When I started selling on Amazon FBA in 2020, I assumed sales tax was Amazon's problem. Turns out I was right — mostly. Amazon collects and remits sales tax on my behalf in every state that requires it. But when I started testing direct sales through my own Shopify store a year later, suddenly sales tax was very much my problem. And the rules governing who owes what to which state are genuinely confusing.
The confusion stems from a single Supreme Court decision in 2018 — South Dakota v. Wayfair — that rewrote how sales tax works for online sellers. Before Wayfair, you only had to collect sales tax in states where you had a physical presence. After Wayfair, states can require you to collect sales tax based on how much you sell to their residents, even if you've never set foot there. That distinction sounds simple, but the implementation across 45 states (plus DC) with sales tax has been anything but.
What you actually need to know, broken down by the scenarios that matter most for small online sellers:
The 2018 Wayfair Decision (and Why It Still Matters)
Before June 2018, the rule was clean: if you didn't have a physical presence in a state — no office, no warehouse, no employees — you didn't have to collect that state's sales tax. An Etsy seller in Texas with no physical connection to California didn't owe California sales tax, even if half their customers lived there.
South Dakota v. Wayfair changed that. The Supreme Court ruled that states can require remote sellers to collect sales tax based on "economic nexus" — meaning your sales volume in that state, not your physical presence. South Dakota's threshold was $100,000 in annual sales or 200 transactions, and most other states adopted similar numbers.
This decision didn't create a new federal sales tax law. Each state wrote its own economic nexus rules, with its own thresholds, its own effective dates, and its own registration requirements. The result is a patchwork that's technically manageable but practically overwhelming for a one-person Etsy shop grossing $40K a year.
The good news — the thing that saves most small sellers from dealing with this directly — is marketplace facilitator laws.
When Marketplaces Collect for You
After the Wayfair decision, states quickly realized that chasing millions of individual small sellers for sales tax compliance would be impractical. So they passed marketplace facilitator laws, which shift the collection and remittance obligation from individual sellers to the marketplaces themselves.
As of 2026, every state with a sales tax has a marketplace facilitator law. This means:
- Amazon collects and remits sales tax on all orders in every applicable state
- Etsy does the same
- eBay handles collection in all states with marketplace facilitator laws
- Walmart Marketplace, Mercari, Poshmark, Depop — all covered
If you sell exclusively through these platforms, your sales tax obligation is largely handled for you. The marketplace calculates the tax based on the buyer's location, adds it to the order total, and remits it to the state. You never touch the money. It shows up separately on your seller dashboard as "marketplace-collected tax" and is not included in your payouts.
This is a genuine relief. When I look at my Amazon seller account, I can see that Amazon collected $3,847 in sales tax across 23 states last year on my behalf. If I had to calculate, collect, and file that myself, I'd need software, registrations in multiple states, and a lot more hours in the day.
Sales tax collected by the marketplace is not your income. It should not appear on your Schedule C as revenue. When you reconcile your 1099-K from Amazon or Etsy, make sure you're only counting your actual sales proceeds, not the gross transaction amount that includes sales tax. This trips up a surprising number of sellers and inflates their reported income. See our Etsy seller tax guide or Amazon FBA tax guide for platform-specific details.
When You Need to Collect Sales Tax Yourself
Marketplace facilitator laws only apply to sales made through the marketplace. If you also sell through channels where no marketplace is collecting on your behalf, the sales tax responsibility falls back on you. The most common scenarios:
Your own Shopify or WooCommerce store. Shopify is not a marketplace facilitator. It's a platform that powers your store, but you're the seller of record. If a customer in New York buys a candle from your Shopify store, and you have economic nexus in New York, you're responsible for collecting and remitting New York sales tax.
Direct sales — craft fairs, pop-ups, wholesale orders. If you sell handmade jewelry at a local market or take wholesale orders directly from a boutique, those transactions aren't happening through a marketplace. You need to collect sales tax on in-person and direct sales in any state where you have nexus.
Sales through your own website (non-Shopify). Whether it's a WordPress site with WooCommerce, a Squarespace commerce page, or invoices sent through PayPal — if there's no marketplace facilitator in the middle, you're the responsible party.
The practical question becomes: do I actually have nexus in the states where my customers are?
Economic Nexus Thresholds by State
Most states set their economic nexus threshold at $100,000 in annual sales or 200 transactions. Some states have dropped the transaction count and only use the dollar threshold. A few have different numbers entirely.
