If you run an online business, it’s easy to assume sales tax is something only brick-and-mortar stores worry about. Sometimes that’s true. Often, it isn’t. Whether sales tax for your online business applies comes down to what you sell, where you’re located, and the rules in each state where you have customers.
Sales tax has changed dramatically over the last several years as nearly everything moved online. Early on, digital products slipped through the cracks — an ebook wasn’t treated like a paperback, and a streamed file wasn’t treated like a DVD. That’s no longer the case. Most U.S. states now tax digital products and services, and as a business owner, staying current on the rules is your responsibility.
This guide breaks down sales tax for online businesses in plain English: what it is, how nexus works, whether your products are taxable, and who to call when you still have questions. The goal is clarity, so you know exactly what to check and who to reach out to keep your business operating within the law.
What are sales taxes?
Sales tax is a tax charged to the final consumer or user of a product or service. It’s levied at the state and local levels — the federal government does not have a sales tax.
Here’s the key point: sales tax is a cost to the final buyer, not a tax your business pays out of its own money the way it pays income tax. You’re legally obligated to follow sales tax laws just as you are income tax laws. Handle it correctly from the start of your business and it stays simple and inexpensive. Ignore it, and you’re looking at back taxes plus fines, penalties, and interest on top.
Sales taxes apply to tangible personal property and some services, and it’s your job to keep up with what’s taxable in your state and when the rules change. “Tangible personal property” used to mean something you could physically hold in your hand. As the online world evolved, so did that definition — and today it captures a lot of digital goods. Whether you owe sales tax is determined by something called nexus.
What is nexus?
Nexus used to mean having a physical presence in a state. Thanks to the internet — and the Supreme Court’s decision in South Dakota v. Wayfair, Inc. — the definition has expanded well beyond a storefront or office.
Today there are four kinds of nexus that matter to online sellers: click-through nexus, affiliate nexus, economic nexus, and marketplace nexus. Each falls under “Remote Seller Nexus,” which is exactly the category that affects you as an online business owner.
Click-through nexus
Click-through nexus applies when a remote seller passes a minimum sales threshold in a state because of an in-state referral partner. In plain English: if someone like an affiliate sends buyers to your sales pages, the state where that affiliate lives can create nexus for your business in that state.
Affiliate nexus
Affiliate nexus applies when a remote retailer holds a substantial interest in — or is owned by — an in-state retailer selling the same or a similar product line under the same or a similar name. In plain English, this is common with multi-level marketing companies (think doTERRA, Young Living, Younique, Paparazzi) where sellers are spread across every state, making those products taxable for sales tax purposes. Most of these companies now collect and remit sales tax themselves, but a few may not — and where they don’t, the responsibility to collect and remit falls back on you.
Economic nexus
Economic nexus requires no physical presence at all. It’s triggered when you hit a set level of sales or gross receipts in a state. This is the one that applies to essentially every online business, and it’s what changed the most after South Dakota v. Wayfair, Inc. In plain English: once you pass a state’s threshold — a certain number of transactions and/or a certain dollar amount of sales — you have economic nexus there, and it’s on you to follow that state’s rules.
Marketplace nexus
Marketplace nexus means that when an online marketplace operates in a state and provides the infrastructure — e-commerce tools, customer service, payment processing, marketing — the marketplace facilitator is required to collect and remit sales tax instead of the individual sellers. In plain English: if you sell on platforms like Amazon or Etsy, those platforms are now required to collect and remit sales tax on your sales in many states. Not every state has adopted marketplace rules yet, so if you sell through a marketplace, check on this regularly.
Does my business fall under sales tax rules?
Most likely, yes — though I don’t know your specific business, so treat this as general guidance.
If you sell tangible personal property — anything a buyer gets to keep and own, whether it’s delivered physically or purely electronically — your business falls under sales tax rules. That includes:
- Software of any kind. Email providers, social media schedulers like Tailwind, Buffer, and CoSchedule — these are software, and software sales are typically taxable even when the product only lives on a website.
- Courses and ebooks. These are commonly taxable as digital products.
Taxability rules vary state by state. Most states treat the same categories the same way, but not all do. In Pennsylvania, for example, clothing and food aren’t taxable — yet neighboring states charge tax on both. This is exactly why the research falls on you as the business owner: you need to know whether what you sell is taxable in each relevant state. When you still have questions after your own research, consult a sales/use tax accountant or reach out to the individual states for clarification.
How do I know if my sales are taxable?
It depends on your state, but the general rule of thumb is that physical, tangible property a buyer can own is taxable — whether it arrives in physical or electronic form — and some services are taxable too.
As the business owner, it’s on you to follow the rules and collect and remit sales tax on time to the correct states. If you’ve done your research and still aren’t sure, contact a sales tax professional in your state (or in any state where you’ve crossed the economic nexus threshold).
What happens if I don’t collect sales tax?
If you don’t collect it, the tax due — plus penalties, interest, and fines — comes out of your business’s pocket instead of the consumer’s.
Remember, sales tax isn’t part of your sales. The final consumer pays it on their purchase. When you collect sales tax, you’re acting as an agent of the state, holding that money and remitting it on a regular schedule (usually monthly or quarterly). It’s never your money — it’s the state’s.
Money you’ve collected but not remitted is considered trust fund money, and failing to hand it over to the state is illegal and carries major penalties. Every state has an agency that audits businesses for compliance, and that’s how noncompliance gets discovered. Follow the rules from day one and you avoid the extra penalties, fees, and fines an audit can pile on — which get expensive fast.
Sales tax exemptions
There are exemptions to collecting sales tax, and most come with an exemption certificate from the buyer. As the seller, you’re responsible for keeping that certificate on file — it’s your proof for why you didn’t charge sales tax on a given sale.
Common exemptions include:
- Sales to government agencies, which are typically sales tax exempt.
- Sales for resale. When a buyer purchases your product to resell it, that sale is exempt — the buyer then charges sales tax when they resell. This works in reverse too: when you buy inventory to resell, you shouldn’t be charged sales tax on the purchase, but you charge it when you sell.
Some services are taxable and some aren’t, so this is another area to research carefully. In an audit, “I didn’t know” is not a defense. Keeping up with the laws and regulations is part of the job.
Who do I contact with sales tax questions?
Every state publishes its legislation on its Department of Revenue website, and several reputable sites explain sales tax rules well. You can also contact a sales tax accountant or the state’s Department of Revenue directly.
When you call a state, write your questions down first — on paper or in a document like a Google Doc — and type the answers in as you go, so you’re not relying on memory later.
Sales tax for online businesses feels complicated because it genuinely varies by state and by what you sell. But once you understand nexus, know which of your products are taxable, and keep clean records of exemptions and remittances, it becomes a manageable part of running a compliant business.
This article is for general educational purposes only and is not legal, accounting, or tax advice. Always consult a qualified tax or accounting professional about your specific situation.