Sales tax basics for online sellers

Sales tax for online businesses can feel overwhelming. Rules vary by state, product type, and whether you have a physical presence. This guide gives you a grounding in the key concepts — and is clear about where you should lean on a professional.

What sales tax is

Sales tax is a tax collected from customers at the point of sale on certain goods and services. As a business, you collect the tax from the customer, hold it, and then remit (pay) it to the relevant state or local tax authority on a schedule.

You do not keep the tax — it is the government's money, collected through you.

Nexus: the key concept

Nexus is the legal term for a connection between your business and a state that creates a sales tax obligation. If you have nexus in a state, you are generally required to:

1. Register for a sales tax permit in that state
2. Collect the correct tax from customers in that state
3. File regular returns and remit the collected tax

Physical nexus

Traditionally, nexus was created by physical activity in a state — an office, employees based there, or inventory stored in a warehouse.

Economic nexus

Since the South Dakota v. Wayfair, Inc. Supreme Court decision of 21 June 2018, most states have enacted economic nexus laws. These create an obligation based on your sales into a state alone — an amount, a number of transactions, or both, measured over a period.

This means an online business with no physical presence in a state can still be obligated to collect sales tax there.

Product taxability

Not all products or services are taxed in all states. Common variations:

• Clothing may be exempt in some states
• Groceries and food items are often exempt or taxed at a lower rate
• Digital products (ebooks, software, SaaS) are treated differently in each state
• Services may or may not be taxable, depending on the state

This complexity is one reason sales tax automation tools exist.

Sales tax automation tools

Manually tracking tax rates across dozens of states is impractical. Several tools integrate with your store to automate calculation and reporting:

These tools look up the correct tax rate for each order based on the customer's location and your product type, apply it at checkout, and generate reports to help you file returns. Some go further. On Stripe's all-in-one Tax plan, Stripe Tax also monitors your sales against state thresholds, can register with tax authorities on your behalf, and can file US sales tax returns from the Dashboard. Stripe's cheaper Tax plan covers calculation only, so check stripe.com/pricing for what each plan includes.

How to register for sales tax

When you determine you have nexus in a state, you need to register before you start collecting tax. Each state, US territory and the District of Columbia has its own tax authority, and you register with each one separately, through its department of revenue or equivalent. Most have online registration. A group of states runs a shared registration system under the Streamlined Sales and Use Tax Agreement, which can cover several member states in one application.

Do not start collecting tax before you are registered — collecting without a permit can create its own compliance issues.

Common questions

Do I need to charge sales tax on digital products like ebooks or courses?

It depends on the state and the specific product. Some states treat digital products the same as physical goods. Others have exemptions. This is an area where professional advice is especially important.

What if I have been making sales without collecting tax and I should have been?

This is called "back taxes" or a sales tax liability. Many states have voluntary disclosure programs that allow businesses to come forward and settle past liabilities under more favorable terms. An accountant can advise you on the best course of action.

Does Stripe automatically handle sales tax for me?

Stripe Tax does a fair amount once you enable and configure it. It calculates and collects the right amount at checkout, and on Stripe's all-in-one Tax plan it also monitors your sales against state thresholds, can register with tax authorities on your behalf, and can file US sales tax returns from the Dashboard. Two things to know: Stripe's cheaper Tax plan covers calculation only, and the threshold monitoring looks at your sales outside the state your business is based in. None of it removes your responsibility. The obligation to be registered where you should be, and to file and pay on time, stays with you. Treat it as the tool that does the work, not as the person accountable for it.

What about VAT for international customers?

VAT (Value Added Tax) is used in many countries outside the US, including the EU and UK. If you sell to international customers, VAT obligations can apply. This is a separate and complex topic. Speak with a tax professional who handles international e-commerce.

Do I need to charge tax on services?

Many US states do not tax services, but some do — and the rules are inconsistent. If you sell services online, consult an accountant to determine whether sales tax applies in the states where you have nexus.

Related guides

• How online payments work
• Stripe basics for business owners
• Payment fees explained
• How taxes work in WooCommerce

Learn more

• US Supreme Court: Opinions of the Court, 2017 term — South Dakota v. Wayfair, Inc. is no. 58, decided 21 June 2018
• Stripe Tax
• Stripe: Collect tax in the United States — per-state thresholds and registration links
• Streamlined Sales Tax Governing Board — shared registration across member states
• TaxJar: What is sales tax? A complete guide
• Avalara: Guide to sales tax nexus rules
• Sales Tax Institute: State sales tax rates