eCommerce Sales Tax Explained Like You're 5 Years Old

Of all the taxes we have to deal with as eCommerce business owners, sales tax is by far the worst. And I'm not being dramatic here.

Think about it for a second. With income tax, you've got one entity to deal with: the IRS. Maybe your state if they have income tax. 

But sales tax? 

You're potentially looking at 46-plus different places that want you to register, collect their money, and send it to them every single month. 

Each with their own websites, their own forms, their own deadlines, their own rules.

Here's what's really messed up about this whole thing: most of you started your online stores thinking you’d just... sell stuff. Make some money. Maybe quit your day jobs. 

Nobody said you'd become unpaid tax collectors for every state and city in America, right?

But here's the thing—you can't just ignore this stuff. I mean, you could, but that's a really expensive mistake waiting to happen. 

So we’re going to walk you through the sales tax basics, show you exactly how this applies to your online store.

eCommerce Sales Tax Basics: What You Need to Know

Alright, so what exactly is sales tax and how does sales tax work for ecommerce.

Ecommerce sales tax is a fee that gets added to almost everything you sell online. Think of it like this: every time someone buys something from your store, the government wants a little piece of that transaction.

And where does all this money go? Roads, schools, government projects. You know, the stuff that keeps society running. Fair enough, I guess.

Here's how it works: each state sets a base sales tax rate, usually somewhere between 4% and 7%. 

But then—and this is where it gets fun—local governments like cities and counties decide they want their cut too. So they just pile their own sales tax on top of the state rate.

Let me give you a real example that'll make this crystal clear. 

California's base sales tax rate is 7.25%. Sounds reasonable, right? 

But if you're selling to someone in Los Angeles, you're looking at 9.5% sales tax. LA decided they needed an extra 2.25% on top of what California already takes.

So every single transaction going to LA means California wants their 7.25% and Los Angeles wants their 2.25%. That's almost 10% extra on every sale just... gone.

What Do You Need To Collect Sales Tax For When Selling Online

Generally speaking, if you're selling physical products—t-shirts, phone cases, supplements, kitchen gadgets, whatever—those are eligible for sales tax in most states.

But here's where it gets messy: every state taxes services in its own way, and some states tax a lot more than just physical goods.

Let me break this down with a real-world example that'll make it stick. 

Think about ordering food delivery through DoorDash or Uber Eats. You order a burger, fries, and you pay a delivery fee. 

When you look at that receipt, you'll see sales tax applied to the burger and fries, but not to the delivery fee in most states.

But here's the thing—and this is important for anyone selling services—many states have started taxing services too. Hawaii, New Mexico, South Dakota, and West Virginia tax services by default, with exceptions for services specifically exempted by law. 

That leaves 41 other states where services aren't taxed by default, but specific services that the state decides to enumerate may be taxed.

And get this—no two states tax exactly the same specific services. 

So if you're providing any kind of service along with your physical products, you might be dealing with sales tax on those services too, depending on which states you're operating in.

For example, if you're selling software along with installation services, or you're selling products with extended warranties, or you're bundling consulting with physical goods—you could be looking at sales tax on the service portion in some states but not others.

Sounds confusing right? But here's where it gets absolutely insane… 

Let's say you're buying candy—something that should be simple, right? Wrong. 

In Illinois, if you pick up a Snickers bar, you'll pay 6.25% sales tax. 

But grab a Twix bar sitting right next to it? You only pay 1% tax because Twix contains flour, which somehow makes it "food" instead of "candy."

Same thing with Reese's Peanut Butter Cups versus Kit Kats—one has flour, one doesn't, so they get taxed completely differently.

This is the kind of stuff that makes your head spin. The Illinois Department of Revenue literally devotes more than two pages to defining what counts as candy.

Because apparently whether something has flour in it determines if it's candy or food for tax purposes.

But it's not just food. Apparel is another category where things get weird. In Pennsylvania, most clothing is tax-exempt. Sounds simple, right? Wrong. 

If the state decides your clothing counts as "formal wear," then it's taxable. And good luck figuring out exactly what Pennsylvania considers formal wear versus regular clothing.

The crazy part is, if you get this wrong, you're either overcharging your customers (which hurts your conversion rates) or undercharging them (which means you're on the hook for the difference). Both options suck.

This is where most e-commerce businesses just throw up their hands and say, "You know what? I'm charging tax on everything." 

