lower thresholds ($50,000 in certain cases)

Marketplace facilitator laws

This is the piece of good news. Most states now have marketplace facilitator laws that require marketplaces (Amazon, Etsy, eBay, Walmart Marketplace) to collect and remit sales tax on behalf of third-party sellers. If you sell on Amazon and the buyer is in a state with a marketplace facilitator law, Amazon handles the tax. You don't need to collect it separately for those sales.

However, you are still responsible for collecting tax on sales through your own channels (Shopify, WooCommerce, your own website). And you still need to track all your sales for nexus calculations, because marketplace sales count toward economic nexus thresholds.

How to register for sales tax permits

Once you determine where you have nexus, you need to register for a sales tax permit in each of those states. Do not collect sales tax without a permit. Collecting tax without being registered is illegal in most states.

How to register

Each state has its own registration process, but the general steps are the same:

1. Go to the state's Department of Revenue (or equivalent) website
2. Find the sales tax registration or "new business registration" section
3. Fill out the application with your business information (EIN, business type, contact info, expected sales volume)
4. Submit the application (some are instant, others take a few days to process)
5. Receive your sales tax permit number

Registration is free in most states. A few charge a small fee or require a deposit.

When to register

Register as soon as you have nexus (or ideally just before you start selling into a state). Don't wait until you've accumulated significant untaxed sales. States can assess back taxes, penalties, and interest on sales made while you should have been collecting.

If you already have nexus in states where you haven't been collecting, don't panic. Many states offer Voluntary Disclosure Agreements (VDAs) that reduce or eliminate penalties for sellers who come forward proactively. A sales tax professional can help you navigate this.

Streamlined Sales Tax Registration

The Streamlined Sales Tax (SST) program lets you register in multiple states at once through a single application at sstregister.org. Twenty-four states participate. If you need to register in multiple states, this saves significant time compared to registering with each state individually.

Setting up sales tax collection

Once registered, you need to configure your sales channels to collect the correct amount of tax from buyers. This is where the platform matters.

Shopify

Shopify has built-in tax calculation. Go to Settings > Taxes and duties, and configure your tax regions. Shopify will calculate and collect tax at checkout based on the buyer's location. For more accurate rates, you can connect a tax calculation service like TaxJar or Avalara.

Amazon, Etsy, eBay, Walmart

These are marketplace facilitators. They collect and remit sales tax on your behalf in most states. You generally don't need to configure anything. The marketplace handles it. Verify this in your seller settings and make sure the marketplace is collecting in all your nexus states.

WooCommerce and other self-hosted platforms

Self-hosted platforms require more setup. WooCommerce has a built-in tax system, but manually configuring rates for thousands of jurisdictions isn't practical. Use a plugin like TaxJar for WooCommerce or WooCommerce Tax (powered by Jetpack) for automatic calculation.

Destination-based vs origin-based taxation

Most states use destination-based taxation, meaning you charge the tax rate where the buyer is located. A few states (like Texas, Pennsylvania, and Ohio in some cases) use origin-based taxation for in-state sales, meaning you charge the rate where your business is located. For out-of-state sales, nearly all states use destination-based rates.

This is why using an automated tax calculation tool matters. Manually looking up the correct rate for every order based on the buyer's zip code, city, county, and state isn't feasible at any meaningful scale.

Filing your sales tax returns

Collecting tax is only half the equation. You also need to file returns and remit what you've collected to each state on their schedule.

Filing frequency

States assign a filing frequency based on your expected sales volume in that state:

• Monthly: For higher-volume sellers. Returns are typically due by the 20th of the following month.
• Quarterly: For moderate-volume sellers. Due dates vary by state but are usually the 20th of the month following the end of the quarter.
• Annually: For low-volume sellers. Due by January 20 for the previous year (varies by state).

Your assigned frequency may change over time as your sales volume grows or shrinks. Check your state accounts periodically.

What goes on the return

A sales tax return reports your total sales, exempt sales, taxable sales, and the amount of tax collected. For marketplace sales, most states require you to report the gross sales (for informational purposes) and note that the marketplace collected the tax.

Filing manually vs automatically

You can file returns manually by logging into each state's tax portal and entering the data. For one or two states, this is manageable. For five or more, it quickly becomes a significant time commitment.

Automated filing services like TaxJar AutoFile or Avalara log into your state accounts and file returns for you. They pull your sales data from all connected channels, calculate the amounts, and submit the returns before the deadline. For multichannel sellers with nexus in multiple states, this is a huge time saver. Learn more in our TaxJar for multichannel sellers guide.

Tools that make sales tax easier

You don't have to do any of this by hand. Here are the most common tools online sellers use for sales tax compliance.

Tax calculation tools

• TaxJar: Popular with small to mid-size e-commerce sellers. Integrates with most platforms. Offers automatic filing (AutoFile). Starts at $19/month.
• Avalara AvaTax: More enterprise-focused, but works for growing sellers too. Deeper integration options. Pricing varies.
• Shopify Tax: Built into Shopify. Handles basic calculation for US sales. Limited compared to dedicated tools but free for Shopify sellers.

Registration services

• TaxJar Registration Service: TaxJar can register you in states where you have nexus. Costs extra but saves significant time if you need to register in many states at once.
• Streamlined Sales Tax (SST): Free registration in 24 participating states through a single application.

When to hire a professional

Consider working with a CPA or sales tax consultant if:

• You have significant historical nexus exposure (should have been collecting but weren't)
• You sell products with complex taxability rules (food, clothing, digital goods)
• You sell B2B and need to manage exemption certificates
• You're facing an audit from a state tax authority
• Your business structure involves multiple entities

For straightforward situations (standard physical products sold to consumers), the tools above combined with the information in this guide should be enough to get you set up correctly. But if your situation is complex or you have back-tax concerns, professional help is worth the investment.

Frequently asked questions

For platform-specific tax setup, check out our guide on TaxJar for multichannel sellers. And for the broader challenge of managing multiple sales channels, see our guide on managing inventory across multiple stores.