Since the Supreme Court's 2018 ruling in South Dakota v. Wayfair, Inc., every online seller with economic nexus must collect and remit sales tax, even without physical presence. We handle economic nexus analysis, multi-state registration, product taxability research, and ongoing filing so you can focus on growing your brand.
On June 21, 2018, the U.S. Supreme Court ruled in South Dakota v. Wayfair, Inc. (585 U.S. ___) that states can require remote sellers to collect sales tax based solely on economic activity, overturning the 1992 physical presence standard from Quill Corp. v. North Dakota. Every state with a sales tax has since adopted economic nexus laws.
Economic nexus means your obligation to collect sales tax in a state is triggered by your sales volume or transaction count in that state, not by having a warehouse, office, or employees there. If you sell $100,000 or more into most states (or conduct 200+ transactions), you have nexus and must register, collect, and remit sales tax.
For DTC brands shipping nationwide, this often means nexus in 15 to 30+ states within the first year of scaling. Every new state where you cross the threshold creates a new filing obligation, typically on a monthly or quarterly basis.
Failing to register and collect once you have nexus creates back-tax liability. States can (and do) assess taxes going back to the date you first exceeded the threshold, plus penalties and interest.
California: $500,000 in sales
No transaction count test
Texas: $500,000 in sales
No transaction count test
New York: $500,000 + 100 transactions
Both conditions must be met
Florida: $100,000 in sales
Effective July 1, 2021
Pennsylvania: $100,000 in sales
No transaction count test
Washington: $100,000 in sales
No transaction count test
Most Other States: $100,000 or 200 transactions
Based on SD v. Wayfair model
Note: Five states have no sales tax at all: Alaska (though some local jurisdictions do impose sales tax), Delaware, Montana, New Hampshire, and Oregon.
If you sell on Amazon, Walmart Marketplace, Etsy, or other platforms, the marketplace facilitator is required to collect and remit sales tax on your behalf in most states. But this does not eliminate your compliance obligations entirely.
As of 2024, all 45 states with sales tax plus DC and Puerto Rico have marketplace facilitator laws. The marketplace collects and remits tax on sales made through its platform.
What the Marketplace Handles:
Sales through your own website, Shopify store, or any channel outside a marketplace facilitator are 100% your responsibility. You must register, collect the correct rate, file returns, and remit tax in every state where you have nexus.
Your Responsibilities:
Important for Multi-Channel Sellers:
Even if Amazon collects tax on your marketplace sales, you still need to track those sales for nexus purposes on your direct channel. Many states count ALL sales into the state (marketplace + direct) when determining whether you have exceeded the economic nexus threshold for your own direct sales. This means your Amazon sales volume can trigger a filing obligation for your Shopify sales.
One of the most complex aspects of sales tax compliance is determining the taxability of your specific products. Tax treatment varies significantly by state and product category. Getting this wrong means you are either overcharging customers or underpaying the state.
Clothing taxability is one of the most state-specific categories. Some states fully exempt clothing, others tax it, and some exempt only items under a price threshold.
State Examples:
DTC apparel brands must map each SKU to the correct taxability category in every nexus state.
Digital products (ebooks, music, streaming) and SaaS subscriptions have widely varying tax treatment. Some states tax all digital goods, others exempt them, and many fall somewhere in between.
State Examples:
SaaS and digital goods sellers must research taxability in each state individually.
Food products, dietary supplements, and health items have complex tax rules. Most states exempt "grocery food" but tax prepared food, candy, and dietary supplements differently.
Key Distinctions:
DTC food and supplement brands face some of the most complex product taxability questions.
Collecting tax on exempt items means higher prices for your customers. You will need to refund overcollected tax, and some states require you to remit it anyway if collected.
Failing to collect on taxable items creates a liability that comes out of your pocket. States assess back taxes plus penalties and interest, often 10-25% annually.
Incorrect product taxability is the number one finding in sales tax audits. States specifically target e-commerce sellers with product classification errors.
Filing sales tax in multiple states requires a systematic process. Missing a filing deadline in even one state triggers late penalties, typically 5-25% of the tax due. Here is how we manage the entire lifecycle for DTC brands.
States assign filing frequency based on your tax liability. As your sales grow, states may move you from quarterly to monthly filing. Missing the change in frequency is a common cause of late filing penalties.
Monthly Filing
Typically required when state tax liability exceeds $300-$1,000/month. Due by the 20th of the following month in most states. This is the most common frequency for established DTC brands.
Quarterly Filing
Common for newer sellers or lower-volume states. Due by the end of the month following the quarter (April 30, July 31, October 31, January 31). Some states have different due dates.
Annual Filing
Only for very low-volume states (under $100-$500/year in tax). Due in January for the prior calendar year. Some states may auto-assign annual filing when you first register.
If you sell to resellers, nonprofits, or government agencies, you must collect and validate exemption certificates. Without proper documentation, you are liable for the tax on those sales if audited.
Resale Certificates
Buyer is purchasing for resale, not end use. Must include buyer's valid sales tax permit number. Use the Multistate Tax Commission's Uniform Sales and Use Tax Certificate or state-specific forms.
Nonprofit / Government Exemptions
501(c)(3) organizations and government entities may be exempt. Requires a copy of the exemption letter or government purchase order. State rules vary on which nonprofits qualify.
Manufacturing / Agricultural Exemptions
Items purchased for use directly in manufacturing or agriculture may be exempt. Requires specific state exemption certificates documenting the intended use.
