Online Sales Tax for Business Owners: What You Need to Know About Nexus and Compliance

What Is Sales Tax Nexus?

Nexus is the legal connection between your business and a state that creates an obligation to collect and remit that state's sales tax on taxable sales made to customers in that state. Without nexus, you have no obligation to collect — and no ability to register, even if you wanted to.

There are two primary types of nexus:

Physical Nexus

Physical nexus exists when you have a tangible presence in a state:

• Your office, store, or business location
• A warehouse or fulfillment center (including third-party facilities where your inventory is stored)
• Employees who work in or travel into the state for business purposes
• A trade show or pop-up sales event in the state (may create temporary nexus)
• A remote worker who lives in the state and works for your business

Economic Nexus

Economic nexus — the post-Wayfair concept — exists when your sales activity in a state exceeds the state's threshold, even if you have no physical presence there. Most states now have economic nexus thresholds of $100,000 in annual sales or 200 transactions. Exceed the threshold and you have an obligation to collect, register, and remit.

The Wayfair Ruling and Economic Nexus

In June 2018, the Supreme Court ruled 5-4 in South Dakota v. Wayfair, Inc. that states could require out-of-state sellers to collect sales tax based on economic activity alone, overturning the 1992 Quill Corp. v. North Dakota decision that had required physical presence.

The Court upheld South Dakota's economic nexus law, which required out-of-state sellers to collect tax if they had more than $100,000 in sales or 200 or more transactions annually in the state. Within two years of the decision, virtually every state with a sales tax had enacted similar legislation.

The practical implication for online sellers: an e-commerce business with nationwide sales now potentially has collection obligations in 45 states (all states with a sales tax). Managing compliance across all those states manually is impossible — which is why automated compliance software has become essentially mandatory for multi-state sellers.

State Economic Nexus Thresholds

While $100,000 / 200 transactions is the most common threshold, states vary. Here is a representative sample — always verify current thresholds with each state's Department of Revenue, as these change:

Five states have no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. In those states, no obligation exists. Note that Alaska allows local jurisdictions to impose sales taxes, creating local obligations even without a state-level tax.

Marketplace Facilitator Laws: What They Change for Amazon, Etsy, and eBay Sellers

One of the most significant simplifications for small online sellers came through marketplace facilitator laws. These laws (now adopted in nearly every state) require large online marketplaces — Amazon, eBay, Etsy, Walmart Marketplace, and others — to collect and remit sales tax on behalf of their third-party sellers.

For sellers who sell exclusively through these marketplaces, this largely eliminates the collection and remittance burden. Amazon, eBay, and Etsy are handling sales tax on your behalf in virtually every state that has adopted marketplace facilitator laws.

What Marketplace Sellers Still Need to Watch

• Amazon FBA physical nexus: If Amazon stores your inventory in fulfillment centers in a state, you may have physical nexus there — even if marketplace facilitator laws cover the collection. You may still need to register for sales tax in those states.
• Direct sales outside the marketplace: If you also sell directly through your own website (Shopify, WooCommerce), those sales are NOT covered by marketplace facilitator laws. You are responsible for collection and remittance on direct sales where you have nexus.
• Business-to-business sales: Many marketplace facilitator laws apply only to retail (B2C) sales. B2B transactions may still require your own collection obligations.
• Income tax obligations remain separate: Marketplace facilitator laws cover sales tax only. Sales through Amazon, Etsy, or eBay still generate income that you must report for federal and state income tax purposes.

What Is Actually Taxable? Products vs. Services vs. Digital Goods

Not everything you sell is taxable in every state. The taxability rules for different types of products and services vary significantly:

Physical Products

Most tangible personal property is taxable in states that have a sales tax. Major exceptions include groceries (exempt in many states), prescription drugs (widely exempt), and clothing (exempt in some states, like New York below certain price thresholds). Agricultural equipment and manufacturing machinery often have special treatment.

Services

Services are generally NOT subject to sales tax in most states — but there are important exceptions. States like Hawaii, South Dakota, New Mexico, and Washington tax most services. In other states, specific services (telecommunications, SaaS, consulting) may be taxable. If your business sells services, verify taxability in each state where you have nexus.

Digital Products and SaaS

This is the most complex area. Digital products (software downloads, e-books, music, video streaming) are taxable in many states but not all. Software as a Service (SaaS) is taxable in some states and exempt in others. The rules are evolving as states update their statutes to address digital commerce. If you sell digital products, you need state-by-state analysis for your specific product categories.

How to Get Compliant: Step-by-Step

If you have been selling online without collecting sales tax where you have nexus, here is how to get compliant systematically:

Step 1: Nexus Analysis

Pull your sales data for the past 12 months broken down by state. Identify every state where you have exceeded the economic nexus threshold. Also identify any states where you have physical nexus (employees, inventory, Amazon FBA warehouses).

Step 2: Prioritize by Risk

Focus first on the states where your sales are highest. A state where you have $500,000 in unregistered sales represents far more exposure than one where you are just over the $100,000 threshold.

Step 3: Register in Each State

Register for a sales tax permit in each state where you have nexus. Most states allow online registration through their Department of Revenue websites. The Streamlined Sales Tax (SST) program allows registration in multiple participating states simultaneously.

Step 4: Implement Compliance Software

Integrate TaxJar, Avalara, or a similar platform with your e-commerce system to automate tax calculation, collection, and filing going forward. Most platforms integrate directly with Shopify, WooCommerce, Magento, and other major e-commerce solutions.

Step 5: Address Historical Exposure

If you have been non-compliant for years, consider a Voluntary Disclosure Agreement (VDA) with each state (see the section below). Proactive disclosure is almost always better than waiting to be discovered.

Sales Tax Software and Automation Tools

For most small to mid-sized online sellers, automated compliance software is the most cost-effective way to manage ongoing obligations. Here are the leading platforms:

For most small online sellers, TaxJar is the starting point — affordable, well-integrated with major platforms, and capable of handling AutoFile (automatic returns filed directly to states) for states where you are registered. As volume and complexity grow, Avalara becomes the more powerful option.

Dealing with Historical Non-Compliance

If you have been selling online without collecting sales tax in states where you have nexus, you have historical exposure — back taxes, penalties, and interest that could be assessed if a state discovers your non-compliance before you address it proactively.

The best path forward is almost always a Voluntary Disclosure Agreement (VDA). Most states offer VDA programs that allow non-compliant businesses to come forward voluntarily with dramatically reduced consequences:

• Limited lookback period: Most VDA programs cap the lookback period at 3–4 years, even if you have been non-compliant longer
• Penalty abatement: Penalties are typically waived entirely for VDA participants
• Anonymity during negotiation: You can typically negotiate terms before identifying yourself
• Payment plans: Many states allow the back taxes to be paid over time

The alternative — waiting until a state contacts you — typically means a full lookback to the date nexus was established, full penalties and interest, and no opportunity to negotiate terms. The VDA path is almost always the better outcome.

A tax professional familiar with state and local tax (SALT) issues can help you quantify your exposure, prepare VDA applications, and negotiate favorable terms with state revenue departments.

For broader business tax planning that complements sales tax compliance, see: 6 Tax Planning Strategies Every Small Business Owner Should Be Using.

Frequently Asked Questions