The complete guide to ecommerce and online selling

The worldwide growth of ecommerce has made it easier than ever to find new customers and break into new markets. This news should be exciting for everyone doing business online. However, the more places you sell into, the more tax obligations you’ll have. That’s where things start to get tricky for online sellers and the marketplaces they sell on.

In the following guide, we’ll break down the ins and outs of online selling, the risks associated, and the keys to success. You’ll learn about potential tax compliance challenges of online selling and how to solve them, whether you sell on a website or ecommerce store, through a marketplace — or you are the marketplace.

You may wonder if you need to collect sales tax for online sales. It depends.

This question can be answered with another question: Do you have sales tax nexus in states where your products are being delivered?

If the answer is yes — you do have nexus in a state — you’ll have to register to collect and remit sales tax in that state. If you’re selling on a marketplace, the marketplace usually collects and remits sales tax for you — but that’s not always the case. If the marketplace doesn’t have nexus, but you do, you’re responsible for the tax owed.

Outside of sales tax, marketplaces are also required to collect, verify, and provide certain information about high-volume sellers on their platform. Making this information available to customers is mandated by the INFORM Consumers Act that went into effect in June 2023 due to the rise of stolen and counterfeit goods on major online marketplaces. 

The business risk of not collecting sales tax online is great enough that we have decided to speak to it directly. Other than property and income tax, sales tax is the largest source of state tax revenue, and one frequently leveraged to fill budget gaps. In short, state governments want their sales tax dollars.

When it comes to selling online, it’s the online business or seller that’s frequently responsible for sales tax. Marketplace facilitators are obligated to collect and remit sales tax on behalf of all the online sellers on their platform. Yes, businesses typically pass this responsibility to buyers by charging sales tax for online sales, but if the online seller fails to do that, the business will be the party held accountable by state and local tax authorities.

Every dollar of ecommerce sales tax you fail to collect is a dollar you’ll be held accountable for by state and local tax authorities. Additionally, late payment penalties, interest, and collection fees may also be assessed. At the extreme, criminal charges may be brought if it’s determined tax evasion has taken place.

The most common question we hear from online sellers and marketplace facilitators is, “When do I need to collect sales tax for selling online?” The answer is complicated.

If you’re running your business by the letter of the law, you need to begin collecting ecommerce sales tax on your first taxable sale. The same goes for marketplace facilitators. If vendors are selling on your platform, then you should be collecting sales tax from the start. State and local tax authorities don’t offer a grace period wherein online sales tax can be ignored. We understand, however, that most small business owners are looking for a magic number. For that, consider the following statement from Michael Fleming of Peisner Johnson:

As mentioned above, managing sales tax on online purchases is complicated. That shouldn’t come as a surprise. All taxes are complicated. Why should ecommerce sales tax be any different?

There are online sellers who would have you believe they’re tax experts simply because they too are wrestling with online sales tax compliance — and they may be very knowledgeable. But, it’s very difficult to discern the experts from the charlatans, and consequently, when the advice you’re getting is sound versus wrong.

We encourage the online businesses we speak with to strike a balance between online research and professional advice. Always consult an accounting professional or government websites when you have questions that go beyond the fundamentals of online sales tax compliance.

Once you’ve decided to get started collecting sales tax for online sales, you’ll need to know in which states you’re required to collect sales tax because you’ve established nexus.

To trigger economic nexus means that you’ve exceeded a U.S. state’s sales or transactions threshold — and now you must collect, remit, and report sales tax there.

But these aren’t the only ways to trigger nexus. You may unknowingly have tax obligations in a state via several different types of business activities.

Nexus is broadly defined as “a physical connection to a state or local taxing jurisdiction.” However, nexus isn’t limited to a physical presence in the plain English sense of the words.

It used to be that businesses needed a physical presence in a U.S. state to have tax obligations there. But since the U.S. Supreme Court’s decision in South Dakota v. Wayfair, Inc. in 2018, even online sales into a state can trigger nexus, aka tax obligations.

It’s highly likely that an online seller will make a tax-exempt sale sooner or later. Taxable goods may be eligible for sales tax exemption depending on the type of buyer or the manner in which the goods will be used.

It’s on the seller to collect and file a valid exemption certificate for each business, organization, or individual making an exempt purchase.

It’s also up to the online seller to ensure that exemption certificates are valid for each sales transaction. This requires your business to keep a copy of each exemption certificate and ensure that they’re renewed when they expire.

