Yes, in some cases, sales tax must be charged on items shipped out of state. In fact, 45 states (plus Washington, D.C.) now require out-of-state sellers to collect sales tax, generating over $23 billion from remote sales in 2021 alone đ.
- đşď¸ State-by-State Rules â Discover why sales tax isnât one-size-fits-all and how each stateâs unique laws (and a key Supreme Court ruling) dictate whether you charge tax on out-of-state orders.
- âď¸ Nexus Demystified â Learn what ânexusâ is (physical vs. economic) and why even without a store in a state, you might still be legally required to collect that stateâs sales tax.
- đŚ Charge or Not? â Get clear answers for three common selling scenarios (with simple tables) so youâll know exactly when you must charge out-of-state customers sales tax â and when you donât.
- đť Digital vs. Physical â Find out how sales tax rules differ when selling intangible products (like e-books or software) versus physical goods, and why an online download might be tax-free in one state but not another.
- â ď¸ Avoid Costly Pitfalls â Learn the common mistakes businesses make with out-of-state sales tax (like ignoring new nexus thresholds or charging the wrong rate) and how to steer clear of audits and penalties.
No Federal Sales Tax: Each State Sets Its Own Rules
The United States has no national sales tax â sales tax is governed at the state (and local) level. This means thereâs no single, federal rule that universally answers whether you must charge tax on an out-of-state shipment. Instead, each state has its own sales tax laws, rates, and regulations. To complicate things further, five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no state sales tax at all (though Alaska allows local sales taxes). If you ship an order to a customer in one of those no-tax states, no sales tax is charged on that sale.
Historically, states were limited in taxing interstate sales. For decades, a seller had to have a physical presence in a state (like a store, office, or warehouse) for that state to require sales tax collection. This principle was solidified by a 1992 Supreme Court case (Quill Corp. v. North Dakota). In other words, if you were shipping to a state where your business had no presence, you generally did not collect that stateâs sales tax â the customer was supposed to self-report use tax instead. This was the baseline rule nationwide until recently.
However, the rapid growth of e-commerce led states to seek new ways to capture lost tax revenue. In 2018, everything changed with the landmark South Dakota v. Wayfair Supreme Court decision. The Court ruled that states can require out-of-state (remote) sellers to collect sales tax even without physical presence, as long as the seller has a sufficient economic connection to the state. This opened the door for every state with a sales tax to create new rules on when an out-of-state business must charge tax. As a result, itâs now all about whether your business has nexus in the customerâs state â which could be via physical presence or via meeting an economic sales threshold. Weâll unpack nexus next, because itâs the key to knowing when you need to add sales tax to that out-of-state order.
Nexus 101: When Do Out-of-State Sales Become Taxable?
âNexusâ is the critical concept for understanding out-of-state sales tax obligations. Nexus means a business has a sufficient connection to a state that triggers a tax collection duty. If you have nexus in the customerâs state, you must charge that stateâs sales tax on the sale. If you donât have nexus there, you generally should not charge their sales tax. There are two main types of nexus:
Physical Nexus: The Old-School Rule (Store, Office, or Inventory)
Physical nexus is established when your business has a tangible presence in a state. This is the traditional basis for sales tax obligations. You automatically have sales tax nexus in a state if your business physically operates or has property there. Common examples of physical nexus include:
- Brick-and-mortar location â e.g. a retail store, office, or showroom in the state.
- Warehouse or inventory â storing products in a state (including inventory stored in third-party fulfillment warehouses, like Amazon FBA warehouses).
- Employees or contractors â having employees, sales reps, or agents working in the state (even remote workers can create nexus for your company).
- Trade shows or pop-up events â regularly attending trade fairs, craft shows, or making in-person sales in a state can create a temporary nexus in some cases.
- Affiliates â in some states, having affiliates or partners who refer customers (via links or promotions) in exchange for a commission can count as nexus (often called âclick-through nexusâ laws).
If you have any physical nexus in the destination state, you are required to register, collect, and remit that stateâs sales tax on taxable sales to customers in that state. It doesnât matter if the order is shipped from another state â your physical presence in the customerâs state gives that state the right to tax the sale. For example, if your New York business has a small warehouse in Georgia for faster shipping, any sales you ship to Georgia customers (even if processed online from NY) would require charging Georgia sales tax, because your inventory in Georgia creates nexus there.
Physical nexus was the only standard for decades. If you lacked any physical presence in a state, you had no obligation to collect that stateâs sales tax (this is why, 10+ years ago, many online retailers didnât charge tax outside their home state). But post-2018, physical presence isnât the whole story.
