Online Selling and Taxes: What You Need to Know

Many new online sellers assume that small or occasional internet sales are automatically tax-free. In reality, most U.S. states tax online transactions in much the same way as in‑store purchases, and your obligations depend on where you sell, how much you sell, and how your business is structured.

This guide explains when taxes apply to online selling, how state thresholds operate, and what small sellers should do to stay compliant without overcomplicating their operations.

Key Tax Concepts for Online Sellers

Before looking at specific thresholds, it helps to separate the main types of tax that may apply to online selling in the United States.

• Sales tax – A tax on retail sales of taxable goods and certain services, generally collected from the buyer and remitted to the state or local authority.
• Use tax – A companion tax to sales tax, typically due when sales tax was not collected on a taxable purchase shipped into a state.
• Income tax – Tax on the profits or net income of your business, typically handled through federal and state income tax returns.

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Online sellers are usually most concerned with sales and use tax, because these taxes affect how you price items and what you must collect from customers at checkout.

Internet Sales Tax Is Not a Separate Tax

The term internet sales tax is often used in media and business discussions, but it does not describe a separate tax category. Instead, it refers to the application of existing state and local sales and use taxes to remote or online transactions.

From the perspective of many state tax agencies, an online sale of tangible merchandise is treated much like a sale in a physical store. If the item would be taxable in a store, it is typically taxable when sold online, unless a specific statutory exemption applies.

Why the Wayfair Decision Matters

For many years, states could generally require a seller to collect sales tax only if the seller had a physical presence—such as a store, office, or warehouse—in that state. This changed with the landmark 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc.

In Wayfair, the Court held that states may impose sales tax collection obligations on remote sellers even if they lack physical presence in the state, provided that the seller has sufficient economic connection, called economic nexus.

Since that ruling, nearly every state that imposes a sales tax has adopted economic nexus rules for remote sellers, including online businesses.

Understanding Economic Nexus Thresholds

Economic nexus refers to the level of sales activity that triggers a requirement for a remote seller to register, collect, and remit sales tax in a particular state.

Most states define economic nexus using one or more measurable thresholds, such as revenue or transaction counts during a calendar year.

Common Types of Economic Nexus Thresholds

While exact rules vary by state, thresholds typically fall into a limited number of patterns.

• Revenue-only thresholds – For example, a requirement to register once your sales into a state exceed a specified dollar amount (such as $100,000 or $500,000) in a year.
• Transaction-only thresholds – Some states use the number of separate sales transactions into the state (such as 200) as the trigger.
• Combined thresholds – Other states require both a minimum revenue amount and a minimum transaction count, or allow nexus to be established when either condition is met.

For example:

• Georgia requires remote sellers to collect sales tax once they exceed either $100,000 in revenue or 200 transactions with Georgia customers in a year.
• Arkansas applies economic nexus when a seller has at least $100,000 in sales or 200 separate transactions in the state during a calendar year.
• Some states, such as Nevada or California, rely on revenue thresholds alone, such as $100,000 and $500,000 respectively.

Illustrative Threshold Table

The table below presents simplified examples of how thresholds can differ among states. Always verify current rules directly from official state tax agencies before making compliance decisions.

When Do You Have to Collect Sales Tax on Online Sales?

In general, you must collect sales tax on online sales into a state when both of the following are true:

• The item sold is taxable under that state’s laws (for example, most tangible personal property).
• You have sales tax nexus with that state, either through physical presence or economic activity that meets the threshold.

Nexus can be created in several ways.

• Physical presence nexus – Having a store, office, warehouse, employees, or inventory in a state typically requires you to collect sales tax on taxable sales to customers there.
• Economic nexus – As discussed, exceeding the state’s revenue or transaction thresholds can obligate you to collect sales tax, even if you have no physical presence.
• Click-through or affiliate nexus – In some states, referrals or marketing arrangements with in‑state affiliates may create nexus if they generate a specified volume of sales.

Once nexus is established, you must generally register with the state and obtain a sales tax permit before you begin collecting tax from customers.

State Examples: How Online Sales Are Treated

Although the broad principles are similar, each state implements its own rules and guidance regarding online sales.

California

California treats internet sales of tangible merchandise largely the same as other retail sales. Retailers engaged in business in California are responsible for collecting and paying sales or use tax on taxable internet sales made to California customers.

• Internet sales are subject to tax if the sale occurs in California or if merchandise is delivered to a California location, unless a specific exemption applies.
• Retailers must generally obtain a seller’s permit or other registration before collecting tax.
• Marketplace facilitator rules may shift tax collection responsibilities to certain online platforms that meet defined criteria.

Texas

Texas imposes a state sales and use tax rate of 6.25 percent, with local sales and use taxes capped at an additional 2 percent.

• Texas sellers must collect sales tax on taxable items sold online to Texas purchasers, including applicable shipping or delivery charges.
• Certain purchases are exempt, such as purchases for resale when the buyer provides a valid resale certificate, or items exported out of the country through eligible channels.