Because marketplace facilitators are responsible for sales tax, they can also find themselves responsible for validating these exempt sales. Depending on the marketplace, you could be dealing with a huge amount of certificates, so having a system to collect and store your exemption certificates can be crucial to maintaining tax compliance.

Sales tax rates and regulations vary depending on what and where you’re selling, who you’re selling to, and the channels you sell through. 

The type of product being sold — physical, digital, or service — has a huge impact on the way it will be taxed. As usual, how products are taxed varies from state to state. 

If you sell digital products, the type of product may determine if it’s taxed at all. For example, digital games are exempt in Arkansas while other digital goods are taxable. Digital games are taxable in North Dakota while other products are exempt. Even the definition of what a digital product is can vary by state.

Similar nuances apply to physical goods and on-demand services.

It gets more complicated when a business starts bundling products together — such as selling a product alongside a service. Even something as simple as including disposable utensils with a food delivery can impact taxability.

Product taxability also depends on who you’re doing business with. Are you or your vendors selling to other businesses or directly to consumers? The kind of online store or marketplace you’re running has big implications on your tax obligations, so it’s important to get it right.

Marketplaces and vendors selling directly to consumers need to identify their items’ taxability and apply the correct tax at the point of sale.

Marketplaces and vendors selling to other businesses (B2B) may find that some transactions are exempt from sales tax. If so, it’s vital to verify and store exemption certificates for those sales in case of an audit.

The steps necessary to manage sales tax properly are as follows: determination, registration, collection, filing, and remittance. We’ll walk through each of these steps recognizing that the details specific to your situation are unique.

Just as online sellers have to consider sales tax, so do marketplace facilitators. If you’ve ever sold on Etsy, eBay, or Poshmark, you may have noticed (or been blissfully unaware) that you didn’t have to calculate or collect sales tax from the buyer. That’s because marketplace facilitators are generally responsible — thanks to marketplace facilitator laws — for collecting the online sales tax on behalf of the retailers who sell through their marketplace.

Marketplace facilitators are also required to provide and distribute W-9s and 1099s to their sellers for tax reporting purposes. This task will become even more of a burden when the threshold for this requirement drops from $20,000 in marketplace sales to $600, thus increasing the number of forms you have to deliver. For reference, the number of 1099-K forms submitted to the IRS is expected to jump from 14 million to 44 million once the threshold is lowered.

While some marketplaces plan to handle this manually, automated tax compliance solutions can be a huge help in complying with the additional requirements that result from the lower threshold.

As the ecommerce universe expands, the lines between marketplace seller and marketplace facilitator are becoming blurred due the fact that many online sellers are now operating as both. From a customer perspective, it might be hard to tell whether you purchased something directly from an ecommerce business or from an online marketplace. But for the sellers themselves, the requirements are distinct.

Just like sales tax, the exact definition of a marketplace facilitator varies from state to state. But generally speaking, a marketplace facilitator is a person who:

• Owns, operates, or controls a physical or electronic marketplace
• Contracts with marketplace sellers to facilitate the sale of their products or services
• Directly or indirectly collects the payment from the purchaser and transmits all or part of the payment to the marketplace seller

In other words, the marketplace facilitator connects vendors with their customers and handles the transactions, including tax collection.

An ecommerce platform, like Shopify or Magento, is a tool that helps businesses display and sell their products or services. They can help track inventory, fulfill orders, and indicate customer preferences.

With an ecommerce platform, the online seller is still responsible for the look and feel of their online shopping experience as well as the taxes owed on the products they sell.

You’ll know if you’re selling through a marketplace if you have no control over the look and feel of the website — and you don’t have to collect sales tax.

Amazon, eBay, Etsy, and Walmart are all examples of marketplace facilitators.

There are also different types of marketplaces, each with different taxability requirements on the products they sell.

Regardless of whether you’re an online seller or a marketplace facilitator, staying tax compliant in the ever-expanding ecommerce universe is a never-ending challenge.

Tax compliance is complicated no matter what kind of business you are — and everyone doing business online, from ecommerce sellers to marketplaces, can benefit from tax compliance software. Automating your tax calculations and reporting can drastically increase efficiency, saving you time and money that would otherwise be spent on complex processes and constant tracking. 

Letting a tax compliance software, like Avalara, bear the weight of these processes can shift your focus from swimming against the current of tax compliance to riding the wave of business expansion. Contact Avalara today to learn how we can help you streamline sales tax compliance for how your business sells online, no matter where and how you’re selling.