Economic Nexus: The New Era After Wayfair (Sales Thresholds)
Economic nexus is a newer rule thatâs all about the volume of sales you make into a state, rather than where youâre physically located. The 2018 South Dakota v. Wayfair Supreme Court ruling gave states the power to enforce sales tax obligations on businesses with âsubstantialâ economic activity in the state, even if they have no physical presence. In practical terms, âsubstantialâ is defined by sales thresholds set by each stateâs law.
Nearly every state with sales tax quickly adopted an economic nexus law after Wayfair. While the exact thresholds vary by state, they generally follow a similar pattern. Most states set an annual sales threshold around $100,000 in sales or 200 separate transactions to customers in that state. If your sales into the state exceed the threshold, you are deemed to have nexus and must start collecting that stateâs sales tax. If youâre below it, the state considers your activity de minimis (too small) and you donât have to collect.
Here are some nuances on economic nexus thresholds:
- The common standard (adopted by many states, including South Dakota itself) is $100,000 in sales or 200 transactions in either the previous or current calendar year. For example, if you had 250 orders to State X last year (even if only $50,000 revenue), or $120,000 in sales (even if only 50 transactions), youâd cross the threshold in that state.
- Some larger states opted for higher dollar thresholds. For instance, California, Texas, and New York use a $500,000 sales threshold (and they dropped the 200 transactions count). These states wanted to exempt very small businesses and only target substantial sellers.
- A few states have unique rules. Kansas famously asserted that any amount of sales (even $1) creates economic nexus â essentially no minimum threshold â though in practice Kansas now has a $100,000 safe harbor after legislation in 2021. Other states like Mississippi and Colorado originally included 200 transactions but later removed the transaction limit, relying solely on a dollar amount. Threshold definitions (whether they count gross sales, taxable sales, or retail sales) and time periods (previous calendar year, current year, or trailing 12 months) can also differ by state.
- Small seller exemptions: Every stateâs law has an exception that if youâre below the threshold, you donât have to register or collect in that state. But be careful â thresholds can creep up on you as your business grows. Itâs crucial to track your sales in each state where you ship goods. Many businesses set up systems or use software to alert them when they are nearing, say, 75% of a stateâs threshold so they can prepare to register.
- The thresholds typically reset each year. If you cross the threshold in Year 1, you must start collecting, and youâll usually continue collecting in Year 2. If your sales drop below in later years, some states allow you to deregister after a certain period of staying under the limit, but many require a couple of years under the threshold or a formal process to exit. In practice, once you register in a state, you often continue collecting unless your business significantly changes.
Bottom line: Economic nexus means big enough sales can obligate you to charge out-of-state sales tax even if youâve never set foot in that state. For example, imagine you run an online craft store in Oregon (no sales tax at home) but you sell $200,000 worth of goods to customers in California this year. Even with no physical presence in CA, you blew past Californiaâs $500,000 threshold? (Actually, $200k is below CAâs $500k threshold, so in that example you wouldnât meet CAâs threshold yet â letâs adjust the example.)
Letâs say you sold $600,000 to California customers this year through your website. Californiaâs economic nexus threshold is $500,000 in a year, so you are now legally required to register with California and charge California sales tax on your online orders shipping to CA addresses. If you only sold, say, $50,000 to CA this year, youâd be under the threshold and would not need to collect California tax (no nexus there, since Oregon also has no sales tax of its own, you wouldnât charge anything on those sales).
All 45 states with a sales tax (plus D.C.) now have economic nexus laws in effect. So wherever your customers are in the U.S., if that state has sales tax, thereâs a point at which enough sales = sales tax obligations for your business.
Marketplace Facilitators: Platforms That Collect Tax For You
A huge relief for many small sellers is the advent of Marketplace Facilitator laws. âMarketplace facilitatorâ is a fancy term for big online platforms like Amazon, eBay, Etsy, Walmart Marketplace, etc. These laws (now active in nearly all sales tax states) shift the tax collection burden to the marketplace when a sale is made through the platform. In other words, if you sell your products via a third-party marketplace, the marketplace itself is responsible for charging and remitting sales tax on those orders in states that have such laws.
For example, if you sell a handmade item on Etsy to a customer in another state, Etsy will typically calculate, charge, and remit the appropriate sales tax for that sale (assuming the state requires it). Amazon does the same for FBA and third-party sellersâ orders. This means you, as the individual seller, usually do not have to collect the tax on marketplace sales, and those marketplace-collected sales often do not count toward your own economic nexus thresholds in many states (some states exclude marketplace sales from a sellerâs threshold calculation, since the marketplace is handling the tax, though a few states include them â always check each stateâs rule).
