Sales and use tax guidelines for e-commerce retailers

Determining sales tax nexus 

Wayfair eliminated the “physical presence” threshold and replaced it with an “economic nexus” threshold, allowing states to collect and remit sales tax on out-of-state e-commerce transactions.

In most states, the threshold for economic nexus is $100,000, though a few go as high as $500,000. Prior to 2025, a retailer could also establish economic nexus by simply processing more than 200 transactions. But as of January 1, 2025, 14 states — including California — dropped the 200-transaction threshold in favor of a purely monetary measure for establishing nexus.

Complicating factors

The 2025 change can complicate transactions for retailers. Consider these factors:

• Different thresholds. Besides determining sales tax nexus, the biggest complicating factor for small and medium-sized e-commerce retailers is that not all states have the same nexus laws or thresholds, and not all transactions are treated the same way in every state. Though many states have dropped their 200-transaction rule for establishing nexus, a few other states still use a combination dollar or transaction formula. In most states, however, the threshold is now $100,000. The outliers with higher limits are Alabama at $250,000, California at $500,000, and New York at $500,000.
• Different nexus criteria. Different states also use different criteria for establishing economic nexus. Some use a straight sales revenue model, while others use a model that combines such factors as gross sales, taxable sales, and sales of tangible personal property. Not all states use a calendar year, either — some use a rolling 12-month period. This state chart guide can help you stay on top of current legislation.
• Different taxing criteria. Various products and services are also taxed differently from state to state. Furthermore, counties, cities, and towns can impose — and continually change — their own taxes on e-commerce transactions.
• Weird nexus triggers. Nexus issues are further complicated by strange and sometimes illogical triggers. In some states, for example, just advertising online through Facebook or Instagram is enough to trigger sales tax nexus obligations.

Nexus in some states can also be triggered by:

• Warehousing inventory in the state
• Hiring an employee, contractor, or sales representative in the state
• Selling products at a local tradeshow
• Using billboard advertising anywhere in the state
• Hiring assembly or maintenance services provided by a third party located in the state
  
  
• Affiliate or click-through nexus. Even if an e-commerce business doesn’t have physical or economic nexus in a state, it can still incur sales tax obligations in multiple states if it receives enough referrals from other businesses or certain affiliates, like employees, sales representatives, or franchisees. This is known as “affiliate” nexus if the internet is not involved — a door-to-door salesperson, for example — and “click-through” nexus when the internet is involved. Remember that the sales threshold for affiliate or click-through nexus is typically lower than it is for economic nexus — usually between $10,000 and $50,000. Determining nexus for e-commerce retailers can be tricky, however, because the rules are murky to begin with, and they are always changing. For example, Illinois repealed — then re-enacted — click-through nexus.

Best practices

Small and mid-size business owners need to examine the rules in the states where they do business and determine whether they surpass the nexus thresholds.

Determining click-through nexus requires understanding the dollar amount of referrals from relevant entities in other states and comparing that amount to the click-through threshold in those states.

Simplify sales tax nexus through marketplace facilitators

While large retailers typically operate their own e-commerce platforms, many small and medium-sized e-retailers sell through marketplace facilitators such as Amazon, eBay, and Etsy.

Selling through a marketplace facilitator simplifies e-commerce sales tax and nexus considerations for the retailers that use them. After Wayfair, most states with a sales tax —except Alaska, Delaware, Montana, New Hampshire, and Oregon — instituted marketplace facilitator laws. These laws require marketplaces to collect and remit sales tax on behalf of the companies whose online sales they facilitate.

Complicating factor

Even though marketplace facilitators typically manage sales taxes for e-retailers, they don’t manage all tax obligations. In some states, for example, nexus established by means other than physical presence or online sales — such as through warehousing or hiring employees or contractors — can also trigger income tax obligations, which facilitators do not collect. States that do not collect sales tax may also have other requirements that facilitators don’t manage.

Best practices

Because tax rules vary from state to state, e-commerce businesses need to understand how their sales activities in each state impact their tax responsibilities, regardless of the sales platform they use.

E-commerce retailers are responsible for understanding their own sales tax footprint, so they shouldn’t rely entirely on marketplace facilitators for compliance-related tax data.

Manage tax exemption certificates and credits

Again, every state has different criteria and rules for sales tax exemption certificates and credits. Yet it’s also essential that these certificates and credits are collected and validated at the point of sale (POS). This means the exemption criteria for each state need to be programmed into an automated solution that manages certificates and credits through the retailer’s POS system.

Because exemption certificate criteria are so complex, two programs — the Streamlined Sales Tax (SST) Project and the Multistate Tax Commission (MTC) program — have developed a universal exemption document that member states will accept. Unfortunately, only about half the states — currently 24 — accept SST certificates and about 38 states accept the MTC certificate, so universality has yet to be achieved. Moreover, each state is free to make up its own rules about how exemption certificates can be applied to different types of transactions.

Best practices

Identify all the applicable exemption certificates and credits necessary for the business, and understand that many apply to specific industries, types of equipment, and overall tax status, such as profit versus non-profit. 

Unless the business is only managing a few exemptions or credit certificates, some form of exemption certificate management software is the only practical way to manage real-time validation requirements.

