Sales Tax Compliance for Small Business

Why Sales Tax Got a Lot More Complicated in 2018

Sales tax compliance for small businesses has become significantly more complex since 2018. What was once a straightforward obligation (collect sales tax where you have a physical location) now extends to online sellers across dozens of states based purely on sales volume. Understanding how the system works, where you have obligations, and how to stay compliant without it consuming your time is essential for any business that sells products or taxable services.

How Sales Tax Works in the United States

Unlike most countries, the United States has no federal sales tax. Sales tax is entirely a state and local system, which means the rules vary dramatically depending on where your buyers are located. Currently 45 states and the District of Columbia impose a statewide sales tax. The five states with no statewide sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska allows local jurisdictions to impose their own sales taxes, so even there the picture is not entirely simple.

Sales tax rates combine a state rate with any applicable county, city, and special district rates on top. The combined rate can range from 0% to over 11% depending on the location. In states like California, Louisiana, and Tennessee, combined rates regularly exceed 9% or 10% in major cities.

Not everything is taxable everywhere. Food, prescription drugs, and clothing are exempt in many states. Digital products, software, and services have inconsistent treatment across states, with some taxing them fully, some partially, and some not at all. Knowing which of your products or services are taxable in each state is part of the compliance picture.

Physical Nexus

Nexus is the legal term for a sufficient connection between your business and a state that creates a sales tax obligation there. Before 2018, nexus was primarily physical. If you had an office, warehouse, employees, or inventory in a state, you had nexus there and needed to collect and remit sales tax from buyers in that state. If you had no physical presence, you generally had no obligation.

Physical nexus triggers still apply and include:

• An office, store, or other place of business
• A warehouse or fulfillment center, including third-party fulfillment (Amazon FBA creates nexus in states where Amazon stores your inventory)
• Employees, contractors, or sales representatives working in the state
• Attending trade shows or making in-person sales in a state regularly
• Owning or leasing property in a state

If you use Amazon FBA (Fulfillment by Amazon), Amazon stores your inventory in warehouses across multiple states. Each state where Amazon holds your inventory creates physical nexus for your business, even if you have never set foot there.

Economic Nexus After Wayfair

In June 2018, the Supreme Court ruled in South Dakota v. Wayfair that states can require out-of-state sellers to collect and remit sales tax based on economic activity alone, without any physical presence. This decision fundamentally changed sales tax compliance for online businesses.

Following Wayfair, every state with a sales tax has enacted economic nexus laws. These laws establish a threshold of sales activity that creates a tax obligation even if your business has no physical presence in the state. The most common threshold, adopted by most states, is $100,000 in sales or 200 transactions in the state during the current or previous calendar year. Some states use higher thresholds or only count sales, not transactions.

In practice, this means a small online seller with customers across the country could have sales tax obligations in 30 or more states once they start reaching these thresholds in multiple states. Managing compliance manually across that many jurisdictions is not realistic, which is why sales tax automation software has become essentially necessary for online sellers at meaningful scale.

Economic nexus thresholds are calculated on a rolling basis in most states. You may cross a threshold mid-year without realizing it. Once you cross a threshold, the obligation to collect and remit sales tax in that state typically begins immediately or within 30 to 60 days depending on the state.

Marketplace Facilitator Laws

If you sell through a marketplace like Amazon, Etsy, eBay, or Shopify, marketplace facilitator laws in most states shift the sales tax collection and remittance responsibility to the marketplace rather than to you as the individual seller. This means Amazon, Etsy, and similar platforms collect and remit sales tax on your behalf for sales made through their platforms in states where they are registered as marketplace facilitators.

This simplifies compliance for many small sellers. However, it does not eliminate your obligations entirely. Sales made through your own website, at trade shows, or through other channels are still your responsibility. Furthermore, some states require marketplace sellers to still register, even if the marketplace handles collection and remittance.

How to Register for Sales Tax

Once you determine that you have nexus in a state, you must register with that state’s taxing authority before collecting sales tax. Collecting sales tax without a registration is generally not permitted, and in some states it can create legal exposure. The registration process varies by state but is typically done online through the state’s department of revenue website.

The Streamlined Sales Tax (SST) program simplifies registration for its member states. Through the SST registration system at streamlinedsalestax.org, you can register in multiple member states simultaneously with a single application. Currently 24 states participate in the SST program.