Important: Marketplace collection laws greatly simplify compliance for online sellers, but you need to be aware of a few points. First, these laws donât mean you never have to worry about tax â they only apply to sales through that marketplace. If you also make direct sales through your own website or other channels, youâre still responsible for those. Second, you may still need to register in a state even if all your sales are on marketplaces, in order to document that you have no tax to remit (some states have peculiar rules on this). Fortunately, most states say if the marketplace is handling 100% of the tax, the seller doesnât have to file there. Third, marketplace laws do not apply to your own website or other channels â so if you reach a threshold with combined marketplace + direct sales, you might need to register for your direct sales (though again, many states exclude the marketplace portion for threshold purposes).
Overall, the introduction of marketplace facilitator regimes means that eCommerce sellers on major platforms have a lighter load. But you should confirm that the platform is indeed collecting in the states where it should (major ones do automatically). Donât accidentally double-charge tax to your customers on a platform â if Amazon is already adding sales tax, you shouldnât be adding it again. Likewise, if you primarily sell on your own site, all the standard nexus rules apply to you directly.
Origin vs. Destination States: Whose Tax Rate Applies?
Knowing when to charge tax is one part of the puzzle. The next piece is knowing whose tax to charge on an out-of-state sale. This comes down to whether the sale is taxed based on the origin (the sellerâs location) or the destination (the buyerâs location). The concepts of origin-based and destination-based sourcing can get complex, but hereâs the gist:
- Origin-based taxing means the sales tax rate is determined by the sellerâs location. If a state uses origin sourcing, a sale is taxed as if it was made at the sellerâs place of business.
- Destination-based taxing means the tax rate is based on the customerâs location (the delivery address for shipped goods).
For interstate sales (shipping to another state), almost all states use destination-based rules. In practice, if youâre required to collect tax on an out-of-state order, you will charge the tax rate of the destination state (and locality) where the item is going. You do not charge your own stateâs sales tax for an item delivered to a different state. In fact, states typically have laws exempting sales that are shipped out-of-state from their own sales tax, precisely to avoid double taxation and to defer to the destination stateâs rules.
For example, suppose you run a business in Illinois and have nexus in Illinois and Wisconsin. If you ship a product to a customer in Wisconsin, and you have nexus in Wisconsin (say you exceeded the sales threshold there), you would charge Wisconsin sales tax on that order, not Illinois tax. Illinois treats it as an out-of-state sale (no IL tax due since itâs delivered outside IL), and Wisconsin expects you to collect WI tax because you have nexus there and the purchase is being âconsumedâ in Wisconsin. The tax belongs to the state where the buyer is.
What about origin-based states? A few states (like Texas, Pennsylvania, Virginia, Arizona, and some others) are origin-based for intrastate sales. This means if youâre in Texas selling to a customer elsewhere in Texas, you would charge the rate for your location (origin). However, when an order leaves the state, even origin-based states revert to destination basis or consider the sale exempt from their tax. No state will ask you to charge your home stateâs tax on an item delivered to another state. Instead, either the destination stateâs tax applies (if you have nexus there) or no tax is charged by you (if you have no nexus in the destination state).
Itâs also important to get the right rate for the destination. In destination-based states, you must use the customerâs local tax rate. State sales tax rates vary (typically 4-7% range), and many states also have county, city or district taxes that stack on top. As a seller, if youâre collecting for that state, youâre expected to charge the combined correct rate based on the delivery address.
For instance, Coloradoâs state rate is 2.9%, but local jurisdictions add additional tax, so the total can be much higher in Denver vs. a rural town. Most states provide lookup tools or tax rate databases; many sellers use tax software to automatically apply the correct rates by ZIP code. Charging the wrong rate (e.g., only the state base rate but not the local) is a common error that can lead to under-collection (and potential liability for the difference).
One more twist: in a few cases, the tax rate and rules can depend on the shipping method or whether the item is picked up in store. For example, if an out-of-state customer comes to your state to buy in person and carries the item away, youâd charge tax for your state (since the sale took place at the origin). But if youâre shipping it to them out-of-state, itâs destination. Also, if you deliver an item to a shipping carrier in your state but itâs bound for out-of-state (FOB shipping point scenarios), most states still treat that as an interstate sale (no origin tax). The general principle: tax applies where the goods are received by the customer.
To summarize, when you do have to charge sales tax on an out-of-state order, youâll be collecting for the customerâs state (destination), using that stateâs rate and rules. If you have no obligation in the customerâs state, then no sales tax is added at checkout (even if your state is origin-based, because the sale is leaving your state). Understanding origin vs. destination is crucial to applying the correct tax and staying compliant with each jurisdictionâs sourcing rules.
Physical vs. Digital Products: Does It Change Your Tax Obligations?