Which works, except now you're making your products more expensive than they need to be in certain states, and you're probably losing sales because of it.

The reality is, unless you're selling really simple products that are clearly taxable everywhere, you probably need someone who actually knows how to classify this stuff properly. 

Because trying to figure out the tax treatment of every product in every state is not a good use of your time.

When Should You Worry About Sales Tax

Here's where most people get tripped up right out of the gate. They think sales tax is something you deal with when you "get big enough." Wrong move. 

“So when do I need to collect sales tax for selling online?”

From day one—literally day one—you need to be handling sales tax for whatever state you're based in.

Let's say you're running your business out of California. You wake up, launch your Shopify store, make your first sale to someone in Sacramento, and boom—you should already be registered with California's tax authority and collecting sales tax on that order. 

Not next month. Not when you hit some magic revenue number. Right now.

Because here's what happens if you don't: You spend six months building momentum, maybe you're doing $10K a month, things are looking good. 

Then you realize you should have been collecting California sales tax this whole time. 

Now you owe the state money out of your own pocket for all those past orders, plus penalties, plus interest.

But here's the good news—if you're only selling to customers in your home state and you don't have employees or inventory anywhere else, you can actually stop worrying about the other 45 states for now. 

You're not magically liable everywhere just because you have a website.

That changes as soon as you start expanding, but in the beginning? Just handle your home state properly and you can focus on the actual hard part of e-commerce: finding customers who want to buy your stuff.

Before you start panicking about collecting sales tax in every state where someone might buy your products, you need to understand something called "nexus." 

This is basically the government's way of determining which businesses actually have to deal with their sales tax.

There are five types of nexus you need to know about: physical nexus and economic nexus. 

Think of nexus as the trigger that says, "Hey, you owe us money now."

Physical Nexus

Physical nexus is pretty straightforward—it's all about where your business has a physical presence. 

• Where are you headquartered? 
• Where's your LLC registered? 
• Where's your inventory stored? 
• Where's it being manufactured? 
• Where are your employees working? 
• Where's your product shipping from?

Let me give you some examples that'll make this crystal clear.

If you're headquartered in California, guess what? You have to collect and pay sales tax in California. Pretty simple, right? 

If you're headquartered in Nevada instead, you've got to deal with Nevada's sales tax.

But here's where it gets interesting. 

What if you're headquartered in California but you're storing your inventory in a Wisconsin warehouse? 

Now you've got physical nexus in both California and Wisconsin. You have to register and deal with sales tax in both states.

Or let's say you're headquartered in California, but you moved to Texas and you're running the business from there, and your inventory is sitting in a Florida fulfillment center.

Congratulations—you now have physical nexus in three states: California, Texas, and Florida. You get to register, collect, and pay sales tax in all three.

This one's actually not that hard to track because it's usually a deliberate business decision. 

You know when you're hiring someone. You know when you're storing inventory somewhere. The question is just remembering that these decisions have tax implications.

Economic Nexus

But then there's the economic nexus, and this is where things get really fun. 

This whole thing started because traditional brick-and-mortar retailers were getting pissed off. 

They're competing against online stores that don't have to charge sales tax, which gives e-commerce an automatic 7-8% price advantage. Not exactly fair competition.

So in 2018, South Dakota took Wayfair to the Supreme Court and won. The ruling basically said, "Hey, if you're doing enough business in our state, we don't care if you don't have a physical presence here—you still owe us sales tax."

Economic nexus gets triggered when your Shopify store sells into another state—even if you have zero physical presence there.

Now, the states aren't completely unreasonable here. They don't care about the little fish. 

They're not going to come after you for selling a $20 t-shirt to someone in Montana. So they put economic thresholds in place.

Here's where it gets tricky: every state sets their own economic nexus thresholds. Most states use $100,000 in sales as the trigger, but some are different. 

And while many states used to have a 200-transaction threshold as an alternative trigger, most have dropped that requirement. 

The point is, once you hit whatever threshold a particular state has set, you trigger economic nexus. 

Hit that threshold, and boom—you're now required to register in that state, get a sales tax permit, file your taxes, and pay them every single month.

You could be sitting in your home office in Oregon, never having set foot in Alabama, but if you sell $100,001 worth of stuff to people in Alabama this year, Alabama considers you to have nexus there. 

They want you to register, collect their sales tax, and send it to them monthly.