For non-SST states, you register directly with each state’s department of revenue. Most registrations are free, though a few states charge a small fee. After registration, you receive a sales tax permit or certificate that authorizes you to collect sales tax in that state.

Collecting Sales Tax

Once registered, you need to collect the correct rate from buyers in each state. The applicable rate depends on the buyer’s location, not your location. This is called destination-based sourcing and is the standard in most states. A few states use origin-based sourcing, where the rate is based on where the seller is located.

For e-commerce businesses, your shopping cart or payment processor handles rate calculation automatically if configured correctly. Shopify, WooCommerce, and most major platforms integrate with sales tax rate databases that apply the correct combined rate based on the buyer’s shipping address.

Filing and Remitting Sales Tax

Registration in a state also sets your filing frequency, which is typically monthly, quarterly, or annually depending on your sales volume in that state. Higher volume means more frequent filing. You must file a return and remit the collected tax by the due date for each filing period, even if you collected zero tax that period in some states.

Filing requirements vary by state and can include detailed breakdowns by county or jurisdiction. Some states offer discounts for timely filing, typically 1 to 2% of the tax collected. Missing a filing deadline results in penalties and interest.

Sales Tax Automation Tools

Manual sales tax compliance across multiple states is impractical for most small businesses. Sales tax automation software handles rate calculation, filing, and remittance automatically. The main options are:

TaxJar is one of the most popular tools for small and mid-sized e-commerce businesses. It integrates with Shopify, Amazon, WooCommerce, Etsy, and most major platforms, automatically imports your transactions, calculates what you owe in each state, and files returns on your behalf. Plans start around $19 per month.

Avalara is the enterprise-grade option, used by larger businesses with complex multi-state obligations. It is more powerful and more expensive than TaxJar, with pricing that scales based on transaction volume and features needed.

Quaderno is a strong option for digital product sellers and SaaS businesses, with particular strength in handling international VAT alongside US sales tax.

For very small businesses just starting out, many e-commerce platforms like Shopify have basic built-in sales tax tools that handle rate calculation and provide basic reporting, even if they do not automate the filing and remittance process.

Even if you use automation software, you are still legally responsible for the accuracy of your sales tax filings. Review your automated filings periodically and confirm that your product taxability settings are correct in each state.

Sales Tax Audits

States audit businesses for sales tax compliance, and e-commerce sellers are increasingly on the radar of state revenue departments following Wayfair. An audit can go back 3 to 4 years in most states, and the exposure from years of uncollected and unremitted sales tax can be significant.

The best audit defense is clean records. Keep documentation of all sales transactions, the sales tax collected on each, filings and remittances by state, and your nexus analysis showing when you crossed each state’s threshold. Most automation tools maintain this documentation automatically.

If you have been selling online for several years without collecting sales tax in states where you likely had economic nexus, a voluntary disclosure agreement (VDA) may be worth considering. Most states have VDA programs that allow businesses to come forward voluntarily, pay past-due tax with reduced or waived penalties, and get current. An accountant or sales tax professional can help evaluate whether a VDA makes sense for your situation.

Common Mistakes

• Assuming you only owe sales tax where you are located. Economic nexus means your obligations follow your customers, not your address. Check your sales volume in every state annually.
• Not monitoring nexus thresholds. Crossing a threshold mid-year without noticing means months of uncollected tax that is still owed. Most automation tools alert you when you approach thresholds.
• Assuming marketplace sales eliminate all obligations. Marketplace facilitator laws handle collection and remittance but may not eliminate your registration requirement in some states.
• Getting product taxability wrong. Assuming all your products are taxable (or none of them are) without checking state-by-state rules leads to either over-collecting or under-collecting. Both create problems.
• Missing filing deadlines even for zero-tax periods. Many states require you to file a return even if you collected no tax during a period. Missing these zero returns generates penalties in some states.

Where to Go Next

The Federal Law section covers the Wayfair decision and its implications in more detail. For broader tax obligations beyond sales tax, see the Taxes 101 guide. If you sell online and need to understand your full compliance picture, the E-commerce Compliance guide covers privacy policies, FTC disclosures, and ADA requirements that apply alongside your sales tax obligations. The Streamlined Sales Tax registration portal at streamlinedsalestax.org is a good starting point for multi-state registration.