Understanding sales tax collection and remittance is crucial for businesses, given the requirements set by the US government. If you’re in the ecommerce business space, you might find it particularly challenging due to the unique rules and steps involved compared to traditional stores.
However, with this guide at your side, navigating the complexities of sales tax for your ecommerce operation becomes more precise and manageable. We break down the current sales tax requirements, ensuring your business stays protected from audits and streamlines operations.
What is a Sales Tax for Sellers?
To a seller, sales tax is the additional amount collected from customers on the sale of tangible personal property. Notably, this category primarily encompasses consumer goods in physical form. In addition to tax collection, the business is responsible for remitting sales tax. Companies that do not have a sales tax nexus or sell non-taxable goods or services do not need to collect or remit sales tax.Do I need to Collect Sales Tax for Selling Online?
The short answer is yes, only if you have a sales tax nexus. Nexus is a legal term for a “connection” to a state that allows it to require you to collect tax. In 2026, there are two primary types of nexus that you must monitor:- Physical Nexus: Having an office, employee, or inventory (including Amazon FBA warehouses) in a state.
- Economic Nexus: Surpassing a specific sales volume in a state.
Compliance Alert: The “200 Transaction” Rule is Fading
Previously, many states used a threshold of “$100,000 in sales OR 200 transactions.” While many states are simplifying their rules, some thresholds remain in flux as of early 2026. For example, while Illinois has passed legislation to simplify nexus, the transaction count threshold remains in effect until specific provisions are met. Here’s the updated economic nexus threshold of each state for 2026:Origin-Based vs. Destination-Based Sales Tax
Once you have nexus, you must determine which tax rate to charge. This depends on “sourcing” rules. Sellers usually need clarification on origin-based and destination-based sales tax. Both terms refer to different methods of collecting in-state taxes. Let’s have a look at both.Origin-Based Sales Tax
If you are in an origin-based state, you must charge sales tax based on your business’s location. For example, if you are located in Arizona, you need to charge the rate for your specific business address regardless of where in the state your customer is. Building on this, let’s use Phoenix, AZ’s combined sales tax rate of 8.6% (state, county, and city taxes). Whenever you sell to any customer, whether they reside in Phoenix or order from Tucson (where the combined sales tax rate is 8.7%), you consistently apply the 8.6% sales tax rate to all transactions. This is because, in origin-based states like Arizona, the tax rate is anchored to the seller’s location, making the calculation straightforward and uniform, regardless of where your customers are situated. These states impose an origin-based sales tax:- Arizona
- Illinois
- Mississippi
- Missouri
- Ohio
- Tennessee
- Utah
- Virginia
Destination-Based Sales Tax
In these states, the sales tax hinges directly on your customer’s location. As a seller, you’ll calculate different sales tax rates for each transaction, depending on where your customer lives or where the product is shipped. In addition to origin-based states, all other states impose destination-based sales tax (excluding those with zero sales tax). If you are a remote seller, there might be different sales tax laws from in-state sellers for origin-based states. New Mexico is originally a state under origin-based sales tax. However, it transitioned to destination-based sourcing in 2021. Pennsylvania operates under a “modified” origin-based sourcing rule for in-state sales, but has transitioned to a destination-based sourcing system for remote sellers via Act 13. Similarly, Texas is a hybrid/destination-heavy state for remote sellers. While local businesses use origin-based rates, remote sellers with no physical presence in Texas must use destination-based rates or the Single Local Tax Rate option. You can visit your state’s Department of Revenue website to understand how tax collection works for remote sellers, or book a call with us, and we’ll guide you through the process.Hybrid Sourcing Sales Tax
Many states use Hybrid Sourcing, most notably California. In California, the “base” state, county, and city taxes are origin-based (tied to the seller’s location), but district taxes (which can add 1%–3%) are destination-based. If you are a seller in Los Angeles shipping to a different district, you must collect the buyer’s location’s district tax rate.How to Collect Sales Tax?