Now you're probably thinking, "Wait, how the hell am I supposed to figure out if I've hit these thresholds in every state?"

There's actually a report you can run in Shopify that shows you a breakdown of all your customer addresses. You need to pull that report for the whole year and start counting. 

If you've got more than $100,000 worth of sales going into any particular state—you've triggered economic nexus in that state.

This is where a lot of fast-growing businesses get into trouble. 

You're focused on scaling from $1 million to $5 million, and somewhere in there you quietly cross economic nexus thresholds in a bunch of states without realizing it.

Affiliate Nexus and Click-Through Nexus

Some states have these more obscure nexus rules:

• Affiliate nexus - if you pay people in that state to refer customers to you
• Click-through nexus - similar to affiliate, but specifically about online referrals

These don't affect most sellers, but worth knowing they exist.

Marketplace Nexus

Here's a newer wrinkle: some states say that if you sell through a marketplace (like Amazon), and that marketplace has nexus in the state, then you automatically have nexus too. 

The good news is that many of these states also require the marketplace to collect the tax for you (we’ll get to that part later).

Monitoring Your Nexus: How Often Should You Check?

So now you know what nexus is, and you're probably wondering, "Okay, how often do I need to be checking this stuff?"

Checking nexus isn't like checking your email or reviewing your P&L. It's not a periodic task you do when you remember to. 

It needs to be automatic, because the consequences of missing it are too expensive to risk.

Think about it this way: Let's say you cross the economic nexus threshold in Illinois on a Tuesday. 

From that Tuesday forward, every order you ship to Illinois customers should have Illinois sales tax collected. 

If you don't realize you crossed that threshold until three months later, you've been shipping orders without collecting tax that whole time.

Now you're in a situation where the customer already paid you, but they didn't pay the tax. The state still wants their money, so guess who's paying it? You are. Out of pocket.

And if you're running a typical e-commerce business with maybe 10% gross margins, and the tax rate is 7-8%, you're basically giving up most of your profit margin to cover these back taxes. 

On a $100 order with 10% margin, you made $10. If you have to pay $7-8 in back taxes, you just turned a profitable order into a breakeven order.

Do that across hundreds of orders over a few months, and you're talking about thousands of dollars coming straight out of your business account. Money you probably don't have sitting around, because you thought those orders were profitable when they actually weren't.

This is why the smart move is to set up real-time monitoring. 

You want to get alerted the moment you're approaching a nexus threshold in any state, so you can register and start collecting before you cross the line.

The alternative is playing nexus roulette with your business, and that's not a game you want to be playing when you're trying to scale.

How to Collect Sales Tax in Shopify

Say you ship and sell items all over the United States. How do you actually collect sales tax for the states where you've triggered nexus?

The good news is Shopify makes the collection part pretty straightforward. 

There's a setting in your Shopify admin that you can turn on and off. 

It allows you to collect sales tax only in the states where you've triggered economic nexus.

You go into your tax settings, add each state where you have nexus, input their tax rates, and boom—Shopify automatically calculates and adds the correct sales tax to every order going to those states. 

The customer sees it on their checkout, pays it, and that money gets deposited into your account along with the rest of their payment.

But here's the critical part you need to understand: that sales tax money isn't yours. Not even a little bit. It belongs to the government.

I know it's tempting to look at your bank account and see that extra money sitting there and think, "Hey, my sales are up!" But that's not your revenue. 

That's money you're holding in trust for the state. As much as this whole process sucks, you have to take that sales tax money and set it aside. 

Put it in a separate account if you have to.

In fact, on your balance sheet, sales tax collected goes down as a liability, not as an asset, because it's money you're eventually going to have to pay out. 

Think of yourself as an unpaid tax collector. You're doing the government's job for them, for free.

So collecting the money through Shopify is the easy part, but what if you are selling through multiple channels?

Does Amazon, Walmart, eBay… Collect Sales Tax for Sellers?

Let's say you've got your Shopify store running, but you're also selling on Amazon, maybe some eBay, possibly TikTok Shop. 

How does sales tax work when you're selling everywhere?

Here's the good news: those big marketplaces are actually required to handle sales tax collection for you. 

Amazon, eBay, Walmart, Etsy, TikTok Shop—they're all what's called "marketplace facilitators," which means they collect and remit the sales tax on your behalf for orders placed on their platforms.

