What Changed With Wayfair
Before the Supreme Court's 2018 decision in South Dakota v. Wayfair, Inc., states could only require businesses to collect sales tax if the business had a physical presence (physical nexus) in the state. An e-commerce seller operating from a single warehouse in Texas with no employees, inventory, or offices in California had no obligation to collect California sales tax.
Wayfair changed this by ruling that states can require sales tax collection based on economic nexus, meaning a sufficient volume of sales into the state, regardless of physical presence. South Dakota's law, which the Court upheld, set the threshold at $100,000 in sales or 200 transactions into the state per year.
Within 18 months of the Wayfair decision, virtually every state with a sales tax had enacted economic nexus laws. Today, 45 states plus the District of Columbia impose sales tax, and all of them have economic nexus provisions. The only states without a general sales tax are Alaska, Delaware, Montana, New Hampshire, and Oregon (though Alaska allows local sales taxes).
For e-commerce sellers, this means you are almost certainly required to collect and remit sales tax in states beyond your home state. The question is which states and what obligations apply.
The Three Types of Nexus
Economic Nexus
Economic nexus is triggered when your sales into a state exceed that state's threshold. The most common threshold is $100,000 in gross sales or 200 transactions per calendar year, though many states have eliminated the transaction count and use only the dollar threshold.
Some key variations to be aware of: California's threshold is $500,000 in sales (no transaction count). Texas uses $500,000 in sales. New York uses $500,000 and 100 transactions. Most other states use $100,000 in sales or 200 transactions, but several states have dropped the transaction count entirely.
Important: The threshold is based on total sales into the state, not taxable sales. Even if some of your products are exempt from sales tax in a given state, exempt sales still count toward the nexus threshold.
Monitor your sales by state monthly. Once you exceed a state's threshold, you typically must register and begin collecting within 30 to 60 days (varies by state). Do not wait until year-end to check.
Physical Nexus
Physical nexus exists when you have a tangible presence in a state. Common triggers include an office, warehouse, or store in the state; employees or independent contractors working in the state; inventory stored in the state (this is the big one for Amazon FBA sellers); and attendance at trade shows or craft fairs in certain states (some states exempt temporary presence under a set number of days).
Amazon FBA and physical nexus: If you use Fulfillment by Amazon, your inventory may be stored in warehouses across a dozen or more states. Each state where Amazon stores your inventory is a state where you have physical nexus. Amazon does not always disclose in advance where your inventory will be stored, which creates a compliance challenge. Use Amazon's inventory placement reports to determine which states hold your stock and register in each one.
Marketplace Facilitator Nexus
Most states now have marketplace facilitator laws that shift the sales tax collection obligation from the individual seller to the marketplace platform (Amazon, Walmart, Etsy, eBay, etc.) for sales made through that platform.
This means Amazon collects and remits sales tax on your Amazon sales in states with marketplace facilitator laws. You do not need to collect separately on those transactions.
However, marketplace facilitator laws do not cover your direct-to-consumer (DTC) sales through your own Shopify store, your wholesale transactions, or sales through platforms that are not classified as marketplace facilitators. For those channels, you must collect and remit sales tax yourself in every state where you have nexus.
The Registration Process
When to Register
You must register for a sales tax permit before you begin collecting sales tax. Collecting tax without a valid permit is illegal in most states. This creates a timing challenge: you need to monitor your sales volume by state, recognize when you are approaching a threshold, and register before you exceed it.
In practice, register as soon as you determine you will exceed a state's nexus threshold in the current or following calendar year. If you are already over the threshold, register immediately.
How to Register
Most states allow online registration through their department of revenue website. The registration process typically requires your EIN (Employer Identification Number), your state of incorporation or organization, the nature of your business, your expected sales volume in the state, and your preferred filing frequency (some states assign this automatically).
Registration is free in most states. Processing takes anywhere from one day to several weeks depending on the state. Some states (California, for example) require additional forms and may impose a security deposit for new registrants.
Streamlined Sales Tax Registration
If you have nexus in multiple states, the Streamlined Sales Tax Registration System (SSTRS) allows you to register in up to 24 member states through a single online application. This saves significant time compared to registering individually in each state. Not all states participate in the streamlined system, so you may need to supplement with individual registrations.
