When Do You Need to Start Paying Sales Tax on Online Sales?

Understanding sales tax responsibilities can be confusing. For businesses with a brick-and-mortar storefront, it’s relatively straightforward. However, the rules get hazy when selling online to customers in other states. Let’s review what you need to know about what online sales you need to tax and when you need to do so.

What You Need to Know About In-State Sales Tax

Before I get into details about selling online, here’s a quick overview of how sales tax works in-state.

In simple terms, sales tax is a tax imposed by the state (and/or county or city) on taxable goods or services sold in the jurisdiction.

For example, suppose a customer goes to a gift shop in Lincoln, Nebraska and buys a taxable product, such as a candle or sunglasses. The store must charge 7.25% sales tax (Nebraska state sales tax of 5.5% + Lincoln city sales tax of 1.75%) on the purchase. It must then report the sales tax it has collected from customers and remit those monies to the appropriate tax authority.

Similarly, if a customer stops by an automotive shop and buys floor mats in Portland, Maine, the store must collect 5.5% state sales tax on the purchase. Cities and counties in Maine do not have their own sales tax, so only the state sales tax applies.

Laws vary from state to state regarding what products and services are taxable, so it’s important to research whether what you’re selling is subject to sales tax. You must collect, report, and remit sales tax on any taxable products and services that you sell by the state’s deadlines.

The only states that do not levy sales tax are:

• Alaska (no statewide sales tax, but some local jurisdictions impose a sales tax in this state.)
• Delaware
• Montana
• New Hampshire
• Oregon

What You Need to Know About Out-of-State Sales Tax

Most states that impose sales tax on in-person transactions also require sales tax on online transactions.

There’s usually a sales threshold an out-of-state business must reach or surpass in a state before it is considered to have economic nexus and required to collect and submit sales tax (sometimes called sellers use tax) on its online sales there.

In some states, the nexus for sales tax responsibilities occurs after a business has achieved a certain dollar amount in sales or reached a defined number of sales transactions to customers in the state.

Many states consider a business to have economic nexus after it has reached $100,000 in sales or 200 or more separate transactions in a year, while others have different thresholds. States’ rules also vary regarding the period of time sales are measured to determine whether a business has nexus and will need to collect and remit sales tax in the year. Most give the option of the current or previous calendar year.

How to Register, Collect, Report, and Remit

1. Register for a Sales Tax Permit – After a business hits the economic nexus threshold in a state, it must register for a sales tax permit there. The deadline for registering for a sales tax permit after reaching the threshold varies by state. For example, in CorpNet’s home state of California, an out-of-state business must register the day it reaches or exceeds the $500,000 gross sales threshold. In comparison, an out-of-state business selling in Florida has until the first of the calendar year after it meets the $100,000 taxable sales threshold before it must register.
2. Collect Sales Tax – After obtaining a sales tax permit, the business should begin applying the appropriate sales tax percentage to its customers’ purchases of taxable products or services. Remember that states’ and local jurisdictions’ sales tax rates vary, so verifying that you’re charging the correct percentage is essential. Most e-commerce software platforms (like Shopify, Wix, and WooCommerce) simplify the process of calculating and applying the correct sales tax to transactions.
3. Report and Remit Sales Tax – A company must track the amount of sales tax it collects. The tax authority for the state or local jurisdiction establishes how frequently sales tax should be reported and remitted—e.g., monthly, quarterly, or annually. After a business calculates how much sales tax it collected in the designated reporting period, it must file an online tax return (or paper return if the state still accepts them) and pay the tax due to the tax authority. With only a few exceptions, most states’ tax departments also manage local jurisdictions’ sales tax reporting and payments.

Sales Made Through an Online Marketplace

In states with marketplace facilitator laws, the marketplace facilitator must collect and remit state sales tax on behalf of its sellers regardless of whether the sellers have physical or economic nexus in any state where it has sold its products.

Examples of marketplace facilitators to whom the laws apply include:

• Amazon
• Etsy
• eBay
• Craig’s List
• Facebook

States’ rules and requirements vary. Sellers may still need to register for a sales tax permit in states where they make sales, even if the marketplace facilitator must calculate, collect, report, and remit the sales tax on their behalf.

Other Sales Tax Considerations

Online sellers have responsibilities beyond sales tax. Like other businesses, they must report and pay federal income tax on their profits (pass-through entities like Sole Proprietorships, Partnerships, and LLCs pay personal income tax while other entities are taxed at the corporate tax rate).

Generally, sellers are subject to state and local income tax in their home jurisdiction, provided that’s where they are fulfilling their orders—even if they ship those orders to customers out of state. However, if a seller has inventory in a fulfillment center (such as through Amazon FBA) in another state, they might have to pay income tax to that state on the profits from orders fulfilled there.

For example, if a retailer located in Pennsylvania has inventory there and in a fulfillment center in California:

• They must report and pay Pennsylvania state income tax on profits from sales shipped from Pennsylvania,
• and they might also have to report and pay California state income tax on profits from sales shipped from California.

Like sales tax, states’ thresholds for when online retailers must report and pay income tax vary.

If online sellers are subject to state and local income tax in more than one state, the income must be apportioned (divided) by state on the state income tax returns. Each state has its own apportionment formula and “throwback” or “throw out” rules (for determining how to treat sales that are either untaxable in the state where the tangible product was received or that incurred no sales tax in any state. For sales of services in multiple states, each state’s rules for apportioning income apply. Some states have adopted market-based sourcing, which means sales of services are assigned to the state where the services are received or delivered. Others have adopted cost-of-performance sourcing, which means sales of services are assigned to the state where the majority of the cost was performed for the income producing activity.

Online sellers also have payroll tax responsibilities in any state where they have employees. For instance, if a retailer in Georgia has a sales representative in Florida, the business must register for payroll tax and comply with the employment laws in Florida.

Last but not least, a business formed as an LLC or Corporation in its home state may need to register as a foreign LLC or Corporation in any state where it has economic nexus (i.e., reached the states’ sales or income threshold to be subject to tax) even if it doesn’t have a physical presence (e.g., office, store, warehouse, employees) there. Again, states’ rules differ for when foreign qualification is necessary, so it’s critical that business owners research the requirements in any state where their company has significant sales transactions.

As you can see, multiple considerations exist when determining tax responsibilities when selling online. It’s advisable to discuss your situation with a tax attorney or other licensed professional to ensure you understand your obligations and learn what you must do to keep your business compliant.