Sales Tax for Online Stores: Where Your Customers Live Decides What You Owe

From our case study on building a shopping cart and checkout. This is how we build stores, not tax advice: check your own states with a tax professional.

For decades the rule was simple: you collected sales tax only where you had a physical presence, an office, a warehouse, staff. Sell from Ohio to someone in Arizona and the tax was the buyer’s problem.

That ended on June 21, 2018.

What Wayfair changed

In South Dakota v. Wayfair, the Supreme Court ruled 5–4 that the physical-presence rule was “unsound and incorrect” and overruled it. States may now require out-of-state sellers to collect their sales tax.

South Dakota’s law, the one the Court upheld, covered sellers with more than $100,000 of sales or 200 separate transactions into the state a year. Every state now sets its own threshold. California’s is $500,000 of sales of goods a year. Crossing a threshold is called economic nexus.

The questions your checkout has to answer

For every order, by the ship-to address, not the billing address:

1. Does the state have a sales tax? Five don’t have a statewide one: Alaska, Delaware, Montana, New Hampshire and Oregon, per the Tax Foundation. Alaska’s cities and boroughs can still levy their own.
2. Do we have nexus there? A physical presence, or sales over that state’s threshold. Re-check your totals every month.
3. Is the buyer exempt? Businesses buying to resell, and many nonprofits, give you a certificate instead of paying tax. Keep it on file; an auditor will ask.

If the answers are yes, yes and no, you collect.

One rate per state? No

The rate stacks state, county, city and special district, and taxability changes too. Some states tax shipping and some don’t; clothing, food and services each have their own rules. Orders placed through a marketplace are usually taxed by the marketplace.

That’s why we let a tax engine keep the rates. The store keeps the rules: where it has nexus, what it sells, which customers are exempt.

24 states have adopted the Streamlined Sales Tax Agreement’s shared rules, which makes registering and filing in them easier.

The cent nobody expects

Take an order with $324.10 of taxable goods at an example rate of 7.5%:

• Round the tax on each line, then add: $24.32
• Tax the whole invoice, then round: $24.31

Both are common. Pick the method your states allow, use it everywhere, and store the tax per line and per jurisdiction. A return of one item needs to refund exactly the tax charged on that item, and your filings need the totals by jurisdiction.

The full case study has a flowchart of these three questions and the worked example line by line: Shopping cart and checkout case study →

Adding multi-state sales tax to your store? Get in touch.