Ecommerce Taxes for Beginners: A Simple Guide for New Online Sellers

For years, tax laws were designed with physical stores in mind. Back in 1994, when the first-ever online transaction (a Sting CD, for the trivia buffs!) took place, no one really considered how ecommerce would fit into this picture and how sales tax might work in a digital world.

Fast forward to now, and look how things have changed.

Ecommerce has exploded, reshaping how we shop and sell. But with that growth comes a growing maze of tax rules that every online seller has to figure out.

Every state sets its own rules, rates, and requirements. What’s taxable in one state might be tax-free in another. Payment schedules? Those vary too. And let’s not forget the staggering 12,000+ tax jurisdictions in the US alone. It’s enough to make your head spin.

But don’t worry — this doesn’t have to be the thing that keeps you up at night. 

In this guide, we’ll break down the basics of ecommerce taxes for beginners. You’ll learn how to determine your tax obligations, how tax works in ecommerce, and the steps you can take to stay compliant without losing sleep. 

Let’s get started!

What Are Ecommerce Taxes and Why Do They Matter? 

Ecommerce taxes are the various taxes online sellers must collect and pay, such as sales tax, income tax, use tax, and sometimes VAT for international sales.

Why Do They Matter?

• Ensure legal compliance with state and federal regulations to avoid penalties or fines.

• Build trust and credibility with customers by correctly managing taxes.

• Prevent financial headaches by keeping your business in good standing.

• For example, in the US, failing to collect sales tax where you’ve exceeded economic nexus thresholds can lead to legal and financial complications.

Key Types of Taxes Ecommerce Sellers Need to Know

Here’s a clear breakdown of the key types of taxes you should be aware of:

💵 Sales Tax

Sales tax is a consumption tax collected on goods or services sold to customers.

If you have a nexus (a significant connection like a warehouse, employees, or sales threshold) in a state, you’re responsible for collecting and remitting sales tax for purchases made by customers in that state.

For example, if you’re based in Texas but sell to customers in California and meet their sales threshold, you’ll need to collect California sales tax. 

💵 Income Tax

Income tax is applied to the profits you make from your ecommerce business. This includes both federal income tax and, in most states, state income tax.

However, some states, like Texas, don’t impose state income tax, which can reduce your overall tax burden.

You’ll need to calculate your business’s profits (revenue minus expenses) to determine how much income tax you owe. 

💵 Use Tax

Use tax is often confused with sales tax but serves a different purpose. It applies when sales tax hasn’t been collected on a taxable purchase.

For example, if you buy inventory from a supplier that doesn’t charge sales tax and the item is taxable in your state, you’re required to pay use tax.

Many ecommerce sellers overlook use tax, but states often check for compliance during audits. Keeping records of untaxed purchases and remitting use tax when necessary is crucial.

💵 Value-Added Tax (VAT)

VAT is a tax applied at each stage of the supply chain, from production to the final sale. It’s common in international markets, especially in Europe. 

For ecommerce sellers exporting goods to countries that require VAT, you’re responsible for understanding and complying with those laws.

How to Determine Your Tax Obligations as an Online Seller

Here’s how you can determine your tax obligations as an ecommerce seller:

Step 1: Identify Where You Have Sales Tax Nexus

Sales tax nexus is your business’s connection to a state, which determines whether you’re required to collect and remit sales tax. Nexus can be created in several ways:

• Physical Presence: If you have a warehouse, office, or employees in a state.

• Economic Nexus: If your sales in a state exceed a specific revenue or transaction threshold (e.g., $100,000 in sales or 200 transactions annually in some states).

• Inventory Storage: If you store products in fulfillment centers like Amazon FBA warehouses in different states.

Step 2: Determine the Type of Taxes You Need to Collect  in Different States or Countries

As an ecommerce seller, there are multiple taxes you might need to handle, including:

• Sales Tax: Collected from customers in states where you have nexus.

• Use Tax: Paid on taxable purchases where sales tax wasn’t collected.

• Income Tax: Paid on your business profits, at both the federal and state levels.

• VAT (Value-Added Tax): If you sell internationally, especially to customers in Europe.

Understanding which taxes apply to your business depends on your location, sales territories, and the type of products you sell.

Step 3: Register for Sales Tax Permits

Before collecting sales tax, you must register for a sales tax permit in each state where you have nexus. Filing without this permit is illegal and can lead to penalties. 

Each state’s Department of Revenue website provides instructions for registration.

Step 4: Monitor Sales Thresholds for Economic Nexus

States that enforce economic nexus laws require sellers to start collecting sales tax once they exceed a specific revenue or transaction threshold. 

Regularly review your sales data to ensure you’re meeting obligations in each state. Tax software or tax experts can alert you when you’re approaching a threshold, so you don’t miss the registration deadline.

Steps to Handle Ecommerce Taxes as a Beginner

Managing ecommerce taxes can be complex, but implementing advanced strategies can help you stay compliant and optimize your tax situation. 

Here are some specific, lesser-known steps to consider:

1. Utilize the Augusta Rule for Tax Savings

The Augusta Rule allows homeowners to rent out their primary residence to their business for up to 14 days per year without incurring personal income tax. 

This can be beneficial for hosting business meetings or retreats. Ensure you document the rental agreement and pay yourself a fair market rate to comply with IRS guidelines.

2. Leverage Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs)

If your business offers high-deductible health plans, you can contribute pre-tax dollars to an HSA, reducing your taxable income. 

Similarly, setting up FSAs for dependent care or medical expenses can provide tax-free benefits. These accounts not only lower your tax liability but also offer financial flexibility for personal and family health needs.