Here's the breakdown that matters for most small sellers. The dollar amounts are annual and refer to sales into that specific state, not your total revenue:
| Threshold Type | States |
|---|---|
| $100K sales OR 200 transactions | About 20 states still use this dual threshold, including New York, New Jersey, and Michigan |
| $100K sales only (no transaction count) | The majority of states have moved here, including California, Texas, Florida, Illinois, Pennsylvania |
| Different thresholds | A handful of states have lower or higher thresholds — check your specific states |
| No sales tax at all | Alaska (no statewide, but some local taxes), Delaware, Montana, New Hampshire, Oregon |
For a side hustler doing $30K-50K in annual revenue through their own website, you're unlikely to hit the $100K threshold in any single state. The 200-transaction threshold is trickier — if you sell inexpensive items in volume, you could hit 200 transactions in a large state like California or New York before you hit $100K. But with the trend toward dollar-only thresholds, this is becoming less of a concern.
You always have nexus in your home state. If you live in Texas and sell through your own Shopify store, you need to collect Texas sales tax from day one, regardless of volume. Texas is actually friendly here — no state income tax, and the sales tax registration process is straightforward.
How to Register for Sales Tax Permits
If you determine you have nexus in a state and sell through non-marketplace channels, you need a sales tax permit in that state before you start collecting. Collecting sales tax without a permit is actually illegal in most states — it sounds counterintuitive, but they want you in the system before you start handling their tax money.
The registration process varies by state but generally follows this pattern: go to the state's Department of Revenue website, create an account, fill out the registration form with your business information (name, EIN or SSN, business type, estimated sales), and submit. Most states process registrations within a few days to two weeks. Some are instant.
There is no federal sales tax registration. There is no single form that covers all states. If you have nexus in 5 states, you register in 5 states separately. This is one of the biggest pain points for growing online sellers, and it's where sales tax automation software starts earning its cost.
Once registered, you'll be assigned a filing frequency — monthly, quarterly, or annually — based on your expected sales volume. Most small sellers end up filing quarterly or annually. Each filing involves reporting your sales in that state and remitting the tax you collected.
What's Actually Taxable (and What Isn't)
Physical goods are taxable in almost every state that has sales tax. If you sell candles, t-shirts, pottery, phone cases, or any tangible product, sales tax applies. There are narrow exceptions — groceries are exempt or taxed at a reduced rate in many states, and clothing is exempt in a few states (including New York for items under $110) — but for most online sellers of physical goods, the answer is straightforward.
Digital products are where it gets messy. There is no consistent standard across states.
Some states tax all digital goods — ebooks, digital art, software, music downloads — the same as physical goods. Others exempt digital products entirely. And then there's the middle ground: states that tax streaming services but not downloadable files, or that tax "digital tangible personal property" (a phrase that manages to be both redundant and confusing) but not SaaS subscriptions.
If you sell digital products through your own store, you need to check the rules for each state where you're collecting. This is genuinely one of the most frustrating parts of online sales tax compliance. I sell a few digital templates through my site, and figuring out which states tax them took more time than creating the templates.
Services are generally not subject to sales tax in most states. If you're a freelance designer or consultant billing for your time, sales tax typically doesn't apply. But there are exceptions — some states tax certain services, particularly those related to tangible goods (like installation or repair services). When in doubt, check your state's specific rules or ask a CPA.
Sales Tax Software: TaxJar vs. Avalara
If you sell through your own store in multiple states, doing sales tax manually — looking up rates, calculating per-order tax, filing in each state — is realistic at very small volumes but falls apart quickly. Two software solutions dominate this space for small to medium sellers.
TaxJar starts at $19/month for up to 200 orders. It integrates with Shopify, WooCommerce, Amazon, and Etsy. The core function is automatic tax calculation at checkout — the software determines the buyer's location, applies the correct rate (including state, county, and city taxes), and handles product-specific rules. TaxJar also generates filing-ready reports and offers an AutoFile service that submits your returns automatically in enrolled states. For a seller doing a few hundred orders a month across 3-5 states, TaxJar handles the mechanical parts well.
Where TaxJar falls short is on the advisory side. It tells you where you might have nexus based on your sales data, but it can't tell you definitively whether you should register in a state — that's a business and legal decision. And the $19/month entry price jumps once you exceed 200 orders.
