Sales Tax Questions
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What is sales tax, and how does it work for online stores?

⚡ TL;DR

Sales tax is a pass-through consumption tax: you collect it from the buyer at checkout and remit it to the state on a monthly, quarterly, or annual schedule. For online stores, the obligation depends on nexus — you owe it in states where you have physical presence or where your sales exceed the economic nexus threshold, typically $100,000 per year.

Sales tax is a transaction tax collected on the sale of goods (and some services) within a state. The seller charges it to the buyer at checkout and then sends it to the state government on a regular filing schedule. For online stores, the question of when to collect depends on a concept called nexus: whether you have enough of a connection to a state to be required to collect there.

How sales tax works mechanically

Sales tax is a pass-through tax. The seller doesn’t pay it from their own funds, they collect it from the buyer and hold it until it’s time to remit. The seller is acting as a collection agent for the state.

The process:

  1. A customer places an order shipping to their state
  2. If the seller has nexus in that state, sales tax is calculated and added to the order total
  3. The customer pays the tax as part of their purchase
  4. The seller files a return with the state on the assigned schedule (monthly, quarterly, or annual) and sends in all the tax collected during that period

If the seller has nexus but doesn’t collect tax, the seller owes the tax anyway, they can’t get it back from the customer after the fact, so they absorb it.

The nexus question for online stores

Not every state requires every seller to collect. The trigger is nexus: a legal connection to the state that creates a collection obligation.

Two types of nexus matter for online sellers:

Physical nexus: Having a physical presence in the state: an office, store, warehouse, inventory in a fulfillment center, or an employee working there. Your home state almost certainly counts.

Economic nexus: Selling enough into a state to trigger their threshold. Since the 2018 Wayfair ruling, all 45 sales-tax states have enacted economic nexus laws. The most common threshold is $100,000 in annual sales into the state.

If you have nexus in a state, you must register for a sales tax permit, charge the correct rate on taxable sales, and file returns.

Rates, jurisdictions, and what gets taxed

Sales tax rates vary by state, and within states, by county and city. A customer in Denver, Colorado pays a rate that includes state, county, and city components. A customer in an unincorporated part of the same county pays a different combined rate.

Not everything is taxable. Groceries are exempt in many states. Clothing is exempt in some. Software-as-a-service is taxable in some states and exempt in others. The taxability of your specific products matters as much as the rate.

Who collects on marketplace sales

If you sell through Amazon, Etsy, eBay, or Walmart, those platforms collect and remit sales tax on your behalf in all 45 states under marketplace facilitator laws. This covers those platform transactions.

If you also have your own website or Shopify store, those sales are your responsibility: the marketplace collection doesn’t extend to other channels.

Frequently asked questions

What is sales tax?
Sales tax is a consumption tax imposed by state and local governments on the sale of goods and some services. It's calculated as a percentage of the purchase price, collected from the buyer at the point of sale, and remitted to the state by the seller. The seller acts as a collection agent: the tax is the buyer's obligation, but the seller is legally responsible for collecting and remitting it.
Does an online store have to collect sales tax?
Yes, if the store has nexus in the customer's state. Nexus means a sufficient connection to that state, either physical presence (a warehouse, office, or employee) or enough sales volume to trigger economic nexus (typically $100,000 per year). If nexus exists, the seller must register, collect the appropriate tax on sales into that state, and file returns.
Is sales tax charged based on where the seller is or where the buyer is?
For most online sales, tax is based on where the buyer is located: the ship-to address. This is called destination-based sourcing and applies in the majority of states. A few states use origin-based sourcing (taxing at the seller's location rate) for in-state transactions, but for out-of-state sales, destination sourcing is the general rule.
What is the difference between collecting sales tax and remitting sales tax?
Collecting is charging the buyer the tax amount at checkout. Remitting is sending that collected tax to the state when you file your sales tax return. Both are required, collecting without remitting is a separate compliance failure. The filing schedule (monthly, quarterly, or annual) determines when remittance is due.

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