Does it matter what youâre selling when it comes to out-of-state tax? Yes, absolutely. Sales tax is not only governed by where a sale takes place, but also what is being sold. Different products (and services) can have different tax treatments. Two major categories to consider are tangible physical goods versus digital goods or services.
Physical goods (tangible personal property) are generally taxable in nearly all states that have a sales tax, unless specifically exempted (common exemptions include groceries, clothing in some states, prescription medicine, etc., but these rules vary by state). If youâre selling standard retail products (electronics, clothing, furniture, toys, etc.), you can assume theyâre taxable in most states, and if you have nexus youâll be collecting tax on those items (except in the five no-tax states or specific product exemptions).
Digital products and downloadable content, on the other hand, occupy a gray area that varies widely by state. A digital product could be anything like an e-book, a music MP3, a software download, a streaming video subscription, an online course, or even a PDF pattern or photo you sell. Historically, many state tax laws only covered âtangible personal property,â which left purely digital goods untaxed by default. But states have been updating laws to tax digital commerce as it becomes a larger part of the economy.
- Some states tax digital goods just like physical goods. For example, states such as Alabama, Arizona, Hawaii, New Jersey, Texas, and Washington (among others) generally consider digital downloads or electronic content as taxable. They often phrase it as digital goods being tangible personal property or include specific statutes for âspecified digital products.â If you have nexus in one of these states and sell a digital product to a customer there, you are required to charge sales tax on it (unless a specific exemption applies).
- Other states exempt most digital products. For instance, California does not tax digital products (if you only transmit the product electronically and no physical item changes hands, itâs not taxable under CA law). New York exempts âdigital downloadsâ of things like books, music, and videos (considered intangibles). Florida, Illinois, Massachusetts and a number of others also do not tax many common digital goods. In those states, even if you have nexus and youâre selling, say, an e-book or a software download, you would not charge sales tax because the item isnât taxable in that stateâs eyes.
- Many states fall in between or have nuanced rules. Some tax certain digital items but not others, or tax the digital good only if the equivalent physical good is taxed. For example, Minnesota taxes digital books and music because the physical counterparts (paper books, CDs) are taxable, but if a type of content was exempt in physical form, itâs exempt in digital form. Some states tax streaming services but not one-time downloads, or have different rules for software as a service (SaaS) versus downloaded software.
- Services vs. goods: If youâre a freelancer or service provider (graphic design, consulting, software development), note that services are generally not subject to sales tax in most states unless specifically listed as taxable (a few states do tax many services). Digital goods sometimes blur with services (e.g., an online platform access might be seen as a service). Each stateâs definitions matter.
Key takeaway: The obligation to collect tax out-of-state depends not just on nexus, but on whether the product itself is taxable in that state. If a product is exempt in a state, you donât charge tax even if you have nexus there. If itâs taxable, you do (assuming you have nexus). So, you need to know the taxability of your offerings in the states where you sell. For physical goods, itâs usually straightforward (with a few category exemptions to be aware of). For digital goods, itâs more complex â roughly half of the sales tax states tax digital products in some way, and half do not. Itâs wise to research the states where you have major markets.
For example, say youâre a freelance software developer in Colorado selling downloadable software tools nationwide. Colorado taxes digital goods, and if you have nexus in Colorado (you do, physically being there), you charge CO customers sales tax on your software sales. If you sell to a customer in Kansas (and youâve exceeded Kansasâ threshold, thus have nexus), note that Kansas actually does not tax purely downloaded digital products â so even though you have nexus in KS, you would not charge sales tax on that software delivered electronically to a Kansas customer. But if you sold the same software to a customer in Arizona (where digital goods are taxable) and you have nexus there, you would charge Arizona tax.
In summary, always consider the type of product: âIs this item taxable in the customerâs state?â Most tangible goods = yes (taxable). Digital goods = check state law (itâs about a 50/50 split among states). And remember, if something is tax-exempt (like youâre selling custom services, or wholesale to a retailer with a resale certificate, or an exempt item like prescription meds), those exemptions usually apply regardless of nexus. Nexus just gives the state the authority; whether tax is actually charged depends on the product and context.
