Do I Need to Collect Sales Tax for My Online Store?
Short answer: you need to collect sales tax in states where you have "nexus," either a physical presence (warehouse, employee, inventory) or enough sales to cross that state's economic threshold (usually $100K or 200 transactions). The good news: if you sell on Etsy or Amazon, the marketplace already collects tax for you in most states. The bad news: if you also sell on your own Shopify site, that part is on you.
Here's the full guide in plain English, including what the thresholds are and what you actually need to do.
The Short Answer
You need to collect sales tax in states where you have "nexus." Nexus means a connection to that state that's significant enough to trigger tax obligations.
There are two types:
- Physical nexus: You have a warehouse, office, employee, or inventory in that state. If you store inventory in an Amazon FBA warehouse in Texas, you have nexus in Texas.
- Economic nexus: You exceed a certain sales threshold in that state. even without any physical presence. This is the big one for online sellers.
Economic Nexus Thresholds
Since the 2018 Supreme Court ruling in South Dakota v. Wayfair, most states have set economic nexus thresholds. The most common threshold is $100,000 in sales OR 200 transactions in a state per year.
| Threshold | States Using This |
|---|---|
| $100,000 in sales | Most states (CA, TX, NY, FL, IL, etc.) |
| $100,000 in sales OR 200 transactions | About 15 states still use dual threshold |
| $500,000 in sales | TX and CA for marketplace sellers |
| $250,000 in sales | AL and MS |
Vanessa's total revenue last year was $62,000. She didn't exceed $100,000 in any single state. In most states, she's below the threshold and doesn't need to collect.
But Wait. Etsy and Shopify Handle Some of This
Here's the part that calmed Vanessa down:
Marketplace facilitator laws: In most states, the marketplace (Etsy, Amazon, Walmart) is required to collect and remit sales tax on your behalf. Vanessa's Etsy sales already have sales tax collected by Etsy. She doesn't owe anything extra on those.
Shopify: Shopify does NOT collect sales tax for you automatically. Vanessa needs to configure tax settings in Shopify for each state where she has nexus. Shopify will calculate and collect, but she needs to remit it to the state herself (or use a service like TaxJar or Avalara).
What Vanessa Actually Needs to Do
- Determine where she has nexus. Physical nexus: only her home state (Oregon. No sales tax). Economic nexus: check if she exceeded $100K or 200 transactions in any state. She didn't.
- For Etsy sales. nothing. Etsy handles it.
- For Shopify sales. she only needs to collect in states where she has nexus. Right now, that's just Oregon (no sales tax), so she collects nothing.
- If she crosses $100K total or $100K in any single state, she'll need to register for a sales tax permit in those states and configure Shopify to collect.
When This Gets Complicated
Vanessa is small and simple. It gets harder when:
- You use Amazon FBA: Amazon stores your inventory in warehouses across the country. Each warehouse location creates physical nexus in that state. You may owe in 10+ states.
- You have employees in multiple states: A remote employee in Georgia creates nexus in Georgia.
- You exceed thresholds: At $200K+ in revenue spread across many states, you might hit economic nexus in 5–10 states. That's 5–10 state tax registrations, 5–10 quarterly filings.
At that point, a service like TaxJar ($19–$99/month) or Avalara pays for itself by automating the calculation, collection, and filing.
The Biggest Mistake Online Sellers Make
Ignoring it entirely. Sales tax compliance isn't optional. States are increasingly auditing online sellers, especially those on marketplaces where transaction data is easy to access. The penalty for not collecting when you should have is owing the tax out of your own pocket. plus interest and potential fines.
Vanessa's approach: check her nexus once per quarter. If revenue stays below $100K per state, she's fine. The day she crosses a threshold, she'll register, set up Shopify tax collection, and sign up for TaxJar.
Frequently Asked Questions
Do I need to charge sales tax on digital products?
It depends on the state. About 30 states tax digital products (ebooks, software, digital downloads). The others don't. Check the specific rules for states where you have nexus.
What happens if I didn't collect sales tax and should have?
You may owe the uncollected tax from your own funds, plus interest. Some states offer voluntary disclosure agreements with reduced penalties if you come forward before an audit.
Do I need to collect sales tax on shipping?
About half of states tax shipping charges. The other half exempt them. It varies state by state. there's no national rule.