Key Takeaways

  • Online businesses must comply with state-specific sales tax requirements, including economic nexus laws.
  • Income tax obligations apply regardless of business structure, with additional considerations for self-employment taxes.
  • Marketplace facilitator laws may shift sales tax collection responsibilities away from individual sellers.
  • International sales may require VAT or GST registration and compliance in foreign jurisdictions.
  • Tax registration, recordkeeping, and reporting are essential components of staying compliant with tax laws.
  • Digital products and services may be taxed differently than physical goods, depending on the jurisdiction.
  • Using automated sales tax tools can help ensure accurate tax collection and remittance.

Sales Tax

Companies that sell taxable goods at a physical business location collect and remit sales tax to the state where they are located. This must usually be done for both in-person and online sales, although some states do not require sales tax for the latter. Some states require internet companies without a brick and mortar location to collect and remit sales tax, but most do not require the collection and payment of sales tax for solely online sales.

Recent legislation in some states requires sales tax to be paid by online companies only for sales made to customers in the same state. This is an extension of the guidelines that have been followed by mail order businesses for decades.

You must remain up-to-date with the sales tax laws in your state to ensure compliance. If you're not sure, check with the department of revenue for guidance about the laws in the state where your business is located.

Understanding Economic Nexus for Online Sellers

Economic nexus laws require online sellers to collect and remit sales tax in states where they exceed certain thresholds, even if they have no physical presence there. These thresholds typically depend on:

  • Total annual sales revenue (e.g., $100,000 or more)
  • Number of transactions (e.g., 200 or more individual sales into the state)

These laws were established following the 2018 U.S. Supreme Court decision in South Dakota v. Wayfair, Inc., which overturned previous physical presence requirements. If your online business reaches these economic nexus thresholds in any state, you must:

  • Register for a sales tax permit in that state.
  • Collect sales tax from customers in that state.
  • Remit collected taxes to the appropriate state tax authority.

Check each state’s Department of Revenue for specific nexus thresholds and requirements.

Income Tax

Every business must pay income tax, even one-person companies that operate only online. This type of business is usually taxed as a sole proprietorship. If you do not pay income taxes on your earnings, the IRS will order an audit that can result in fines as well as criminal penalties.

Self-Employment Tax and Estimated Payments

If you operate an online business as a sole proprietor, independent contractor, or single-member LLC, you may be classified as self-employed for federal tax purposes. This means you’re responsible for paying:

  • Income tax on net business earnings.
  • Self-employment tax, which includes Social Security and Medicare taxes.

The current self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). You may also owe quarterly estimated tax payments if you expect to owe $1,000 or more in taxes when your return is filed.

The IRS provides resources through its Self-Employed Individuals Tax Center to help you understand and meet these obligations​.

Shipping Restrictions

Internet businesses must be aware of restrictions on shipping established either by state law or by the guidelines of their distribution company. You may have to do some research if you have a product that is restricted by many shipping firms. Restrictions may affect items including, but not limited to:

  • Aerosol containers.
  • Air bags.
  • Alcoholic beverages and cigarettes.
  • Live animals.
  • Weapons, ammunition, and explosives.
  • Dry ice.
  • Fresh produce and perishable items.
  • Cosmetics, perfume, and nail polish.
  • Poisonous or hazardous materials.

In some cases, you can ship restricted items for an additional fee. The Federal Trade Commission maintains a guide to custom, duty, and tax laws for companies that ship their products internationally.

Payment Gateways

When establishing an e-commerce business, you'll need to set up a payment gateway through which your customers can purchase your products and services. When choosing a payment gateway, factors to consider include:

  • Limitations on the types of products and services you can sell
  • Start-up fees.
  • Monthly fees.
  • Transaction fees.
  • Termination fees.
  • Available security and anti-fraud features.
  • Whether the platform is hosted or non-hosted.

Your payment gateway must be PCI compliant so that the personal information of site visitors is protected. It's important to educate yourself on measures to protect your business and your customers from data theft. This affects both your checkout process and the way that information is stored and disposed of.

Tax Responsibilities for Marketplace Sellers

If you sell through third-party marketplaces like Amazon, Etsy, or eBay, be aware of marketplace facilitator laws. Under these laws, the marketplace platform may be required to:

  • Collect and remit sales tax on your behalf.
  • Provide documentation on the taxes collected for your transactions.

However, you should still verify whether you must register for a sales tax permit or file reports, as requirements vary by state.

Intellectual Property

This area of internet business law governs trademarks, copyrights, and patents. A trademark is a design, symbol, word, or phrase that distinguishes your company from others in the market. Copyrights protect artworks, literature, music, and other original items of authorship. A patent protects an invention for a period of 20 years. These rights are conferred by the United States Patent and Trademark Office. Depending on the type of product or service you sell, you may want to obtain one or more of these protections. You should always make sure that your business is not infringing on the intellectual property of others.

Inventory

If you are running an online business from your home, you must be aware of local ordinances that prevent you from storing inventory at your home or require a specific license or permit to do so. Failure to comply with local zoning laws will result in fines and penalties.

International Sales and VAT/GST Compliance

Selling products or digital services to customers outside the U.S. may subject your business to Value-Added Tax (VAT) or Goods and Services Tax (GST) obligations in those countries. Common scenarios include:

  • Selling downloadable digital products to customers in the European Union.
  • Providing software-as-a-service (SaaS) platforms to clients in Canada, Australia, or New Zealand.

Many countries require non-resident businesses to register for VAT/GST if they surpass certain sales thresholds. Failure to comply can result in penalties or restrictions on doing business in those regions.

Consider consulting with an international tax advisor to ensure proper registration and tax collection for global sales.

Age Restrictions

If the market for your product or service includes children younger than age 13, your website must comply with the Children's Online Privacy Protection Act. This includes many regulations, but the most relevant to your business is the restriction on collecting personal information from children in this age group.

If you sell age-restricted products such as alcohol or vaporizers, your website must have age verification tools as part of the checkout process.

Tax Registration, Reporting, and Recordkeeping

Proper registration and reporting are key to managing tax on online business effectively. Here are best practices to follow:

  • Obtain all necessary sales tax permits and business licenses in jurisdictions where you have tax obligations.
  • Maintain accurate records of sales, tax collected, exemptions, and returns filed.
  • Understand your reporting frequency, as some states require monthly, quarterly, or annual sales tax filings.
  • Use accounting software or automated tax solutions to streamline compliance and reduce the risk of errors.

Neglecting these responsibilities can lead to penalties, audits, or the loss of your ability to operate in certain markets.

Frequently Asked Questions

  1. Do I need to collect sales tax if I only sell online?

    Yes, you may need to collect sales tax if your business meets a state's economic nexus thresholds, even if you don't have a physical presence there.

  2. What is economic nexus, and how does it affect online businesses?

    Economic nexus refers to tax obligations triggered by reaching certain sales or transaction levels in a state, requiring tax registration and collection.

  3. Do online business owners need to pay self-employment tax?

    Yes, if you operate as a sole proprietor, LLC owner, or independent contractor, you must pay self-employment tax in addition to income tax.

  4. Are digital products subject to sales tax?

    In many states, yes—especially digital downloads, e-books, software, and streaming services. Taxability depends on state laws.

  5. What happens if I don't comply with sales tax laws for my online business?

    Failure to comply can result in penalties, interest on unpaid taxes, audits, and even the suspension of your right to operate in certain jurisdictions.

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