3 Out-of-State Sales Scenarios: Charge Tax or Not?
The rules and concepts above can be a lot to digest. Letâs bring it down to earth with three common scenarios online and remote sellers face when shipping to other states. In each scenario, weâll answer the big question: do you charge sales tax or not?
| Scenario (IfâŚ) | Do You Charge Sales Tax? |
|---|---|
| No Nexus in the Customerâs State You have no physical presence in the state and your sales there are below the economic nexus threshold (very few or low-dollar orders to that state). | No. You are not required to collect sales tax for that state. The sale is considered interstate commerce with no nexus. (The customer may owe use tax, but thatâs on them to report.) |
| Established Nexus in the Customerâs State You do have nexus in the state â either physical (business location, inventory, personnel) or you exceeded the sales threshold for economic nexus. | Yes. You must collect that stateâs sales tax on the item. Charge the tax rate based on the customerâs delivery address (destination-based rate). Youâll later remit this tax to that stateâs revenue agency. |
| Sale to a State with No Sales Tax Youâre shipping to one of the five states that do not impose sales tax (DE, NH, OR, MT, and AK). | No. You do not charge sales tax because thereâs no state sales tax in the destination. (Tip: Alaska has local sales taxes in some areas, but those are handled by local rules; remote sellers generally donât need to worry about Alaska locals unless doing high volume there.) |
| Selling via an Online Marketplace You sell through a marketplace platform (Amazon, Etsy, etc.) to a customer in another state. | Usually No (for marketplace sales). The marketplace will charge and remit the tax on your behalf, in states with marketplace facilitator laws. You, the seller, typically donât need to collect on that platform sale. (However, if you make direct sales to that state outside the marketplace, those you must handle if you have nexus.) |
A quick note on use tax: In Scenario 1 (no nexus), the customerâs state cannot force you to collect tax. However, the customer still owes whatâs called use tax on their purchase (equivalent to the sales tax) to their state. Consumers are supposed to self-report use tax for untaxed out-of-state purchases when they file state taxes. In reality, individual compliance is low and hard to enforce â which is exactly why states pushed for the Wayfair decision, so they could require sellers to collect it instead. Nonetheless, itâs good to know the concept: when you donât collect sales tax on a taxable item, technically the buyer should remit use tax. Business customers, in particular, are more likely to pay use tax on un-taxed purchases (or they might furnish you a resale certificate if itâs for resale). But average consumers rarely do, and states know that.
The table above highlights the big âyes or noâ situations. Most scenarios will fall into one of those buckets. Always evaluate both your nexus status in the state and whether the destination state has sales tax (and taxes the item). If you find yourself in a gray area (e.g. you made just enough sales to approach a threshold, or youâre not sure if an online service you sell counts as taxable software), you may want to consult with a tax professional or the stateâs revenue department for guidance. But broadly, if no connection, no tax; if nexus established, yes tax; if no tax in that state, then no tax (nexus or not, because thereâs nothing to collect).
Out-of-State Sales Tax Traps: Common Mistakes to Avoid
Navigating multi-state sales tax is tricky, and itâs easy to slip up. Here are some costly mistakes and pitfalls that businesses should avoid when dealing with out-of-state sales:
- Ignoring Nexus Thresholds: One of the biggest mistakes is failing to monitor your sales in each state. You might unknowingly cross a stateâs economic nexus threshold and not register in time, leading to uncollected tax liability. For example, if you sell just over $100,000 to customers in a state and donât realize you triggered nexus, the state could later come after you for the tax you should have collected. Avoidance tip: use sales tracking tools or spreadsheets to watch your totals by state, and review them monthly or quarterly against each stateâs threshold. Donât wait for an official letter â by the time a state notifies you, you may already owe back taxes.
- Registering Too Early or When Not Needed: On the flip side, some sellers jump the gun and register in states where they arenât required to. Collecting tax in a state unnecessarily can be a headache â it makes your products more expensive to those customers (possibly hurting sales against competitors who arenât charging it) and creates extra paperwork for you (filing returns with $0 due). For instance, a small business doing only $10k of sales to a particular state usually doesnât need to register there (assuming a $100k threshold). If they mistakenly register anyway, theyâre now on the hook for regular filings even if no tax is due. Avoidance tip: Only register/collect in a state once you truly have nexus (or expect to hit a threshold imminently and choose to register proactively). If you mainly sell via marketplaces, verify if you even need a separate registration â in many cases, you donât, since the marketplace is handling it. Unnecessary registration is not illegal, but it creates compliance burden with no benefit.
- Charging the Wrong Tax Rate: Sales tax rates can be complex, and a common error is using the incorrect rate for the customerâs location. Some businesses accidentally charge their home stateâs tax rate on out-of-state orders, which is wrong (and could result in either overcharging or undercharging the customer). Others use outdated rates or forget to include local district taxes. Charging the wrong rate can lead to angry customers (if overcharged) or a tax shortfall (if undercharged, you might owe the difference). Avoidance tip: Use a reliable tax rate lookup for each order. Many shopping cart platforms and accounting software have tax rate databases or integrations with services like TaxJar or Avalara. These tools automatically apply the correct destination rate and even update when rates change. If calculating manually, always check the state revenue website for the current combined rate by locality. And remember, in origin-based states for intrastate sales, if youâre selling within your own state, know whether you should use origin or destination for that scenario â many mistakes happen on home-state sales too due to sourcing confusion.
