How to Determine Where to Collect Sales Tax

Did you know that collecting sales tax in the wrong state or failing to collect it where required could cost your business thousands in fines, penalties, or even legal trouble? 

Sales tax isn’t just a box to check; it’s a moving target.

Each U.S. state has its own rules about when a business becomes responsible for collecting tax. 

And if you’re selling across multiple states, figuring out where you actually need to collect sales tax can feel like solving a legal puzzle without a picture on the box.

Suppose you want help handling state registrations, reseller certificates, or staying compliant as you grow. 

That’s why doola’s sales tax solutions are designed for automation, reminders, and built-in compliance support so you can focus on building your business, not reading tax codes.

In this article about how to determine where to collect sales tax, you’ll find a clear, founder-friendly roadmap for determining where your business is legally required to collect sales tax, and how to do it.

Let’s doola it!

What Is the Sales Tax Nexus?

Think of sales tax nexus as the invisible string that connects your business to a state’s tax rules, obliging you to collect and remit sales tax on sales made there. 

If the string isn’t connected, you’re generally off the hook for that state’s sales tax, at least for now.

But many entrepreneurs treat sales tax as a back-burner issue, something to worry about once they’re bigger. 

But the truth is, knowing where your nexus lies early on prevents surprises that can stall growth or even derail your business.

Imagine scaling your Shopify store across multiple states and suddenly being hit with a demand for unpaid taxes that stretch back months or years. That’s the nightmare no founder wants.

Nexus is your business’s official “tax footprint” in each state. Staying aware and compliant saves you from headaches down the road and lets you focus on what really matters:

• Collect the right tax in the right places

• Avoid costly fines and interest

• Build trust with customers by complying with laws

• Keep your focus on growth, not back taxes

Physical vs. Economic Nexus: What’s the Difference?

Both Physical Nexus and Economic Nexus can trigger your responsibility to collect sales tax in a state, but they happen in very different ways.

Physical Nexus: The Tangible Connection

Physical nexus is pretty straightforward: if your business has a physical presence in a state, you have to collect sales tax there. This could mean:

• Having a warehouse or office

• Storing inventory in a fulfillment center

• Employing remote workers or contractors

• Attending trade shows or pop-up shops

Economic Nexus: The Sales-Based Trigger

Economic nexus is based on your sales activity in a state, regardless of physical presence. 

States set thresholds, usually total sales revenue or number of transactions, that, once crossed, require you to collect sales tax.

These thresholds vary by state, but often look like:

• $100,000 in sales OR

• 200 separate transactions in the state per year

Why This Matters for Founders

Many entrepreneurs are caught off guard by these rules, especially economic nexus, a relatively new concept now widespread across all 50 states.

• Remote employees can trigger physical nexus even if they don’t own property there.

• Economic nexus thresholds can change, so staying updated is crucial.

• Some states have additional “click-through” or affiliate nexus rules if you partner with local affiliates.

For the most current thresholds and updates in 2025, check out this comprehensive state sales tax guide.

5 Key Factors That Determine Where You Should Collect Sales Tax

Navigating sales tax obligations can feel like decoding a puzzle, but breaking it down into clear factors makes it manageable. 

Think of this as your Nexus Checklist for Founders: a straightforward way to diagnose where your business must collect sales tax.

1. Business Location

Your registered business address or headquarters often creates a physical nexus. If your LLC, office, or storefront is in a state, that state expects you to collect sales tax.

📌 doola’s Tip for the Do’ers: Registering your company in a state means you’ll likely have tax responsibilities there. Choose your state carefully based on your growth plans and compliance ease.

2. Inventory Storage

Storing products in a state, whether in your own warehouse or via third-party fulfillment centers like Amazon FBA, creates a physical nexus. This is a major trigger for tax collection duties.

📌 doola’s Tip for the Do’ers: Keep a close inventory log and know where your stock lives. Using multiple fulfillment centers across states can multiply your nexus footprint.

3. Number of Sales/Transactions in a State (Economic Threshold)

If you exceed a state’s sales revenue or transaction count thresholds, you trigger economic nexus. This applies even without any physical presence.

📌 doola’s Tip for the Do’ers: Monitor your sales in each state monthly. Many founders are surprised by the economic nexus because thresholds vary widely, and some states recently lowered theirs in 2025.