Ohio (illustrative of combined state and local rates)

Ohio’s statewide sales tax rate is 5.75 percent, with combined local and transit rates capped at 8.75 percent. As in other states, online sellers with nexus are responsible for collecting applicable state and local taxes on taxable sales to Ohio customers.

Is There a “Tax-Free” Amount You Can Sell Online?

A common question among small online sellers is: How much can I sell online without paying taxes? The answer is more nuanced than a single number.

Two distinct issues are involved:

1. Sales tax collection obligations – Whether you must charge customers sales tax and remit it to the state.
2. Income tax reporting obligations – Whether you must report and pay income tax on profits from your online activities.

Sales Tax Thresholds vs. Income Tax

• Economic nexus thresholds (such as $100,000 in sales or 200 transactions) generally determine when a remote seller must begin collecting sales tax in a state.
• These thresholds do not exempt the seller from income tax; income tax rules are separate and often require reporting even relatively small amounts of business income.
• In many cases, if you are operating a business or regularly selling items for profit, you may have income tax obligations even before crossing any sales tax thresholds.

Therefore, while some states allow small remote sellers below their economic nexus thresholds to avoid registration and sales tax collection, this does not mean the income from those sales is tax‑free.

Marketplace Facilitators and Platform Sales

Many online sellers use third‑party platforms—such as major marketplaces or auction sites—to reach customers. States increasingly treat these platforms as marketplace facilitators when they meet statutory criteria.

Under marketplace facilitator laws:

• The platform may be considered the retailer for tax purposes.
• The facilitator, rather than the individual seller, may be required to collect and remit sales tax on facilitated transactions.
• Sellers using these platforms may have reduced direct sales tax obligations for facilitated sales, though they can still have obligations for sales made through other channels or in states without such laws.

It is important for sellers to review each marketplace’s tax policies and match them against state law to understand who bears the responsibility for collecting and remitting tax on each sale.

Practical Steps for Small Online Sellers

Online tax rules can be complex, but small sellers can manage risk by following a structured approach.

1. Clarify Your Business Model

• Determine whether you are running a business or occasionally selling personal items.
• Identify the types of products you sell and whether they are typically taxable in the states where your customers live.

2. Identify Where You Have Nexus

• List states where you have physical presence (such as inventory locations or employees).
• Review your sales over the past 12 months to see whether you approach or exceed economic nexus thresholds in any state.
• Consider whether affiliate or referral arrangements could create click‑through or affiliate nexus.

3. Register Before Collecting

• Once nexus exists, most states require that you register for a sales tax permit before collecting tax.
• Registration processes vary by state; many can be completed online through the state revenue department or tax agency.

4. Configure Your Checkout System

• Use reputable ecommerce software capable of calculating state and local sales tax based on customer location.
• Ensure taxable and exempt items are correctly categorized.
• Verify that shipping and handling charges are taxed or exempt as required by state law; for example, Texas taxes certain shipping charges as part of the sale.

5. File Returns and Remit Tax

• After collecting tax, you must file periodic sales tax returns with each state where you are registered and remit the amounts collected.
• Filing frequencies (monthly, quarterly, annual) often depend on your volume of taxable sales.

Common Mistakes to Avoid

Small online sellers often make avoidable errors that can create back taxes, penalties, or administrative complications.

• Collecting without a permit: Collecting sales tax before registering with the state can violate state rules and complicate remittance.
• Ignoring remote sales: Assuming that out‑of‑state sales are tax‑free can lead to unrecognized nexus and unpaid tax.
• Misclassifying products: Treating taxable items as exempt (or vice versa) can distort your collection and filing obligations.
• Forgetting marketplace rules: Not understanding whether a marketplace facilitator is collecting tax on your behalf may cause double collection or undercollection.

Frequently Asked Questions

Do I owe sales tax if I only sell a few items online each year?

If you sell only occasionally and remain below economic nexus thresholds in all states, you may not be required as a remote seller to register and collect sales tax in those states. However, if you have physical presence in your home state, you may still have to collect tax on taxable sales to customers there, even when your volume is low.

Is income from online sales always taxable?

Income tax rules are separate from sales tax. In most cases, profits from online selling are subject to federal and, where applicable, state income tax, even when sales volumes are modest. You should consult a tax professional for guidance on reporting income from your online activities.

How do I know if my products are taxable?

Taxability depends on each state’s laws. As a general rule, most tangible personal property sold at retail is taxable unless specifically exempted, as noted in state guidance such as California’s publication on internet sales and Texas’s sales tax information for online orders.

What happens if I ship items to states where I am not registered?

If you do not have nexus in a state, you are usually not required to collect that state’s sales tax. The purchaser may owe use tax directly to their state. Once your activity in that state crosses an economic nexus threshold, you will typically need to register and begin collecting tax.

Can marketplace facilitators handle my tax obligations?

Many large marketplaces collect and remit sales tax on facilitated sales in states with marketplace facilitator laws. Even so, you may have separate obligations for sales made through your own website or other channels. Check both marketplace policies and state law to understand the division of responsibility.

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medha deb

 

Medha Deb is an editor with a master's degree in Applied Linguistics from the University of Hyderabad. She believes that her qualification has helped her develop a deep understanding of language and its application in various contexts.

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