Is your store taking off and you’re now wondering whether or not you need to collect sales tax on online sales?
In this post, we cover what sales tax is for ecommerce as well as what conditions your store needs to meet in order to be required to collect sales tax.
Note: We are not tax experts. If you’re unsure about what state sales tax laws you need to follow, such as local sales tax you may need to collect, how much sales tax you need to collect and what your sales tax exemptions are, consult a tax advisor.
What is sales tax for ecommerce?
Sales tax is a part of everyday life for most citizens of American states and territories. It comes in the form of a percentage you, as a consumer, are required to pay for products you purchase in person.
For example, the sales tax rate in California is 7.25%. So, if the subtotal for items you want to purchase in store comes out to $21, you can expect to pay $1.52 in sales tax since 7.25% of $21 is $1.52. This would bring your actual total to $22.52.
While the first true ecommerce transaction involved a Sting CD sold between two friends in the United States in 1994, it wasn’t until 2018 that online stores were acquired to collect sales taxes just as brick-and-mortar stores are required to.
This was the result of a U.S. Supreme Court ruling in the case South Dakota v. Wayfair.
Before this ruling, you only had to collect sales tax in states you had a physical presence in. Now, you’re required to collect sales tax from customers who reside in states that have sales tax policies, but only if you reach economic nexus in those states.
Economic nexus is a sales or transaction threshold you need to hit in a particular state before you’re required to collect sales tax from customers who place orders in that state.
For example, the economic nexus threshold in Hawaii is $100,000 in gross sales or 200 separate transactions.
This means you must make $100,000 from sales to Hawaiian customers or process at least 200 orders from customers in Hawaii before you’re required to collect sales tax from customers who live in this state.
The United States doesn’t have a federal tax rate for sales tax, so whatever sales tax rate Hawaii requires retailers to charge customers in store is the same tax rate you’ll need to charge Hawaiian customers online.
The good news is you only need to collect sales tax on sales you’ve made after you reach a state’s threshold.
How to determine if your store needs to collect sales tax
Thanks to the South Dakota v. Wayfair ruling, you only need to collect sales if the following conditions are met:
- The state your customer is ordering from has a sales tax policy
- You reach economic nexus in a state that has a sales tax policy
However, as an ecommerce merchant, you likely sell to customers located all around the continental U.S. and maybe even to Alaska, Hawaii and Puerto Rico. How do you keep track of how much you’re earning from these individual states?
We’ll discuss this in a bit. For now, let’s review the economic nexus threshold of each U.S. state and territory.
Economic nexus for each U.S. state (and Washington, D.C.)
Important terms:
- Threshold – Economic nexus threshold is the amount in sales you need to earn in order to achieve economic nexus in the specified state
- Includable sales – Types of sales that count toward the respective state’s threshold based on that state’s economic nexus laws
- Threshold Period – The time period in which includable sales are calculated. If a threshold period says “previous or current year,” then either the previous year or the current year count toward the threshold, not both combined. So, if you met the threshold in 2024 but do not meet the threshold in 2025, you still have to pay sales tax if the threshold period says “previous or current year”
- Gross sales – Resales, taxable sales and exempt sales
- Retail sales – Excluding resales
- Taxable sales – Excluding nontaxable sales
- Separate transactions – Sales that are documented on separate individual invoices
- Tangible personal property (TPP) – Property that can be touched and moved from a physical location
- N/A – Not applicable; this state or territory does not have sales tax
- Gross revenue – The business’ total revenue made in the specified state, even if that revenue didn’t come from sales
Note 1: This is a basic list of the amount in sales you need to accrue in each state in order to reach economic nexus. Economic nexus laws differ between states as each state has different lists for exempt product types and exempt entities.
Note 2: Sales tax nexus includes sales made from marketplaces like eBay, Facebook and Amazon as well as online services unless a state’s tax code only includes TPP.
