The first time an online seller reads about ecommerce tax, they usually come away with two feelings: that they are already breaking the law, and that fixing it requires an accountant, a lawyer and a small fortune. Neither is usually true. Ecommerce tax is genuinely more complicated than tax for a local shop, but the complexity is structural, not mysterious. Once you can see the three separate systems you are dealing with, the whole thing becomes a checklist rather than a fog.
This guide is written for someone in their first year or two of selling — Shopify, Etsy, Amazon, WooCommerce, a Substack with a paid tier, it does not much matter. We will keep the acronyms to a minimum and be specific about what actually triggers an obligation.
Three Different Taxes, Three Different Rules
The single most useful thing you can learn is that "ecommerce tax" is at least three separate systems that share nothing except your bank account.
Income tax is charged on your profit — revenue minus legitimate business expenses. It is owed to your federal or national government (and often your state or province) regardless of where your customers live. If you make money, this applies.
Sales tax or VAT/GST is charged on the transaction, collected from your customer, and passed on to the government. It is never your money. Where it applies depends on where your customer is and whether you have crossed a threshold in that place.
Customs and import duty applies when physical goods cross borders. It is paid by whoever the shipping terms say pays it — often your customer, and often a nasty surprise if you did not tell them in advance.
Confusing these three is the root of most beginner mistakes. Sellers panic about sales tax while quietly under-reporting income, or they register for VAT they never owed while ignoring a state where they clearly had nexus.
Sales Tax in the United States: Nexus Is Everything
The US has no national sales tax. Instead there are more than eleven thousand taxing jurisdictions — states, counties, cities and special districts — each with its own rate and its own view of what is taxable. You do not deal with all of them. You deal only with the states where you have nexus, which is a legal connection strong enough that the state can require you to collect.
Physical nexus is the old rule and the simple one: an office, an employee, a warehouse, inventory sitting in a fulfilment centre, or sometimes a contractor. If your inventory is stored in a state — which happens automatically with Amazon FBA — you probably have nexus there whether you chose it or not.
Economic nexus is the newer rule, created by the 2018 South Dakota v. Wayfair decision. It says a state can require collection based purely on sales volume, with no physical presence at all. The common threshold is $100,000 in sales or 200 separate transactions into that state in a twelve-month period, though thresholds vary and several states have dropped the transaction count entirely. California and Texas use $500,000. New York uses $500,000 and 100 transactions.
The practical implication for a new seller is reassuring: you almost certainly do not have nexus in forty-five states. You have it in your home state from day one, in any state holding your inventory, and in any state where your sales genuinely cross the threshold. That is usually one to three states in year one, not fifty.
Once you cross a threshold, the sequence is: register for a sales tax permit in that state, configure your platform to collect at the correct rate, and file returns on the schedule the state assigns — monthly, quarterly or annually depending on volume. Collecting without a permit is illegal in most states, so register first. Our US sales tax registration service handles the permit side if you would rather not learn eleven state portals.
Marketplace Facilitator Laws: The Rule That Saves Beginners
If you sell on Amazon, Etsy, eBay or Walmart, there is a good chance you owe far less sales tax administration than you fear. Every US state with a sales tax now has marketplace facilitator laws requiring the platform itself to calculate, collect and remit sales tax on your behalf for sales made through that marketplace.
Two caveats keep people out of trouble. First, this covers marketplace sales only — sales through your own Shopify or WooCommerce store are entirely your responsibility. Second, marketplace sales may still count toward your economic nexus thresholds in some states, which can create a registration requirement even when the platform is doing the collecting. Check the rules for the states where you have real volume.
Income Tax: What Actually Reduces Your Bill
Income tax follows your business structure, not your platform. A sole proprietor reports on a personal return. A single-member LLC is disregarded by default and does the same. Multi-member LLCs and partnerships file an information return and issue K-1s to owners. Corporations file their own return. An S-Corp election can reduce self-employment tax once profits are consistently high enough to justify running payroll — a decision worth modelling rather than guessing at.
The lever most new sellers under-use is deductions. Ordinary and necessary business expenses reduce taxable profit, and ecommerce businesses have more of them than founders realise: cost of goods sold, platform and payment processing fees, shipping and packaging, software subscriptions, advertising, product samples, professional fees, a proportionate home office, and business use of your phone and internet. Inventory is the one that trips people up — in most cases you deduct inventory as cost of goods sold when it sells, not when you buy it, which is why a profitable-looking bank balance and a taxable profit figure can differ so sharply.