So if someone buys your product on Amazon and ships it to Texas, Amazon handles the Texas sales tax. You don't have to worry about it. Same with the other major platforms.

This is actually pretty sweet because it means you can focus your sales tax energy on your direct-to-consumer sales. Your Shopify store? That's all you. But your Amazon sales? Amazon's got it covered.

But here's where it gets tricky—just because Amazon is collecting the tax doesn't mean those sales don't count toward your nexus calculations. 

In about half the states, when they're figuring out whether you've crossed their economic nexus threshold, they include your marketplace sales in that calculation.

So let's say California's threshold is $500,000 in sales over a 12-month period. 

You sell $495,000 on Amazon and $10,000 on your Shopify store. Even though Amazon handled all the tax collection for those Amazon sales, you've still crossed California's threshold ($495K + $10K = $505K), which means you need to register in California for your Shopify sales.

This is why you can't just ignore your marketplace sales when you're tracking nexus. 

You need the full picture of where you're selling and how much, even if someone else is handling the tax collection on some of those sales.

And here's another fun wrinkle—when you're actually filing your tax returns in states where you're registered, some of them want you to break out your marketplace sales separately. 

They want to know exactly how much you sold on Amazon versus your own store. Some states even ask for Amazon's EIN number on the filing.

So even though you don't have to collect tax on those marketplace sales, you still need to track them and report them. 

It's like they're saying, "We don't need you to collect tax on these sales, but we definitely need you to tell us about them in excruciating detail."

How to Actually Pay Sales Tax for eCommerce

Alright, so you've figured out you have nexus in, let's say, 35 states. Cool. 

Now you get to experience one of the most beautifully frustrating aspects of American bureaucracy: registering for sales tax in 35 different states, each with their own special way of making your life difficult.

Here's what you're signing up for: You're going to visit 35 different state websites. 

Each one is going to ask you different questions in different formats. Some want your business formation documents. Others want your bank account information. 

A few are going to ask you questions that make you wonder if the person who wrote them has ever actually run a business.

But here's my favorite part—after you fill out all this paperwork and submit everything correctly (hopefully), most states are going to mail you a physical PIN code. Like, actual paper mail. In 2025. 

It's like two-factor authentication, except instead of getting a text message, you're waiting for the postal service.

And if you don't get that letter? Good luck figuring out what happened. 

Maybe it got lost in the mail. Maybe you put down the wrong address. Maybe it's sitting in a pile somewhere in a state office building. 

Either way, you can't actually start filing returns until you get that PIN, so you're just... waiting.

On a good day, if everything goes perfectly, you might get through this whole process in about a month per state. On a bad day, when things go wrong, it can take much longer.

Now multiply that by 35 states, and you start to understand why this isn't something you want to be doing yourself while you're also trying to run and grow your business. 

The opportunity cost alone is insane—you could be spending that time on marketing, product development, customer service, or literally anything else that actually moves your business forward.

This is one of those situations where trying to save money by doing it yourself often ends up costing you way more in the long run.

Consequences of Getting It Wrong

Let's talk about what happens when this all goes sideways. 

Because if you're thinking, "Maybe I can just wing it and deal with the consequences later," you should probably know what those consequences actually look like.

First off, let's be clear about who's on the hook here. 

This isn't like other business debts where you can just let your LLC take the hit if things go bad. Sales tax is one of those things where the state can come after you personally. 

Your business entity doesn't protect you here. So if your company goes under but you still owe sales tax, guess who they're calling? You.

Now, what does "going wrong" actually look like? 

Let's say you've been growing fast, crossing nexus thresholds left and right, but you haven't been collecting sales tax in those states. You're just focused on growth, revenue is good, everything seems fine.

Then one day, a state decides to audit you. 

They notice that based on your sales volume, you should have been filing returns with them. But you're not on their list of registered businesses. 

So they open up your books and start doing the math.

They look at all the orders you've shipped into their state over the past few years. 

They calculate what the sales tax should have been on each order. Then they add penalties. Then they add interest… 

And suddenly you're looking at a bill for hundreds of thousands of dollars. Sometimes millions.

And remember, your customers already paid you for those orders. 

They didn't pay sales tax because you weren't collecting it, but the state doesn't care about that. 

They want their money, and it's coming out of your pocket.

But here's what's even scarier—what if you've been collecting sales tax but not remitting it? 