Note 3: These figures may change in the future so be sure to confirm the current figures before proceeding to make any final calculations.
| State/Territory | Threshold | Includable Sales | Threshold Period | Shipping Taxable (Y/N) |
| Alabama | $250,000 + specified activities | Retail sales | Previous calendar year | No |
| Alaska | $100,000 or 200 transactions | Gross sales | Previous calendar year | No |
| Arizona | $100,000 | Gross sales | Previous or current calendar year | No |
| Arkansas | $100,000 or 200 separate transactions | Taxable sales | Previous or current calendar year | Yes |
| California | $500,000 | Gross sales of TPP | Preceding or current calendar year | No |
| Colorado | $100,000 | Retail sales | Previous or current calendar year | No |
| Connecticut | $100,000 and 200 transactions | Retail sales | 12-month period ending September 30 | Yes |
| Delaware | N/A | N/A | N/A | N/A |
| District of Columbia | $100,000 or 200 separate retail sales | Retail sales | Previous or current calendar year | Yes |
| Florida | $100,000 | Taxable sales | Previous calendar year | No* |
| Georgia | $100,000 or 200 sales | Retail sales of TPP | Previous or current calendar year | Yes |
| Hawaii | $100,000 or 200 separate transactions | Gross sales | Current or immediately preceding calendar year | Yes |
| Idaho | $100,000 | Gross sales | Previous or current calendar year | No |
| Illinois | $100,000 or 200 separate transactions | Retail sales | Preceding 12-month period | No |
| Indiana | $100,000 | Gross sales | The calendar year in which the retail transaction is made or for the calendar year preceding the calendar year in which the retail transaction is made | Yes |
| Iowa | $100,000 | Gross sales | Current or immediately preceding calendar year | No |
| Kansas | $100,000 | Gross sales | Current or immediately preceding calendar year | No |
| Kentucky | $100,000 or 200 separate transactions | Gross sales | Previous or current calendar year | Yes |
| Louisiana | $100,000 | Retail sales | Previous or current calendar year | No |
| Maine | $100,000 or 200 transactions | Gross sales | Previous or current calendar year | No |
| Maryland | $100,000 or 200 separate transactions | Gross sales | Previous or current calendar year | No* |
| Massachusetts | $100,000 | Gross sales | Previous or current calendar year | No |
| Michigan | $100,000 or 200 separate transactions | Gross sales | Previous calendar year | No |
| Minnesota | $100,000 or 200 transactions | Retail sales | 12-month period ending on the last day of the most recently completed calendar quarter | Yes |
| Mississippi | More than $250,000 | Gross sales | Prior 12-month period | Yes |
| Missouri | $100,000 | Taxable sales of TPP | Previous 12-month period reviewed quarterly | No |
| Montana | N/A | N/A | N/A | N/A |
| Nebraska | $100,000 or 200 separate transactions | Retail sales | Previous or current calendar year | Yes |
| Nevada | $100,000 or 200 separate transactions | Retail sales | Previous or current calendar year | No |
| New Hampshire | N/A | N/A | N/A | N/A |
| New Jersey | $100,000 or 200 separate transactions | Gross sales | Previous or current calendar year | Yes |
| New Mexico | $100,000 | Taxable sales | Previous calendar year | Yes |
| New York | $500,000 and more than 100 sales | Gross receipts from sales of TPP | Immediately preceding four sales tax quarters | Yes |
| North Carolina | $100,000 | Gross sales | Previous or current calendar year | Yes |
| North Dakota | $100,000 | Taxable sales | Previous or current calendar year | Yes |
| Ohio | $100,000 or 200 separate transactions | Retail sales | Previous or current calendar year | Yes |
| Oklahoma | $100,000 in aggregate sales of TPP | Taxable sales | Preceding or current calendar year | No |
| Oregon | N/A | N/A | N/A | N/A |
| Pennsylvania | $100,000 | Taxable sales | Previous calendar year and then starting in the 2nd quarter | Yes |
| Puerto Rico | $100,000 or 200 separate transactions | Gross sales | Seller’s accounting/fiscal year | No |
| Rhode Island | $100,000 or 200 separate transactions | Gross sales | Immediately preceding calendar year | Yes |
| South Carolina | $100,000 | Gross sales | Previous or current calendar year | Yes |
| South Dakota | $100,000 or 200 separate transactions | Gross revenue | Previous or current calendar year | Yes |
| Tennessee | $100,000 | Retail sales | Previous 12-month period | Yes |
| Texas | $500,000 | Gross revenue | Preceding 12 calendar months | Yes |
| Utah | $100,000 or 200 separate transactions | Gross sales | Previous or current calendar year | No |
| Vermont | $100,000 or 200 separate transactions | Gross sales | Prior four calendar quarters | Yes |
| Virginia | $100,000 or 200 separate transactions | Retail sales | Previous or current calendar year | No* |
| Washington | Gross income exceeding $100,000 | Gross revenue | Current or preceding calendar year | Yes |
| West Virginia | $100,000 or 200 separate transactions | Gross sales | Preceding or current calendar year | Yes |
| Wisconsin | $100,000 | Gross sales | Previous or current calendar year | Yes |
| Wyoming | $100,000 or 200 separate transactions | Gross sales | Previous or current calendar year | No |
*Shipping may be taxable in this state depending on certain conditions. For example, if you combine shipping and handling costs, you may be required to tax shipping even if shipping is listed as a separate charge.