4. Remote Employees or Contractors

Having remote workers, contractors, or sales reps living or working in a state often triggers physical nexus, even if your business location is elsewhere.

📌 doola’s Tip for the Do’ers: Don’t overlook this. A single remote employee can establish nexus and require you to register for sales tax in that state.

5. Affiliates and Marketplace Facilitators

Affiliate marketing relationships and third-party marketplace platforms can create “affiliate nexus” or “marketplace facilitator” obligations. 

For example, if you pay commissions to an influencer living in a state, or sell via Amazon or Etsy, some states require tax collection.

📌 doola’s Tip for the Do’ers: Keep track of your affiliate partners’ locations and understand how marketplaces like Amazon handle tax collections.

Common Mistakes to Avoid When Determining Sales Tax Responsibilities

Even well-meaning founders make mistakes, especially when juggling operations, growth, and compliance. 

Here’s a list of the most common missteps we often see, along with practical ways to avoid them.

Ignoring Economic Nexus in “Low-Sales” States

Just because you’re not raking in six figures in a particular state doesn’t mean you’re off the hook. Many states have transaction count thresholds, not just revenue limits.

Regularly monitor both sales revenue and the number of transactions per state. 

Stay informed with doola’s automated alerts that notify you when you’re nearing economic thresholds, so you don’t get caught off guard.

Misclassifying Digital Products

Selling eBooks, online courses, or software? Some states tax them, others don’t, and misclassifying them can lead to over- or under-collection.

Research state-specific tax rules for digital goods and services, especially in states like New York, Texas, or Washington.

Assuming Marketplace Platforms Handle Everything

Platforms like Amazon or Etsy collect and remit sales tax in some states, but not all of them. And if you also sell on your own site? That’s a separate responsibility.

Check each platform’s tax handling per state, and don’t assume you’re covered across the board.

Using a “One-Size-Fits-All” Tax Rate

Applying a single flat rate to all U.S. customers is risky. U.S. sales tax is destination-based in most states, meaning rates vary by city, county, and even ZIP code.

Use tax automation tools like doola that calculate exact rates at checkout for seamless bookkeeping and tax filing.

Not Tracking Where Inventory Is Stored

If you use Amazon FBA or other 3PL services, your inventory may be stored in states you’ve never visited, creating a physical nexus.

Request regular inventory reports from your fulfillment provider, or integrate doola with your marketplace and storage providers to track and register you in relevant states.

Neglecting Remote Employees or Contractors

Hiring a remote team member creates a physical nexus in their state, even if they work only part-time.

Make sure you account for every team member’s location in your tax planning.

Delaying Compliance Until You’re “Bigger”

Waiting to grow before addressing sales tax can backfire. Late registration, missed filings, or uncollected taxes can lead to back taxes and penalties.

Start simple, start early. Even registering in one state now is better than scrambling in ten later.

Mistakes happen. What matters is staying informed, adjusting quickly, and building systems that scale with you.

And if you’re not sure where to start, doola can keep your e-commerce business compliant with state-by-state guidance, automated alerts, and stress-free tax registration.

Simplify Sales Tax Compliance With doola

With doola, you get a partner built for busy founders who’d rather focus on growth than government forms. You get:

• Automated nexus tracking so you know exactly when you cross a state’s threshold

• State-by-state registration support to get you compliant without the guesswork

• Sales tax and reseller certificate services that simplify setup for platforms like Amazon, Shopify and Stripe

• Deadline reminders and ongoing compliance tools to help you stay up to date as your business scales

Ready to sell with confidence and avoid costly tax surprises?

Explore our sales tax solutions here!

Or, schedule a demo to see how doola can support your compliance journey!

FAQs

How do I know which states I have to collect sales tax in?

You must collect sales tax in any state where your business has nexus, a tax connection based on physical presence, sales volume, or activity. Check out our sales tax nexus guide here.

How often do I need to update my nexus status?

Nexus status should be reviewed regularly, especially after sales spikes, entering new markets, or hiring remote workers. Quarterly reviews are a good rule of thumb for growing businesses.

What are the risks of not collecting sales tax where required?

You could face audits, back taxes, penalties, and loss of marketplace access. Staying compliant protects your revenue and reputation in the long term.

Can international founders be responsible for U.S. sales tax?

Yes. If your business sells to U.S. customers and crosses state nexus thresholds, you’re required to collect and remit sales tax, even if you’re based outside the U.S.