3. Implement Inventory Management Strategies to Optimize Tax Deductions

Efficient inventory management can lead to significant tax savings. By utilizing methods like the Last In, First Out (LIFO) or First In, First Out (FIFO) inventory systems, you can influence the cost of goods sold and, consequently, your taxable income. 

Regularly reviewing and adjusting your inventory valuation methods can help align with your financial goals and tax planning strategies.

4. Stay Informed on International Tax Obligations

If your ecommerce business sells internationally, be aware of VAT (Value Added Tax) and other international tax obligations. Each country has its own tax laws, and non-compliance can lead to penalties. 

Utilizing global tax compliance tools and consulting with international tax experts from doola can help navigate these complexities.

5. Explore Tax Credits for Research and Development (R&D)

If your ecommerce business invests in developing new products or improving existing ones, you might qualify for R&D tax credits. These credits can offset a portion of your tax liability, providing financial relief and encouraging innovation. 

Consult with a tax professional from doola to determine eligibility and ensure proper documentation of your R&D activities.

Tips for Simplifying Ecommerce Taxes

Here are some specific tips to simplify ecommerce taxes for beginners and avoid costly mistakes.

1. Use a Dedicated Bookkeeping Service

Keeping your finances organized is the foundation of simplifying your taxes. Without accurate records, it’s easy to miss deductions or make errors when filing. 

A service like doola Bookkeeping provides dedicated bookkeeping support tailored to ecommerce businesses. The platform can track your income, expenses, and sales tax obligations, ensuring that your finances are always audit-ready.

2. Separate Personal and Business Finances

Combining your personal and business finances can create confusion during tax season and expose you to liability. Open a dedicated business bank account and use it for all your ecommerce transactions. 

Platforms like Mercury and Brex are excellent for ecommerce sellers, offering seamless integration with bookkeeping tools and other financial platforms.

3. Educate Yourself on Tax Changes

Tax laws for ecommerce sellers, especially in the US, change frequently. Stay informed about updates to sales tax nexus laws, deductions, or reporting requirements to avoid penalties.

Sign up for newsletters from tax-focused platforms like doola regularly to stay updated.

4. Track Taxable and Non-Taxable Items Separately

Not all products are subject to sales tax in every state. For example, in some states, clothing or groceries might be exempt. If you sell a mix of taxable and non-taxable items, failing to separate them in your records can lead to over-collecting or under-collecting sales tax.

Use ecommerce platforms like Shopify to categorize products by tax type. Or, enable automated tax calculation tools within your store settings to prevent manual errors.

5. Maintain a Record of Marketplace Facilitator Fees

If you sell through marketplaces like Amazon, eBay, or Etsy, they might collect and remit sales tax on your behalf. However, you’ll often incur marketplace facilitator fees for this service. These fees can impact your profitability and need to be recorded properly for tax purposes.

So, keep a detailed record of marketplace fees for deductions and reconciliation. Many marketplaces provide monthly reports that you can integrate into your bookkeeping system.

Related Read: Shopify Bookkeeping Guide for 2025

Common Mistakes New Ecommerce Sellers Make With Taxes

Here’s a breakdown of the most common tax mistakes and how to avoid them.

❌ Not Understanding Nexus Laws

Nexus refers to the connection your business has with a state, which determines whether you’re required to collect and remit sales tax there. Nexus can be triggered by factors like having a physical location, employees, inventory, or even significant sales volume in a particular state (economic nexus). 

For ecommerce sellers, this is especially relevant in the age of online marketplaces. Many new sellers don’t realize that selling to customers in different states could create tax obligations. 

For example, if you’re selling on platforms like Shopify or Amazon, your inventory stored in a fulfillment center in another state could trigger nexus without you even knowing.

👉🏼 How to Avoid This Mistake:

• Familiarize yourself with state-specific nexus laws, as these vary across the US

• Use tools like TaxJar to automate sales tax tracking and ensure compliance.

• Consider consulting with a tax professional from doola to identify where your business may have nexus obligations.

❌ Failing to Keep Proper Records

Proper record-keeping means tracking all your income, expenses, and taxes related to your ecommerce business. This includes invoices, receipts, and any other documentation that shows what you earned and spent. 

Without organized records, it’s nearly impossible to file accurate tax returns. Worse, if you’re ever audited, missing or incomplete records could result in penalties or interest charges.

Many ecommerce sellers neglect to track their expenses properly, leading to overpaying taxes or missing out on deductions.

👉🏼 How to Avoid This Mistake:

• Use bookkeeping tools like doola Bookkeeping to track your finances and store records.

• Regularly reconcile your accounts to ensure accuracy.

• Keep both digital and physical copies of all critical tax-related documents for at least 3–7 years, depending on your location’s requirements.

❌ Missing Filing Deadlines

Missing tax filing deadlines can result in late fees, penalties, and even interest charges. For sales tax in particular, states are often unforgiving when it comes to late payments, and repeated misses could harm your business’s credibility.

👉🏼 How to Avoid This Mistake:

• Set up reminders or use calendar tools to track filing deadlines.

• Work with tax professionals from doola to manage your tax compliance and stay organized.

Simplify Ecommerce Taxes With doola Bookkeeping

Struggling with ecommerce taxes? Let doola simplify your tax compliance, so you can focus on growing your business.

Book a demo to learn more!

FAQs

Do I need to collect sales tax for every state?

No, you only need to collect sales tax in states where your business has a nexus (physical presence or meets sales thresholds).

Can I deduct the cost of running my online store?

Yes, expenses like website hosting, advertising, and inventory are often tax-deductible. Consult a professional to maximize deductions.

What happens if I don’t pay ecommerce taxes?

Failure to pay can lead to penalties, interest, audits, or even legal action. It’s essential to stay compliant to avoid these risks.