- Misclassifying Products or Services: Not everything you sell may be taxable, and misclassification can cause trouble. For example, perhaps you assume your product is tax-exempt and donât collect tax, when in reality the state considers it taxable. Or vice versa: you charge tax on something exempt, potentially losing customers or getting complaints. Common culprits include digital goods (assuming theyâre exempt everywhere â theyâre not), clothing (some states exempt or reduce tax on apparel), dietary supplements, and services. Avoidance tip: Research the taxability of your specific products in your high-sales states. State tax guides or a tax consultant can clarify if any of your items fall under exemptions or special categories. Set up your shopping cart with the correct product tax codes (many tax software solutions allow you to categorize products so theyâre taxed appropriately per state law). By correctly classifying what you sell, you ensure youâre only charging tax when you should â and not missing it when you should have charged it.
- Not Keeping Up with Permits and Filings: Complying with sales tax isnât just âcollect the money.â You must also obtain a sales tax permit for each state where you need to collect, file regular returns, and remit the tax collected by the due dates. A big mistake is collecting sales tax from customers without being registered in that state â this is illegal in every state. (From the stateâs perspective, thatâs holding tax money without authorization.) Another mistake is forgetting to file a return because you had no sales or no tax due; if you have an active permit, most states require filing even if $0 tax was collected that period. Missing filings can lead to penalties or even cancellation of your permit. Avoidance tip: Always register before collecting. Itâs usually an online process with the stateâs Department of Revenue or Taxation. Mark your calendar with each stateâs filing frequency and deadlines (which might be monthly, quarterly, or annual depending on your volume). Even if you didnât make any sales to that state in a given period, submit a zero return on time to stay compliant. And of course, remit the taxes you collected in full â they are trust funds, not your money to keep.
- Poor Recordkeeping (Especially for Exempt Sales): Lastly, failing to maintain good records can haunt you in a sales tax audit. You should save invoices, sales records, and any exemption certificates from buyers. For example, if you sell to a reseller or tax-exempt organization out-of-state and donât charge tax, you must have a valid resale or exemption certificate on file from that buyer to prove why no tax was collected. If you donât and you get audited, the state can deem those sales taxable and assess you the tax. Similarly, keep documentation of your nexus status and sales figures â if you ever need to defend why you didnât collect in a state (because you were under threshold), having the sales reports to back that up is crucial. Avoidance tip: Implement a record retention system. Keep digital copies of all resale certificates and exemption documentation received (and ensure theyâre filled out properly). Maintain sales summaries by state by year. Most states have a statute of limitations of 3-4 years for audits (longer if you never filed), so keep records at least that long, if not longer. Good records can be a lifesaver in resolving any disputes with tax authorities.
By sidestepping these pitfalls, youâll greatly reduce your risk of costly compliance problems. Multi-state sales tax compliance may never be fun or easy, but with careful attention to the rules and good practices, you can manage it without it turning into a nightmare.
Collecting Out-of-State Sales Tax: Pros and Cons
The expansion of sales tax duties to out-of-state sellers has sparked debate and practical considerations. Hereâs a quick look at the pros and cons from a business perspective:
| Pros (of complying with multi-state tax rules) | Cons (of multi-state tax obligations) |
|---|---|
| Level playing field: Youâre competing fairly with local businesses. Before, online sellers had an advantage not charging tax; now everyone follows the same rules, which can foster goodwill with local communities. | Added complexity: Tracking nexus and rates in dozens of jurisdictions is complicated. Small businesses face a steep learning curve (nexus laws, different tax bases) and may need to invest in software or expertise. |
| Legal compliance & peace of mind: By registering and collecting where required, you avoid the risk of audits, penalties, and back taxes. You wonât be looking over your shoulder worrying if a state tax agency will come knocking. | Compliance costs: Multi-state compliance isnât free. Costs include tax software subscriptions, possibly hiring tax professionals, time spent filing many returns, and administrative overhead. These costs eat into your margins. |
| Market expansion: Being registered in many states means you can confidently sell to customers in those states without restriction. You donât have to block or turn away orders from certain states for fear of tax issues, allowing you to grow nationwide. | Pricing impact: Charging sales tax can effectively make your product more expensive to customers in some states. If a small competitor (below the threshold) sells similar products tax-free to those customers, you might lose a price-sensitive sale or see reduced demand in states where tax adds 5-10+% to the cost. |
| Customer experience: When you handle the sales tax, customers arenât later hit with surprise use tax obligations. This can be a smoother buying experience and avoids putting law-abiding customers in a tough spot come tax time. | Audit exposure: Registering in many states means youâre on the radar of many tax authorities. In the unlikely event of audits, you could face inquiries from multiple states. Even if youâve done nothing wrong, responding to audits can be time-consuming. |
In short, collecting out-of-state sales tax is a double-edged sword. It brings compliance and the ability to grow, but adds operational burden. Most businesses decide that the pros of staying compliant (avoiding legal trouble, accessing broader markets) outweigh the cons, especially once they hit a certain size. Modern software and services can mitigate the burden. Nonetheless, itâs valuable to weigh these factors as you develop your sales strategy. Some very small businesses consciously stay below nexus thresholds to minimize complexity (a temporary strategy), while others embrace nationwide compliance as the cost of doing business in the e-commerce era.