Collect certificates BEFORE or at the time of the first exempt sale, not after
Verify the buyer's sales tax permit number is active using the state's online lookup tool
Ensure the certificate covers the specific state where the goods are shipped
Store certificates digitally with a clear link to the customer account
Set reminders to renew certificates that have expiration dates (varies by state)
Document your "good faith" acceptance process in case of audit
Use a blanket certificate for repeat customers instead of per-transaction forms
These are the errors we see most often when onboarding new DTC clients. Each one creates real financial exposure. The good news: they are all fixable.
Many sellers assume they do not owe tax until a state contacts them. By then, you owe back taxes from the date you first exceeded the threshold, plus penalties (typically 5-25%) and interest (6-12% annually).
Most states use destination-based sourcing, meaning you charge the rate where the buyer is located, not where you ship from. Using origin-based rates in a destination-based state means collecting the wrong amount on every order.
Your Amazon and Walmart sales count toward the economic nexus threshold for your Shopify store in most states. Sellers who only track direct sales often miss nexus triggers created by their marketplace volume.
If you are registered in a state but had no taxable sales that period, you must still file a $0 return. Failing to file (even with zero tax due) triggers delinquency notices, penalties, and can result in permit revocation.
A "health supplement" and a "food product" may be taxed differently in the same state. Using the wrong product tax code means you are either overcharging customers or building up a back-tax liability.
Some states tax shipping charges, others exempt them, and many have conditions (taxable if the underlying product is taxable, exempt if shipped separately). Getting this wrong on every order adds up fast.
Selling tax-free to a "reseller" without a valid exemption certificate on file means you are liable for the tax in an audit. States routinely disallow exempt sales when the seller cannot produce the certificate.
The Situation
A DTC skincare brand was selling through Shopify and Amazon, generating $3.2M in annual revenue. They were only collecting sales tax in their home state (California) and assumed Amazon handled everything for marketplace sales. They had been selling for 3 years without a nexus review.
What We Found
Our nexus analysis revealed economic nexus in 27 additional states. Total estimated back-tax exposure was approximately $185,000. Several products were classified as "cosmetics" in some states but "health aids" in others, with different tax treatment. Shipping charges were being taxed uniformly when state rules differed.
Our Approach
We prioritized states by exposure amount and filed Voluntary Disclosure Agreements (VDAs) in the 8 highest-liability states to negotiate reduced lookback periods and penalty waivers. We registered in the remaining 19 states prospectively. We reclassified products by state and corrected the shipping tax configuration.
The Result
Through VDAs, we reduced the total back-tax liability from $185,000 to approximately $62,000 (a 66% reduction) by negotiating shortened lookback periods and full penalty abatement. The brand is now compliant in all 28 nexus states with automated monthly filing.
Results at a Glance
Reduction in back-tax liability through VDAs
Fully compliant with automated filing
From engagement to full compliance
Saved through VDA negotiations
Use this checklist to evaluate your current compliance posture and identify gaps before a state finds them for you.
Common questions from DTC brands and e-commerce sellers about sales tax compliance.
Yes. Since the Supreme Court's 2018 ruling in South Dakota v. Wayfair, states can require you to collect sales tax based on economic nexus alone. If you exceed the state's sales or transaction threshold (typically $100,000 in sales or 200 transactions), you must register, collect, and remit sales tax in that state, regardless of physical presence.
You likely have accumulated back-tax liability. The best path forward is usually a Voluntary Disclosure Agreement (VDA). Most states offer VDAs that limit the lookback period (often to 3-4 years instead of the full period) and waive penalties in exchange for voluntary registration. We strongly recommend filing VDAs before a state contacts you, as VDA terms are typically more favorable than audit assessments.
Amazon collects and remits tax on marketplace sales in all states with marketplace facilitator laws. However, you are still responsible for: (1) sales tax on orders through your own website or other direct channels, (2) tracking total sales into each state (marketplace + direct) for nexus threshold purposes, and (3) any states where you had nexus before marketplace facilitator laws took effect.
In most states, you use destination-based sourcing. This means the tax rate is based on the delivery address. The total rate includes state, county, city, and special district components. A single ZIP code can have multiple tax rates depending on the exact address. Tax automation software or a professional service is strongly recommended to get this right.
It depends on the state. Some states (like Texas and California when shipping is not separately stated) tax shipping charges. Others (like Colorado and Oregon, which has no sales tax anyway) do not. Several states tax shipping only when the underlying products are taxable. The treatment also depends on whether shipping is separately stated on the invoice.
A VDA is a formal agreement with a state tax authority where you voluntarily come forward to register and pay past-due taxes. In return, the state typically limits the lookback period and waives penalties. You should file a VDA when you discover you have had nexus in a state for some time but were not collecting tax. VDAs are almost always a better outcome than waiting for the state to find you through audit.
States are increasingly targeting e-commerce sellers for audit, particularly after Wayfair. Common audit triggers include: inconsistencies in reported sales vs. payment processor data, large exempt sales without certificates on file, operating in the state without being registered, and prior VDA filings that suggest compliance gaps in other states. Audits typically cover a 3-4 year lookback period.
Sales tax is collected by the seller at the point of sale. Use tax is owed by the buyer when the seller does not collect sales tax. For e-commerce sellers, you are generally collecting sales tax. However, if you purchase supplies, equipment, or inventory from out-of-state vendors who do not charge you tax, your business may owe use tax on those purchases to your home state.
Find out where you have nexus, what you owe, and how to get compliant. We review your sales data across all channels and provide a state-by-state compliance roadmap.