Avalara is the larger, more enterprise-focused option. Their AvaTax product handles real-time tax calculation with over 1,200 pre-built integrations. For small sellers, Avalara offers plans through their partnership with various e-commerce platforms, but pricing is less transparent than TaxJar's — you generally need to request a quote. Avalara excels if you're growing fast, selling across many channels, or dealing with complex product taxability questions.
For most side hustlers running a Shopify store alongside marketplace sales, TaxJar at $19/month is the practical choice. The cost is deductible as a business expense, and it eliminates hours of manual research and filing.
Resale Certificates
If you buy products specifically to resell them — if you're doing retail arbitrage, wholesale purchasing, or manufacturing — you shouldn't be paying sales tax on those purchases. That's what resale certificates are for.
A resale certificate (sometimes called a reseller permit or sales tax exemption certificate) tells a supplier that you're buying their product to resell, not for personal use. The sales tax will be collected when you sell it to the end consumer. Without the certificate, you'd pay sales tax twice: once when you buy the inventory and once when your customer buys it from you.
To get a resale certificate, you typically need a sales tax permit in the state where you're making the purchase. The certificate is a form (each state has its own version) that you provide to the supplier. Some suppliers accept the Multistate Tax Commission's Uniform Sales & Use Tax Certificate, which covers multiple states on one form — handy if you buy from suppliers in different states.
If you're an Amazon FBA seller buying wholesale inventory, this matters. Your wholesale supplier should not be charging you sales tax on inventory purchases if you provide a valid resale certificate. If they are, you're overpaying, and that's margin you're losing on every unit.
Common Mistakes
Ignoring your home state. Even if you sell exclusively through marketplaces (which handle collection for you), your state may still require you to have a sales tax permit and file returns. Some states want you to report marketplace-collected sales on your return, even though the marketplace already remitted the tax. It's a reporting requirement, not a payment requirement, but failing to file can trigger notices.
Confusing sales tax with income tax. Sales tax is collected from your customers and passed through to the state. It's not a tax on your income — it's a tax on the transaction that you facilitate. You don't report sales tax collected as income on your Schedule C. But the cost of sales tax software and compliance? That's a deductible business expense.
Not tracking where your customers are. If you're approaching $100K in sales through your own store, you should know which states your customers are in. Tools like TaxJar and your Shopify analytics can show you sales by state. Getting surprised by a nexus obligation is avoidable with basic sales tracking.
Over-collecting. If you set up your Shopify store to collect sales tax in all states "just to be safe," you're potentially collecting tax you're not registered to collect — and that's a problem. Only collect in states where you have nexus and a valid permit.
For most small online sellers, the practical takeaway is this: if you sell only through marketplaces, sales tax is mostly handled for you. If you also sell through your own store, you need to understand where you have nexus and set up collection accordingly. It's not as overwhelming as it seems once you figure out which scenario applies to your business — but it does require you to actually figure that out rather than ignoring it.
Related reading: Etsy seller tax guide, Amazon FBA tax guide, and the complete side hustle tax guide.
Frequently Asked Questions
Do I need to collect sales tax if I sell on Etsy or Amazon?
In most cases, no — the marketplace collects and remits for you. Amazon, Etsy, eBay, and other major platforms are marketplace facilitators required by law to handle sales tax in nearly every state. But if you also sell through your own website or at craft fairs, those sales are on you.
What is economic nexus and how does it affect small sellers?
Economic nexus means a state can require you to collect sales tax based on your sales volume there, even without physical presence. Most states use a $100,000 annual sales threshold. For small sellers doing under $50K through their own store, you're unlikely to trigger nexus in any state except your home state. The threshold applies to each state individually — it's not your total revenue across all states.
Do I need sales tax software?
If you sell through your own store in multiple states, yes. TaxJar starts at $19/month and handles rate calculation, product exemptions, and filing. If you only sell through marketplaces, you probably don't need it — the platforms handle collection for you.
Are digital products subject to sales tax?
Depends on the state, and the rules are genuinely inconsistent. Some states tax all digital goods like physical goods. Others exempt them. Some split the difference — taxing streaming but not downloads, or taxing software but not ebooks. There's no federal standard. If you sell digital products, you need to check each state where you have customers. It's the most frustrating corner of sales tax compliance, and it's where sales tax software earns its keep by tracking the rules for you.