Glossary of Key Sales Tax Terms
Sales Tax â A percentage-based tax on the sale of tangible goods and certain services, imposed at the state (and sometimes local) level. Retailers collect sales tax from customers at the point of sale and remit it to the taxing authority. In the U.S., 45 states and D.C. levy statewide sales taxes (rates and rules vary by state).
Use Tax â A twin tax to the sales tax, usually the same rate, owed by the buyer when sales tax was not collected on a taxable purchase. Use tax is meant to capture tax on out-of-state or online purchases. For example, if you buy a taxable item from a seller who doesnât charge your stateâs sales tax, you are supposed to report and pay use tax to your state. In practice, businesses often pay use tax on untaxed purchases (like equipment bought out-of-state), and individuals are supposed to but often donât, unless states enforce it.
Nexus â A legal term meaning a business has a âsufficient connectionâ to a state, allowing the state to require the business to collect and remit taxes. For sales tax, nexus can be triggered by physical presence or economic activity in the state. If you have nexus in a state, you must abide by that stateâs tax laws (register, collect sales tax on taxable sales, file returns). No nexus means a state cannot compel you to collect its sales tax.
Physical Nexus â A type of nexus created by having a physical footprint in a state. This includes owning or renting property, having an office or store, having employees or agents, or storing inventory in the state. Physical nexus has been the traditional standard for sales tax obligations. If you have any physical nexus in a state, you generally must collect sales tax on all taxable sales to customers in that state (even online sales).
Economic Nexus â Nexus established purely by economic activity â usually defined by exceeding a certain level of sales or number of transactions in the state. Economic nexus laws, enacted by most states after 2018, mean that even without physical presence, a remote seller who makes significant sales into a state (e.g., over $100,000 in a year) is required to register and collect sales tax in that state. Economic nexus thresholds vary by state.
Threshold (Sales Threshold) â The amount of sales (in dollars) or the number of transactions at which a stateâs economic nexus law kicks in. For example, a â$100,000 or 200 transactionsâ threshold means you have economic nexus once you exceed $100,000 in gross sales OR 200 separate sales to customers in that state over a year. Thresholds prevent very small businesses from having to collect in dozens of states; you only have to comply once your sales volume in that state is above the set level.
South Dakota v. Wayfair (2018) â The U.S. Supreme Court ruling that upended the prior physical presence rule. In this case, the Court ruled in favor of South Dakota, allowing the state to enforce sales tax collection from online retailer Wayfair, even though Wayfair had no physical presence in SD, because Wayfairâs sales exceeded South Dakotaâs economic nexus threshold. The decision effectively allowed all states to adopt similar laws. Wayfair is a landmark case that paved the way for economic nexus and fundamentally changed interstate sales tax collection.
Origin-Based (Sales Tax) â Refers to a sourcing rule where the sales tax rate is determined by the sellerâs location (the origin of the sale). In origin-based states, if a sale is made and delivered within the same state, the retailer may charge the tax rate applicable at their business location, regardless of where in the state the buyer is. Only a few states use origin sourcing for intrastate sales. Note: For interstate sales, origin-based rules donât apply; if the buyer is out-of-state, then either destination-based rules apply or the sale is exempt from origin state tax.
Destination-Based (Sales Tax) â Refers to the rule that sales tax is based on the destination of the product (the buyerâs location). The majority of states are destination-based, meaning for in-state sales you charge the rate of the customerâs locality, and for out-of-state sales, if youâre collecting that stateâs tax, you use the customerâs location to determine the tax. Essentially, tax follows the delivery location. All interstate taxable sales are effectively destination-based â you charge the tax of the state (and local area) where the item is delivered.
Sales Tax Permit (Sales Tax License) â A certificate or license issued by a state that authorizes your business to collect sales tax. You must register for a sales tax permit (also called a sellerâs permit, reseller permit, or sales and use tax license in some states) in any state where you have sales tax nexus. Itâs illegal to collect sales tax in a state without first obtaining their permit. The permit also comes with obligations: filing returns regularly (even $0 returns if no tax collected in a period). Registration is usually done through the stateâs Department of Revenue or Taxation, often online, and may require periodic renewals.