Sales tax collection and remittance are two different but equally important steps. According to the state’s laws, sales tax collection refers to obtaining sales tax from customers as a percentage of their taxable item or service.Understand your State Laws
The prerequisite to sales tax collection is understanding the laws of all states where you do business or sell. Did you know that approximately 45 states enforce a state sales tax, with 38 of them levying an additional local sales tax? If you are an ecommerce seller, you may have sales tax nexus in multiple states. Ensure you understand all those states’ sales tax laws to design your strategy accordingly.Determine the Correct Sales Tax Amount
To collect the due sales tax on your transactions accurately, you must be well-versed with the sales tax rates in the states where you have established a tax nexus. Consider specific considerations such as sales and transaction thresholds, non-taxable items, and fluctuating local tax rates. Simplify this process by leveraging sales tax calculators like Shopify, which ensure precise calculations for each transaction, guarantee compliance, and minimize errors.Register for a Sales Tax Permit
Before you begin collecting sales tax, it’s mandatory to register for a sales tax permit in the states where you have a tax nexus. Remember, collecting sales tax without a valid permit is against the law.Collect Tax on All Sales Channels
Do you sell on multiple sales channels (e.g., brick-and-mortar store, drop shipping, etc.)? Ensure that you collect sales tax on all of them. For instance, if you have an online store and a physical outlet, you must collect sales tax on transactions through both channels and file a sales tax return for sales from both.Do I Need to Collect Sales Tax on Shipping and Handling Charges?
The application of sales tax on shipping and handling fees can vary. Here’s a general guideline:- Taxable Items Delivery: The shipping charges are usually taxable when linked to the delivery of taxable goods.
- Separately Stated & Optional Charges: If shipping and handling fees are optional and listed individually on the invoice, they are typically exempt from sales tax, even if the shipped item is taxable. In states like New York, Texas, and Pennsylvania, if the item being sold is taxable, the shipping and handling charges are almost always taxable, even if they are listed individually and are optional. In California, separately stated delivery charges are often exempt, but only under very specific conditions regarding how the delivery is handled.
- Non-Taxable Items Delivery: Shipping charges associated with non-taxable items are generally not subject to sales tax.
- Combined Shipments: If you ship a taxable shirt and an exempt grocery item together, most states require you to “pro-rate” the tax on the shipping fee based on weight or price.
Remitting Sales Taxes
Sales tax revenue is used by state and local governments to fund various public services, such as schools, roads, and public safety. Failing to remit the correct sales tax amount can result in penalties, fines, and even legal troubles for your business. Ensuring accurate and timely sales tax remittance is essential to maintain compliance and avoid costly consequences. Here’s how it is done:- Know Your State’s Rules: Each state has rules for reporting sales tax. Some want just a summary, while others need a more detailed report.
- Collect Sales Tax: Set up your e-commerce platform to automatically calculate and collect the correct sales tax from your customers based on their location. Make sure your tax settings are up-to-date and accurate.
- Keep Detailed Reports: Provide a clear, complete report of the sales tax you’ve collected, following your state’s guidelines.
- Submit Your Sales Tax Returns: Adhering to the specific filing and sales tax remittance deadlines set by your state, which may be monthly, quarterly, or annually, is paramount in sales tax compliance. Alongside submitting your returns, ensure the timely payment of collected taxes.
Frequently Asked Questions
1. How to collect and remit sales tax?+
To collect and remit sales tax, businesses must first register for a sales tax permit with the appropriate state or local tax authority. After registering, they need to determine whether they have sales tax nexus, which establishes their obligation to collect tax in a state.Once the nexus is confirmed, the correct sales tax rate must be calculated based on the buyer’s location. The business then collects the appropriate tax from customers at the point of sale. Finally, the collected tax must be reported and remitted to the state by filing sales tax returns on a scheduled basis: usually monthly, quarterly, or annually.
Many businesses use automated tax software to manage changing rates, maintain accurate records, and submit payments through state online filing portals.
2. What do businesses do with collected sales tax?+
Businesses do not keep collected sales tax as revenue. Instead, they record it as a liability on their balance sheet, usually in a “Sales Tax Payable” account, because the money belongs to the government rather than the business.After collecting the tax from customers, the business holds these funds temporarily and then remits them to the appropriate state or local tax authority when filing its sales tax return. This typically occurs on a scheduled basis—monthly, quarterly, or annually—depending on the filing requirements assigned to the business.
3. Does Shopify automatically collect and remit sales tax?+
Shopify can automatically calculate and collect sales tax at checkout once you configure your tax settings. However, the responsibility for tax compliance still generally remains with the merchant.