None of this works without records. If your books are a shoebox in March, you will take the deductions you can prove and lose the rest. Bizvee's bookkeeping service exists precisely for this, and if you are still invoicing manually, our free invoice generator will at least keep the paper trail consistent.
Selling Internationally: VAT, GST and the £/€ Thresholds
Cross-border selling adds one more layer, and it is worth knowing before your first international order rather than after your hundredth.
The UK requires VAT registration once taxable turnover exceeds £90,000 in a rolling twelve-month period. Overseas sellers shipping goods valued at £135 or less directly to UK consumers must register regardless of turnover, and charge VAT at the point of sale. Digital services sold to UK consumers have their own rules. Our UK VAT registration service covers the registration itself.
The EU operates a single distance-selling threshold of €10,000 across all member states combined, after which you either register in each country or use the One-Stop-Shop (OSS) scheme to file a single return. OSS is the sane choice for almost everyone.
Canada and Australia both use a GST-style system: registration is generally required at CAD $30,000 and AUD $75,000 of turnover respectively, with specific rules for non-resident digital sellers.
Digital products deserve their own warning. Ebooks, courses, software and templates are taxed based on the customer's location in most of the world, frequently with no threshold at all for non-resident sellers. If you sell a $19 course to someone in Berlin, VAT may be due on that single sale. Most digital-goods platforms handle this as merchant of record; if you sell direct, you own it.
Setting This Up Without Losing Your Weekend
A workable first-year system looks like this.
Separate your money. A dedicated business bank account is the foundation for everything else. Mixing personal and business transactions turns a two-hour bookkeeping month into a two-day one and weakens your liability protection.
Turn on tax calculation in your platform. Shopify, BigCommerce and the rest have built-in engines. Configure them for the states or countries where you are registered, not everywhere.
Ring-fence collected tax. Sales tax and VAT are not revenue. Move them to a separate account weekly. Sellers who spend collected tax and then face a quarterly filing are the ones who end up on payment plans.
Track nexus monthly. A simple sales-by-state report tells you which thresholds you are approaching. Registering the month you cross is routine; discovering it eighteen months later means back tax, interest and penalties.
Set aside income tax as you go. Twenty-five to thirty percent of net profit is a reasonable starting reserve, adjusted once you know your actual effective rate. US sellers with meaningful profit generally owe quarterly estimated payments.
The Mistakes That Cost Real Money
Treating platform payouts as revenue is the most common. Your Shopify payout is already net of fees, refunds and sometimes collected tax — booking it as your top line understates both revenue and expenses, and quietly loses you deductions.
Ignoring the state you actually live in comes second. Home-state nexus exists from the first sale, threshold or no threshold.
Not collecting exemption certificates is a wholesale seller's classic. If you sell to resellers, you need a valid resale certificate on file, or you owe the tax yourself in an audit.
And finally, forgetting that an LLC is not a tax strategy. Forming in Wyoming or Delaware does not exempt you from collecting sales tax where your customers are, or from income tax where you live. Where you incorporate affects filing fees and corporate law, not your sales tax map.
What Happens If You Get It Wrong
Founders often assume a mistake means an immediate penalty, and the fear stops them acting at all. The reality is more forgiving, provided you fix things voluntarily.
Registering for sales tax late generally means back tax, interest and a penalty on the amounts you should have collected. Most states run voluntary disclosure agreements that limit the lookback period (often to three or four years) and frequently waive penalties entirely — but only if you approach them before they approach you. Once a state contacts you, that door closes.
Under-reporting income is treated more seriously than late registration, which is why the income tax side deserves at least as much of your attention as the sales tax side. Platforms report your gross sales to tax authorities directly — Form 1099-K in the US is issued by payment processors and marketplaces — so the numbers are already known. A return that does not reconcile to those forms is the most common trigger for an enquiry.
The other cost is a slower one: disorganised tax affairs make your business harder to sell, harder to raise on, and harder to get a business loan against. Clean filings are an asset even when nobody is auditing you.
Where to Start This Week
Confirm your business structure and get an EIN if you do not have one. Open a separate business bank account. Identify your home state and any state holding inventory, and register there. Switch on tax collection in your platform for those places only. Start recording every transaction from today forward, even if the past is messy. Then set a reminder for the first week of each quarter to review your sales-by-state report and your set-aside balance.
That is genuinely most of it. Ecommerce tax punishes neglect far more than it punishes ignorance — the sellers who get hurt are almost never the ones who asked questions early. If you want the registrations, books and filings handled together, Bizvee's ecommerce accounting team does exactly that.
Ready to start your company?
Launch in the US, UK, Canada, or Australia with Bizvee — formation, banking support, bookkeeping and filings.