Understand the difference between origin and destination states for state-by-state compliance

When Wayfair ended physical presence nexus rules, that decision enabled states to change how businesses located within the state collect and remit online sales taxes. This change led to the important distinction between origin-based and destination-based states.

In origin-based states, sales tax is based on where the seller’s business is located. In destination-based states, the sales tax rate is based on where the buyer is located — the destination of the sale.

For example, if a business is physically located in an origin-based state, it should charge every customer in that state the same sales tax rate, plus any applicable additional jurisdictional taxes. But if a business is in a destination-based state, it should charge sales tax based on where the buyer is located, plus any applicable local taxes.

Complicating factors

The designation of origin and destination-based states creates these complications:

• California’s hybrid system. Post Wayfair, all but about 10 states have become destination-based states. One outlier is California, which has a hybrid system wherein state, county, and city taxes are based on a sale’s origin, but district taxes — which are used to pay for transportation infrastructure — are based on the buyer’s location.
• Origin or destination crossover. Tax rates for businesses operating across borders between origin and destination states can also be tricky. For example, suppose a retailer’s home state is destination based, but the business keeps some or all of its inventory in an origin-based state. Then the inventory could trigger sales-tax nexus and subject the retailer to sales tax rates in the origin state — both for transactions within the state and transactions involving inventory stored in that state.

Best practices

Every e-commerce retailer needs to understand the sales tax rules in the state where the business is based. The business also needs to know these rules for its customers' location and whether any of its practices may trigger nexus in another state. If so, the retailer must know what the tax implications are.

If the retailer conducts online business in — or is expanding into — multiple states, identify potential crossover issues and run sample tax scenarios to get a clearer picture of the business owner’s tax obligations.

Remote online sellers

The rules differ somewhat for e-commerce sellers who have established economic nexus in a state, but the business itself is located out- of- state — otherwise known as “remote sellers”.

In most cases, remote sellers use the destination system and charge the destination-based tax rate for the state where the buyer is located. Things get complicated in situations where nexus is established inadvertently by some other means and the remote seller is unaware. See “weird nexus triggers” above.

Best practice

To simplify matters, some origin-based states allow remote sellers to use a flat rate. But remember, every state has its own sales tax laws and regulations, rules for exemptions, and other variables for calculating and collecting sales tax. Everything really depends on the specific laws in states where an e-retailer has established nexus.

Consider international sales tax for e-commerce

E-commerce retailers who ship products internationally should be aware that the rules for international e-commerce can be complex and may vary significantly depending on the countries involved.

In general, however, the following are the most common considerations.

VAT or GST

Some countries have a value-added tax (VAT), also known as a goods and service tax (GST). This is a tax on the supply or value added to goods and services at each stage of production and distribution. Currently, 175 countries use VAT or GST. The Organisation for Economic Co-operation and Development (OECD) guidelines handbook outlines the rules for each.

• The European Union (EU). EU VAT or GST rules differ from country to country, but in general, e-retailers need to register for VAT or GST in countries where they have exceeded online sales thresholds. They must charge VAT or GST on sales and file tax returns according to the rules in each country.
• VAT or GST outside the EU. Many other countries also use a VAT or GST system, including Japan, Norway, the United Kingdom, Switzerland, and South Korea. But while certain criteria may differ, all these countries require e-retailers to register, report, and remit VAT or GST according to their country’s specific rules.
• Customs duties and import taxes. Any time physical goods cross a border, customs duties, tariffs, and import taxes may apply. These fees are separate from — or in addition to — a VAT, GST, or sales tax and are collected by the destination country’s customs authority. Registration and remittance rules vary by country, which is why many e-commerce companies that ship in volume to multiple countries often hire local agents or brokers to manage duty obligations.
• Transfer pricing. E-commerce retailers that operate internationally should be aware that tax authorities scrutinize transfer pricing practices to make sure prices are consistent with current market values and adhere to the so-called arm’s length rule. Pricing of intangible assets and digital services is particularly interesting to tax authorities and could trigger an audit if the pricing suggests an attempt to profit-shift.

Best practices

Best practices for VAT or GST compliance include:

• Maintain complete transparency and visibility into the supply chain, which is essential for calculating VAT or GST.
• Keep detailed records of transfer pricing methodologies to demonstrate compliance with a given country’s tax laws, should it ever be necessary to defend them.
• Automate VAT or GST to ensure day-to-day accuracy for every transaction.

What you can do to remain tax compliant while selling online

Once an e-commerce business understands its nexus issues and sales and use tax obligations, an automated, cloud-based solution can eliminate most of the headaches by streamlining the entire sales tax process.

The key is to find an easy-to-use solution that a business can customize and configure to meet its needs now and in the future. But all vendors are not equal.

To pick the right sales tax software, research how well it is supported and how easily it can be integrated into existing business systems. Also, be sure to choose a vendor that has demonstrated expertise in your specific industry, as well as a strong record of success.

As for features, it helps to choose a vendor whose solution combines tax automation and e-invoicing compliance — for both ease of use and accuracy.

Besides sales tax, VAT or GST, and certificate management, look for a software solution that keeps track of regulatory updates and can create audit-ready reports. Doing so will minimize the chances of audits and penalties, ensure greater accuracy, and free up time for more valuable work.

Remember, tax automation software isn’t an expense, it’s an investment — and the right solution will yield dividends for many years to come.