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Sales Tax Collection: Nexus, Registration, and How Not to Get Caught Off Guard
Sales tax is the compliance obligation that catches the most small businesses off guard. You might owe it in states where you have no office, no employees, and have never set foot. The rules changed in 2018 when the Supreme Court's South Dakota v. Wayfair decision allowed states to require sales tax collection from remote sellers. Here's what you need to know.
Do You Need to Collect Sales Tax?
You must collect sales tax when two conditions are both true:
→ You have nexus (a connection) in a state
→ You sell taxable goods or services to customers in that state
What Creates Nexus
| Type | What It Means | Examples |
|---|---|---|
| Physical nexus | Physical presence in the state | Office, warehouse, inventory stored (including Amazon FBA), employees, sales reps, trade show attendance (varies by state) |
| Economic nexus | Exceed revenue or transaction threshold | Most states: $100K in sales OR 200 transactions in the state per year. Some states use $100K only (no transaction test). Thresholds vary. |
| Marketplace nexus | Selling on a marketplace | Amazon, Etsy, eBay, Shopify marketplace — the marketplace collects and remits for you in most states |
States With No Sales Tax
Five states have no state-level sales tax: Alaska (but local sales taxes exist), Delaware, Montana, New Hampshire, and Oregon. You never need to collect sales tax on sales shipped to customers in these states (except for Alaska local taxes in some cases).
What's Taxable?
This varies enormously by state. General rules of thumb:
→ Physical products: Taxable in almost every state
→ Digital products: Taxable in ~30 states (software downloads, e-books, digital music)
→ SaaS: Taxable in ~20 states and growing. Check each state individually.
→ Services: Most states exempt services, but ~15 states tax some or all services
→ Food/groceries: Exempt in most states, taxed in some (varies wildly)
→ Clothing: Exempt in a few states (NY, PA, NJ on items under certain thresholds)
Step-by-Step: Getting Compliant
Step 1
Determine Where You Have Nexus
List every state where you have: a physical presence (office, employees, inventory), or sales exceeding the economic nexus threshold. If you sell through Amazon, Etsy, or other marketplaces, the marketplace handles collection — but track your direct sales separately.
Step 2
Register for a Sales Tax Permit
In each state where you have nexus, register for a sales tax permit through the state's department of revenue website. This is usually free (a few states charge $5–$50). Do NOT collect sales tax without a permit — collecting without a permit is illegal in most states.
Step 3
Configure Your Sales Tax Collection
Use your e-commerce platform's built-in tax tools or a dedicated sales tax service:
| Tool | Cost | What It Does |
|---|---|---|
| Shopify Tax | Included (basic) / 0.35% per transaction (advanced filing) | Auto-calculates, collects, and can file in all states |
| Stripe Tax | 0.5% per transaction | Auto-calculates and collects across all Stripe transactions |
| TaxJar | $19–$99/mo | Multi-channel sales tax calculation, collection, and auto-filing |
| Avalara | Quote-based ($50+/mo) | Enterprise-grade tax compliance, 1,200+ integrations |
| Manual | Free + your time | Look up rates, configure platform settings, file returns yourself |
Step 4
File and Remit Sales Tax Returns
Each state assigns a filing frequency based on your sales volume: monthly (high volume), quarterly (moderate), or annually (low volume). You file a return reporting total sales, taxable sales, and tax collected, then remit the tax. Your sales tax software can auto-file in most states.
Origin-Based vs. Destination-Based
This determines which tax rate you charge:
→ Origin-based (11 states): Charge the tax rate of YOUR business location. Simpler.
→ Destination-based (most states): Charge the tax rate of the BUYER's location. More complex — rates vary by city and county.
This is why sales tax software exists. Calculating destination-based rates manually across thousands of jurisdictions is impractical.
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Disclaimer: This guide is for informational purposes only and is not tax advice. Sales tax laws change frequently. Consult a tax professional or use a sales tax compliance service for your specific situation.