Sales Tax for Online Business: Things You Should Know

Sales tax is also an obligation that online business owners need to pay or impose on the customer. What exactly is sales tax? To understand better about online business sales tax or e-commerce sales tax, you should continue reading this.

What is e-commerce sales tax?

Sales tax is a consumption tax imposed by the government and added to the cost of the retail products or services. Sales tax is imposed on the consumers. It is collected by the seller and remitted to the appropriate tax authority.

E-commerce sales tax is similar to the basic sales tax. As an online retailer or seller, you also have the responsibility of collecting and remitting the tax to the state. However, there are also limitations. You do not have to collect sales tax on the following products:

  • Wholesale items
  • Raw materials
  • Sale to non-profit groups

As mentioned earlier, sales tax is imposed on retail products and services.

When exactly do you collect e-commerce sales tax?

There are two basic rules when collecting sales tax:

  • When you have sales tax nexus in the same state as your customer

Sales tax nexus is applied when your business has a connection with the state. Every state has a different definition of sales tax nexus, but in general, nexus is triggered by the business’ physical presence or it has an economic connection to the state.

If your online business has a physical presence in the state, you may collect applicable sales tax from your online customer within that state.

The product is taxable within the state

Tangible products sold online are taxable. However, some states do not impose sales tax on certain products such as clothing in Pennsylvania. And some states would reduce sales tax on certain products; for instance, in Illinois, they reduce the sales tax by 1 percent on groceries.

So, how e-Commerce sales tax works?

E-Commerce sales tax will be imposed on products that are taxable by law. The percentage of sales tax imposed on a product is small. However, the percentage imposed will depend on every state’s business taxation.

Are there risks of not paying for the e-Commerce sales tax?


Failing to collect sales tax imposed on products – may it be purchased at an actual store or online – you are held accountable by the state and local tax authorities. Aside from penalties, criminal charges, like tax evasion, may be brought out against you. So, make sure to collect and remit the sales tax.

Are there late penalties for missing your filing and payment deadline?


If you miss your filing and payment deadline, you’ll be charged with late fees or penalties up to 50 dollars, depending on the state law.

To avoid the consequences of filing and paying for the sales tax every year, make sure to write down your tax obligations.

When do you start collecting e-Commerce sales tax?

Generally, you need to collect sales tax on your first taxable sale. However, it depends on your state or local tax authorities. So, before you start an online business, try asking questions to your state or local tax authorities about the process of sales tax within your location.

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