Filing Obligations
Filing Frequency
Each state assigns a filing frequency based on your estimated sales tax liability. Common frequencies are monthly (for sellers with higher tax obligations, typically over $500 to $1,000 per month in tax); quarterly (for moderate-volume sellers); and annually (for low-volume sellers).
Filing frequency can change as your sales volume changes. A state may start you on quarterly filing and move you to monthly once your tax liability exceeds a certain threshold.
What to File
Your sales tax return reports: total gross sales into the state, exempt sales (wholesale, resale, tax-exempt buyers), taxable sales, tax collected, and any applicable discounts (some states offer a small discount for timely filing and remittance).
Multi-channel sellers must aggregate sales from all channels (Amazon, Shopify, wholesale, etc.) on a single state return, excluding sales where a marketplace facilitator has already collected and remitted the tax.
Zero Returns
If you are registered in a state but had no taxable sales during a filing period, you must still file a zero return by the deadline. Failure to file a zero return triggers late filing penalties in most states, even though no tax is owed. This catches many sellers off guard; they assume no sales means no filing obligation.
Common Compliance Failures
Failure to Register in Amazon FBA States
This is the most common and most costly mistake for FBA sellers. Amazon stores your inventory in states you may not even be aware of, creating physical nexus. Sellers who do not track inventory placement and register in FBA states accumulate tax liabilities that can reach five or six figures before they realize the problem.
Not Charging the Correct Rate
Sales tax rates vary not just by state but by county, city, and special taxing district. A customer in one ZIP code might owe 7.25% while a customer three miles away owes 9.5%. Using a flat state rate instead of the precise local rate will result in undercollection in some transactions and overcollection in others.
Use a sales tax automation platform (TaxJar, Avalara, or Vertex) that calculates the precise rate for each transaction based on the ship-to address. Shopify and most e-commerce platforms integrate with these services.
Misclassifying Products
Many products are taxed at different rates or are exempt entirely in certain states. Clothing is exempt in Pennsylvania but taxable in California. Food products have varying taxability by state. Digital products and SaaS subscriptions have complex and inconsistent tax treatment across states.
If you sell products in categories that may be exempt or subject to reduced rates, research the specific rules in each state where you have nexus. Misclassification in your favor (not charging tax on a taxable product) creates a liability. Misclassification against your favor (charging tax on an exempt product) creates customer complaints and potential refund obligations.
Ignoring Use Tax Obligations
When you purchase inventory, equipment, or supplies from out-of-state vendors who do not charge sales tax, you may owe use tax to your home state. Use tax is self-assessed and reported on your state sales tax return. Many e-commerce sellers are unaware of this obligation and accumulate use tax liabilities over years.
Penalties and Interest
State penalties for sales tax non-compliance vary but typically include: late filing penalties (5% to 25% of the tax due per month, up to a maximum), late payment penalties (similar structure to late filing), interest on unpaid tax (typically 1% to 1.5% per month, compounding), and fraud penalties (up to 100% of the tax due for willful non-compliance).
The most dangerous scenario is retroactive assessment. If a state determines that you had nexus for three years before you registered, it can assess the sales tax you should have collected for the entire three-year period, plus penalties and interest. On $1 million in taxable sales at an average 7% rate, that is $70,000 in tax, plus potentially $20,000 to $40,000 in penalties and interest.
Voluntary Disclosure Agreements
If you discover that you have had nexus obligations in one or more states and have not been collecting, a voluntary disclosure agreement (VDA) is usually your best path to compliance. A VDA is a negotiated agreement with the state where you register, file back returns for a limited lookback period (typically 3 to 4 years instead of the full statute of limitations), and pay the tax due with reduced or waived penalties.
VDAs are only available to sellers who come forward before the state contacts them. Once a state sends you a notice or begins an audit, the VDA option is generally off the table.
Work with a sales tax advisor or attorney to manage the VDA process. They will negotiate with the state on your behalf, manage the lookback period, and ensure the agreement protects you from further assessment for the covered periods.
The bottom line: sales tax compliance is not optional, it is not something you can figure out later, and the cost of non-compliance far exceeds the cost of doing it right from the start.