Marketplace Facilitator â An online marketplace or platform that facilitates sales for third-party sellers. Examples include Amazon Marketplace, Etsy, eBay, Walmart.com, etc. Marketplace facilitator laws in many states designate these companies as the party responsible for collecting and remitting sales tax on sales made through the platform. This relieves individual third-party sellers of the collection burden for those sales. Essentially, the marketplace is treated as the retailer for tax purposes. If you sell via a marketplace, you should familiarize yourself with how that marketplace handles tax; in most cases, they automatically collect tax on your behalf for states that require it.
Resale Certificate â A legal document a buyer provides to a seller to prove that a purchase is for resale and therefore not subject to sales tax. Businesses that buy products wholesale to resell can present a resale certificate (also called a resellerâs permit or exemption certificate) to the supplier to avoid being charged sales tax. The idea is that sales tax will be collected when the item is finally sold to the end consumer. If youâre a seller and another business customer gives you a valid resale certificate for an out-of-state sale, you generally should not charge sales tax on that sale (itâs an exempt transaction). However, you must keep that certificate on file as proof for auditors that the sale was for resale. Resale certificates are issued per state â usually, the buyer must have a sales tax permit in their state to issue one. Always ensure certificates are completely filled out and valid.
Exemption Certificate â A broader term for a document that allows a tax-free sale due to the buyerâs status or intended use of the product. A resale certificate is one type, but others include certificates for nonprofit organizations, government agencies, or for specific exempt uses (like manufacturing equipment in some states). If a buyer claims a sales tax exemption, they must provide an exemption certificate. The seller then does not charge tax, relying on that certificate. Like resale certificates, these must be retained in records to justify not collecting tax.
Remote Seller â A retailer or seller that sells into a state without a physical presence there. In the context of sales tax, âremote sellersâ are the businesses affected by economic nexus laws â typically online sellers, mail-order companies, or any business shipping products to customers in other states where they lack physical operations. Post-Wayfair, remote sellers can be required to collect tax if they have economic nexus. The term helps distinguish these out-of-state businesses from local brick-and-mortar businesses.
With these key terms defined, youâll be better equipped to understand the discussions and regulations around out-of-state sales tax. The language of sales tax can be jargon-heavy, but now you have a cheat sheet!
FAQ: Out-of-State Sales Tax
Q: Do I need to collect sales tax on out-of-state sales?
A: Yes. If you have nexus (physical presence or exceed an economic threshold) in the customerâs state, you must collect that stateâs sales tax. If you have no nexus there, then no, you generally do not collect.
Q: Do I have to register for sales tax in every state I ship to?
A: No. You only need to register in states where your business has a tax obligation (due to physical presence or meeting the economic nexus threshold). In states with no nexus, do not register or collect.
Q: Are there states with no sales tax at all?
A: Yes. Five states have no state sales tax: Delaware, Montana, New Hampshire, Oregon, and Alaska. No sales tax means you donât charge tax on sales to customers in those states (Alaskaâs local taxes aside).
Q: Are digital products subject to sales tax when sold out of state?
A: Yes, often. Many states tax digital goods (like e-books, downloads, SaaS) if you have nexus, but some states exempt them. It depends on the stateâs laws â check each state, as rules vary widely.
Q: Will online marketplaces collect sales tax for me?
A: Yes. In most states with marketplace facilitator laws, platforms like Amazon, Etsy, or eBay collect and remit sales tax on your behalf for sales made through their site. You usually do not need to collect tax on those marketplace transactions (the platform does it automatically).
Q: Is there a federal sales tax on interstate sales?
A: No. There is no federal sales tax in the U.S. All sales tax obligations come from state (and local) laws. Interstate sales are governed by the statesâ nexus and tax rules, without any national sales tax law.
Q: What happens if I donât collect sales tax when I should?
A: You could face penalties. If you fail to collect when required, states can bill you for the back taxes that should have been collected, plus penalties and interest. Non-compliance might lead to audits or even personal liability for business owners, so itâs important to register and collect once you have nexus.
Q: Do I charge sales tax on shipping charges for out-of-state orders?
A: It depends. Many states tax shipping fees if the item sold is taxable and the shipping is part of the sale. Some states, however, exempt shipping charges if stated separately. For example, California doesnât tax true separate shipping charges, while Texas does. So, if youâre collecting tax in a state, check that stateâs rule on shipping: in most cases yes, charge tax on shipping if the product is taxable, unless the state specifically exempts it.