Maybe you set up tax collection on your store, customers have been paying the tax, but you've been treating that tax money like regular revenue and spending it on inventory or marketing.

That's not just a tax problem. That's theft. In some states, it's actually a felony. 

You collected money from customers on behalf of the state, and then you spent it instead of sending it to the state. They take that very seriously.

We've seen businesses get completely wiped out by sales tax liabilities. 

The really messed up part is that this stuff compounds. The longer you wait to deal with it, the more expensive it gets. Interest and penalties keep adding up. 

And unlike other business problems where you can usually find some way to work things out, states don't really negotiate on sales tax. They want their money, period.

International Sales Tax - VAT and Friends

If you're selling internationally, each country has its own rules:

• European Union - VAT rates vary by country, and there are thresholds for when you need to register
• United Kingdom - has its own VAT system separate from the EU now
• Canada - GST/HST depending on the province
• Australia - GST with a threshold of AUD $75,000

The key with international taxes is that ignorance isn't a defense. If you're selling to these countries, you need to understand their rules or work with someone who does.

Key Takeaway

Look, here's the bottom line: sales tax is one of those things where being proactive costs you a little bit of money upfront, but being reactive can cost you your entire business.

You've got two choices. 

You can try to handle this yourself, which means staying on top of nexus monitoring across 46 states, managing registrations, figuring out product classifications, tracking marketplace sales, filing returns on time, and keeping up with rule changes. All while trying to run and grow your business.

Or you can find someone who actually knows this stuff and get it off your plate entirely. Whether that's UpCounting or another provider, the math is pretty simple: the cost of getting professional help is way less than the cost of screwing this up.

Don't let sales tax be the thing that kills your business. It's too important to wing it, and it's too complex to handle yourself unless this is literally what you do for a living. 

Find a good provider, get it set up right, and then go back to building something awesome.

FAQ

Let me hit you with some rapid-fire answers to the questions that come up all the time.

Do I Need To Charge Sales Tax On Shipping?

State by state, obviously. Because why would anything about sales tax be simple? In California, shipping is tax-exempt. In a bunch of other states, you're charging tax on shipping too. So that $5.99 shipping charge? In some states, your customer is paying tax on that as well. Just another thing to track.

What The Hell Is Sst?

SST stands for Streamlined Sales Tax Association. It's basically a group of states that got together and said, "Hey, maybe we should make this slightly less insane for businesses to deal with." They created some standardized processes for filing returns across multiple states. It's not government-run, but it makes the backend filing process a bit more streamlined. Your tax software probably uses it behind the scenes.

When Should I Consider A Vda Versus Just Back-Filing?

VDA is a Voluntary Disclosure Agreement. It's basically you going to a state and saying, "Hey, I screwed up. I should have been paying you taxes for years, but I wasn't. Can we work something out?"

Here's how it works: You approach the state before they audit you or contact you. You admit you owe them money. In exchange, they often waive penalties and interest, so you just pay the actual tax you owed. It can save you a ton of money if you're looking at a big liability.

But VDAs take forever—we're talking months. And you can only do them if the state hasn't already contacted you, and only if you haven't been collecting tax (because if you were collecting and not remitting, that's theft, and they're not going to be as friendly about it).

If you're just a few months behind and the liability isn't huge, back-filing is usually the way to go. You just register with the state, tell them when your liability started, and file returns for all the periods you missed. You'll pay some penalties and interest, but it's much faster than a VDA.

How To Sell Online Without Paying Taxes

You can't legally sell online without dealing with sales tax obligations. If you're thinking there's some loophole or hack to avoid this entirely, there isn't.

Here's the reality: If you're making sales to customers in states where you have nexus (which includes your home state from day one), you're required to collect and remit sales tax. Period. There's no minimum revenue threshold that gets you out of this in your home state, and there's no "small business exemption" that makes you invisible to state tax authorities.

The confusion usually comes from people thinking they can fly under the radar if they're small enough, or that online businesses somehow exist in a tax-free zone. Neither is true. The internet didn't create a magical tax-free commerce zone—it just made it easier for states to track who's selling what to their residents.

But I Am Not A ‘Business’ - It’s Just A Hobby

Sales tax collection requirements are based on nexus (physical or economic presence in a state), not whether the IRS classifies your activity as a hobby or business. Even hobbyists may need to collect sales tax if they have nexus in a state, though many states have "casual seller" exemptions for very small-scale activities.

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