What Is Internet Sales Tax?

In 2018, the United States of America Supreme Court ruled that online sellers across 45 states and Washington D.C. should pay sales tax even if they do not have a physical store or presence in the state. 

This sales tax, otherwise known as an internet sales tax, is a percentage of a tax levied on online sales. Like brick and mortar merchants, online merchants are responsible for charging a sales tax to the customers and remitting the collected tax back to the state. They should collect taxes based on the customer’s location. 

How Does Internet Sales Tax Work?

Internet sales tax works similar to any other sales tax, except it is applied to online sales. Whether you should collect the internet sales tax will depend on your tax nexus and product taxability.

Tax nexus is your connection to a state. If most of your buyers are from one state, that state becomes your tax nexus and you will have to pay online sales tax to that state. You can have more than one tax nexus.

Product taxability is identifying if a product is exempt from taxes. Some states have exceptions for specific products. For example, Pennsylvania doesn’t charge sales tax on clothing.

How do you Handle Sales Tax When Selling Online?

The marketplaces like eBay, Etsy, Amazon and Walmart collect sales tax from buyers on behalf of the third-party sellers. If you sell products through these marketplaces, they’ll automatically calculate and collect internet sales taxes on transactions through their platform. 

But, if you sell products on your personal e-commerce, in order to add sales tax, you must register for a sales tax permit. After receiving the permit, you are fully responsible for collecting and remitting sales tax owed to each state.

How Much Can You Sell Online Before Paying Tax? 

Sales tax rates are different from each state and depend on the number of transactions, the sales-tax-free threshold or both. For instance, Kentucky has a sales-tax-free threshold of $100,000 or up to 200 transactions and California has a sales-tax-free threshold of $500,000.

How are Online Purchase Taxes Calculated?

Internet sales tax is governed at the state level, which means each state sets its own state rates. Identify the state tax rate and any local rates applicable to your product. Your tax will be the product of the state tax rate and the product selling price. The base tax rates usually range between 4-7% of the product’s selling price. 

Alternatively, you can also use automated software to calculate tax. These tools ask you to supply the state name and total selling price and in turn display the total tax amount automatically.

Can I Start an Online Business Without Registering?

No, you cannot. You can, however, register your online business in a single afternoon, spending less than $100. If you’re ready with your online storefront, register your domain name and submit your Employee ID Number (EIN) and domain name with the application to file for your online business registration. 

Should I Add Tax to My Invoice?

You must add sales tax to the invoice as per your state’s sales tax rates and threshold. If you are selling via marketplaces like Amazon, eBay and Etsy, they automatically apply tax on their invoices.

Factors Involved with Internet Sales Tax

If you want to start selling online, you’ll need to consider internet sales tax. Here are a few fundamental factors involved.

Sales nexus

If an online seller doesn’t have any physical presence in the state but exceeds the state’s sales tax threshold, they must collect sales tax from the buyers. For instance, if you are selling to your customer’s in South Dakota, the state government mandates collecting sales tax on their behalf when the business’s sales exceed the $100,000 threshold. 

Sales platform

If you want to conduct business from your e-commerce platform, you will have to register for a sales tax permit to collect your sales tax. But, if you sell products on an online marketplace like WooCommerce, Amazon or Etsy, they will handle your sales tax collection process themselves. 

Tax due dates

Keep an eye on the calendar to never miss your sales tax due date, as the state could subject you to late penalties. Many integration tools automatically submit your remit to the states where your sales nexus points. It ensures you never miss your due dates.


The taxability of a product is an essential factor to consider for online sales tax. While many products are taxable, some states exempt certain products from sales tax. Check with your state to ensure the product you are selling isn’t taxable to avoid collecting tax on tax-free products.

Advantages of Internet Sales Tax

Online businesses make up a trillion-dollar industry, hence why the sales tax imposed on this industry is substantial. The government can use it towards infrastructure development, debt payment or government-sponsored programs. 

While the internet sales tax increases the price of a product, it also increases the competition between vendors. Competition is vital for innovation, higher service level and overall economic growth.

Disadvantages of Internet Sales Tax

Tax can be a considerable disadvantage for small businesses as they have a lower capacity to absorb the blow from price hikes, unlike large companies. As they can’t compete with bigger businesses, many entrepreneurs and small businesses might get discouraged from continuing their businesses and decide to move to locations without any internet sales tax.

Internet sales tax is also a hassle. Businesses can find taxation laws challenging to keep up with. They might need professional assistance to ensure they are not breaching any tax laws, raising the bookkeeping cost.

Charging internet sales tax can also increase the total cost of the product. This increase can reduce the buyers’ purchase capacity and decrease the total internet sales volume.

Prepare Your Business for Internet Sales Tax

Though community and country can benefit from taxation, it can undoubtedly be burdensome and time-consuming to stay up to date with sales tax rates and due dates. Automating the sales tax calculation and remittance can reduce the hassle of taxation and avoid tax fraud. Find the best sales tax software that can calculate your sales taxes accurately and automatically now.