Whether you must collect sales tax depends on whether you have a physical or economic presence in the buyer's state
You must collect sales tax on online sales if you have nexus in the state where the buyer lives. Nexus means you have a meaningful connection to that state — usually a physical location, employees, or enough sales volume to trigger a threshold. If you have no nexus in a state, you generally do not have to collect tax on sales to customers there, though the customer may owe use tax instead.
The rules changed significantly in 2018 when the Supreme Court ruled in South Dakota v. Wayfair that states could require sales tax collection based on sales volume alone, not just physical presence. This means even a one-person operation shipping from home can owe sales tax in states where it makes enough sales.
What counts as nexus and what sales volume triggers collection requirements varies by state. Some states set thresholds at $100,000 in annual sales; others use $500,000 or different measures entirely. You need to know the rules in each state where you sell.
Key Takeaways
- You must collect sales tax in states where you have nexus, which can mean a physical location, employees, inventory, or enough annual sales to meet that state's threshold.
- Sales tax thresholds vary widely by state — some start at $100,000 in annual sales, others at $500,000 or higher, and some use different measures like transaction count.
- If you do not have nexus in a state, you do not collect tax, but the buyer may owe use tax to their state instead.
- Most online sales tax software can track your sales by state and alert you when you cross a threshold, but you must set it up correctly for your business model.
- Failing to collect when required can result in back taxes, penalties, and interest, so reviewing your nexus position annually is essential.
Physical presence and inventory create automatic nexus
If you have a warehouse, office, retail location, or any physical space in a state, you have nexus there and must collect sales tax on all sales to that state's residents. This applies even if the location is just a small storage unit or a desk in a shared office.
Holding inventory in a state also creates nexus. If you use a fulfillment center, warehouse, or even consignment arrangement in a state, you must collect tax on sales to that state. This is true even if you do not have employees or a formal business address there.
Having employees or contractors working in a state creates nexus as well. A single salesperson, customer service representative, or contractor based in a state is enough to trigger the requirement.
Sales volume thresholds vary significantly by state
After the 2018 Wayfair ruling, states began setting sales volume thresholds that trigger collection requirements. These thresholds are not uniform, and they change as states update their laws.
Most states use an annual sales threshold. Common amounts are $100,000 or $500,000 in total sales to that state in the current or prior calendar year. Some states use different measures: transaction count (for example, 200 transactions), gross revenue, or a combination of factors. A few states have no threshold at all and require collection from the first sale.
You need to track your sales by state to know when you cross a threshold. Many online sales platforms — Shopify, WooCommerce, BigCommerce — have built-in reporting that shows sales by state. If you sell through multiple channels (your website, Amazon, eBay, in-person), you must add those sales together to determine whether you have crossed a threshold in any state.
| Threshold Type | What It Means | Example States |
|---|---|---|
| $100,000 annual sales | Collect tax once you reach $100,000 in sales to that state in a calendar year | South Dakota, Kentucky, Mississippi |
| $500,000 annual sales | Collect tax once you reach $500,000 in sales to that state in a calendar year | New York, Pennsylvania, Illinois |
| No threshold | Collect tax on all sales to that state, regardless of volume | California, Texas, Florida |
| Transaction-based | Collect tax if you make a certain number of transactions to that state | Some states use 200 transactions as the trigger |
How to determine your nexus position
Start by listing every state where you have a physical location, employees, inventory, or a fulfillment arrangement. You have automatic nexus in all of those states and must collect tax on all sales there.
Next, pull your sales reports for the past 12 months and organize them by state. Most e-commerce platforms can generate this report automatically. Add up total sales to each state, including all channels where you sell. Compare each state total to that state's threshold. If you have crossed the threshold in any state, you have nexus there as of the date you crossed it.
Check your state's Department of Revenue website for the exact threshold and any recent changes. Thresholds are updated periodically, and some states have different rules for different types of sales (tangible goods versus services, for example).
If you are unsure about a state's rules or your own position, consider consulting a tax professional who handles sales tax. The cost of an hour of information is usually far less than the cost of owing back taxes and penalties.
What happens if you have nexus but do not collect
If you have nexus in a state and do not collect sales tax, you are personally liable for the tax owed. The state can pursue you for back taxes, plus penalties (often 10 to 25 percent of the unpaid tax) and interest. Some states also impose criminal penalties for willful evasion.
States have become more aggressive about enforcement, especially for online sellers. Many states now require marketplace platforms like Amazon and eBay to report seller information to the state revenue department. This makes it easier for states to identify sellers who should be collecting but are not.
If you discover you should have been collecting in a state but were not, contact that state's Department of Revenue. Many states offer voluntary disclosure programs that reduce or eliminate penalties if you come forward before the state contacts you. The sooner you address it, the better your position.
Setting up collection in multiple states
Once you know where you have nexus, you need to register for a sales tax permit in each of those states. Most states allow online registration through their Department of Revenue website. Registration is usually free, though some states charge a small fee.
After registration, you must collect the correct tax rate for each jurisdiction where you sell. Tax rates vary not just by state but often by county and city. A customer in one part of a state may owe a different rate than a customer 50 miles away.
Most e-commerce platforms and accounting software can calculate the correct rate automatically if you set them up correctly. Shopify, for example, can explore the right rate based on the customer's shipping address. WooCommerce and BigCommerce have similar features. If you use a general accounting program like QuickBooks, you may need to add a sales tax module or use a third-party integration.
You will also need to file sales tax returns in each state where you collect. Filing frequency varies by state — some require monthly returns, others quarterly or annually. The return shows total sales, taxable sales, and tax collected. You remit the tax owed to the state on the schedule they set.
Keeping records for sales tax compliance
Keep detailed records of all sales by state, including the customer's address, the date of sale, the amount, and the tax collected. Your e-commerce platform usually stores this automatically, but you should also export and back up the data regularly.
Save copies of all sales tax returns you file and all payment confirmations. Keep these records for at least three to seven years, depending on the state. If a state audits you, these records are your proof that you collected and remitted the correct amount.
If you use a sales tax service like TaxJar, Avalara, or Vertex, those platforms maintain records and can generate reports by state. They also track threshold dates, so you know exactly when you crossed into nexus in each state.
Frequently Asked Questions
Do I have to collect sales tax if I sell on Amazon or eBay?
Amazon and eBay collect and remit sales tax on your behalf in most states where they have nexus. However, you are still responsible for understanding your own nexus position. If you also sell through your own website or other channels, you must track all sales together to determine whether you have crossed a threshold in any state.
What if I ship from one state but my customer lives in another?
You collect tax based on where the customer lives (the destination state), not where you ship from. If you have nexus in the customer's state, you must collect their state and local tax rates. If you do not have nexus there, you do not collect, but the customer may owe use tax to their state.
Do I have to collect sales tax on shipping charges?
It depends on the state. Some states tax shipping as part of the sale; others do not. Most e-commerce platforms let you configure this by state. Check your state's Department of Revenue website for the rule in each state where you sell.
What is use tax, and do I need to worry about it?
Use tax is a tax the buyer owes to their state if they purchase from a seller with no nexus there. Most consumers do not pay it voluntarily. As the seller, you are not responsible for collecting or remitting use tax — that is the buyer's obligation. However, some states are exploring ways to collect it from online sellers.
How often do I need to file sales tax returns?
Filing frequency varies by state and sometimes by sales volume. Some states require monthly returns; others require quarterly or annual returns. When you register for a sales tax permit, the state will tell you the filing schedule. Your sales tax software can usually generate returns automatically on the right schedule.