Source: Sales Tax Institute, TaxJar
How to keep track of your economic nexus status
So, each state has its own threshold that determines what conditions need to be met before your store is required to collect sales tax from its citizens. How do you keep track of your status in each state?
The easiest way to do this is by selling through Shopify. Other platforms do have automatic tax collection features that are able to charge your customers the correct sales tax rate based on their location, but whether or not those other platforms track your sales tax obligations is not clear.
Shopify’s ecommerce platform tracks your tax liabilities in a section of the platform’s Settings dashboard called “Taxes and duties.”
This section displays your tax liabilities for each state as the platform uses the net sales (which subtracts refunds and shipping costs from your gross sales) you’ve made within each state’s threshold period to determine if you’re required to collect sales tax in that state.
Once Shopify has determined that you’ve reached economic nexus in a state, you can manage that state’s tax liability settings within Shopify and enable sales tax to begin collecting sales tax in that state.
How to track economic nexus status if you don’t use Shopify
If you use a different ecommerce platform or use a custom-built solution, you have a lot more work on your hands when it comes to tracking your tax liabilities in each state and territory you sell to.
It all depends on the number of sales you make as well as your sales revenue. If sales and revenue are growing at a slow rate, you probably don’t have to worry about keeping track of your economic status.
However, if your store is growing rapidly, you may want to keep track of your threshold manually in a spreadsheet.
These columns will do just fine:
| State/Territory | Sales | Transactions | Threshold Period | Shipping Taxable (Y/N) | Tracking Start Date | Tracking End Date |
- State/Territory – Name of the U.S. state or territory you’ve received an order from. Apart from each U.S. state (minus Delaware, Montana, New Hampshire and Oregon, which do not require sales taxes to be collected), you also need to collect sales tax from Washington, D.C. (District of Columbia) and Puerto Rico.
- Sales – The amount of revenue you’ve earned from each state/territory. Refer to our chart to determine what counts as revenue.
- Transactions – The number of transactions you’ve made in each state/territory. Remember, if a state’s threshold says “$100,000 or 200 separate transactions,” you’re required to collect sales tax if you’ve processed over 200 transactions in that state, even if you haven’t received $100,000 in revenue from it.
- Threshold Period – Make a note of the state’s threshold period to remind yourself when you need to reset your Sales and Transactions columns to zero.
- Shipping Taxable (Y/N) – Refer to our chart, and make a note if shipping is or isn’t taxable in the specified state. This will help you remember to deduct shipping costs from an order’s total before you track it in the Sales column.
- Tracking Start Date – The date you made your first sale or transaction in the specified state/territory.
- Tracking End Date – The date you can reset the Sales and Transactions columns to zero if you haven’t met the threshold requirements for economic nexus in the specified state within that state’s threshold period.
What to do when you reach economic nexus in a U.S. state/territory
Once you reach a state or territory’s threshold for economic nexus, you’ll need to register for a sales tax permit in that state. You should do this as soon as possible as most states require you to collect sales tax on the next order you receive after you reach the threshold.
Most ecommerce platforms have ways for you to collect sales tax. Some have automatic features while others require you to enable and/or input sales tax rates manually.
Refer to your platform’s knowledge base or consult a customer service representative to see how it handles sales tax collection.
You’ll also need to remit sales tax in that state when you file your taxes.
Disclaimer: The information in this article is provided without warranty and is meant to serve as a rough guide only. It does not constitute any form of legal/tax advice. Tax thresholds can change. So, be sure to do your own due diligence and confirm all of the figures in this article before proceeding with any calculations. If you have any doubts, you should speak to a Certified Public Accountant (CPA) so they can make sure everything is handled correctly.