Home eCommerce Success News & Updates eCommerce Sales Tax Compliance 2025 - Risk Management & Action Plan
October 09, 2025

eCommerce Sales Tax Compliance 2025 - Risk Management & Action Plan

By Veronica Jeans, Bestselling Author

Risk Management, FAQs & Action Plan

In this article, we'll address critical mistakes, answer your most pressing questions, and provide your complete action plan.


⚠️ Red Flags: When to Get Professional Help Immediately

Critical warning signs requiring urgent action:

  • ⚠️ You've collected sales tax but used it for business expenses
  • ⚠️ You've been selling online 2+ years without any registrations
  • ⚠️ You have FBA inventory but aren't registered in warehouse states
  • ⚠️ You received a state audit notice or questionnaire
  • ⚠️ Your sales exceed $100K in 5+ states you're not registered in
  • ⚠️ You don't have valid exemption certificates for 20%+ of "exempt" sales
  • ⚠️ You have remote employees in states where you're not registered
  • ⚠️ You've been in business since before 2020 but never addressed Wayfair nexus

If 2+ red flags apply:

  1. Stop collecting tax in unregistered states immediately
  2. Contact a sales tax attorney or CPA specializing in eCommerce
  3. Consider Voluntary Disclosure Agreement (VDA) before states find you
  4. Document everything—dates, amounts, circumstances
  5. Do NOT ignore state correspondence
  6. Set aside funds for back taxes (estimate 3-4 years × annual liability)

Common Mistakes and How to Avoid Them

Mistake Consequence Prevention
Collecting tax without permit Penalties + back taxes + interest Register BEFORE collecting
Using collected tax for expenses Criminal fraud charges possible Separate bank account for tax
Ignoring FBA nexus Liability in 10-20+ states Audit FBA locations quarterly
No exemption certificates Pay tax on "exempt" sales + 30% penalty Automated certificate collection
Missing zero returns $10-100 penalty per missed return Automated filing service
ZIP-code-only rates Under/overcollection, audit risk Rooftop-accurate software
Over-registering Unnecessary ongoing filings Nexus analysis before registering
Delayed registration Retroactive tax + penalties Register within 30 days of threshold

Voluntary Disclosure Agreement (VDA) Decision Tree

Question 1: Do you have uncollected/unremitted sales tax exposure?

  • If NO → Skip VDA, focus on forward compliance
  • If YES → Continue to Question 2

Question 2: How many years of exposure do you have?

  • 1 year or less → Consider simple registration and catch-up filing
  • 2-3 years → Strong VDA candidate
  • 4+ years → VDA highly recommended

Question 3: What's your estimated liability?

  • Under $5,000 → VDA cost may exceed benefit; consult advisor
  • $5,000-$50,000 → VDA provides good ROI
  • $50,000+ → VDA essential; could save $20,000-$100,000+

Question 4: Have you received any state correspondence?

  • Audit notice → TOO LATE for VDA; need audit defense
  • Pre-audit questionnaire → Act immediately; VDA still possible
  • No contact → Perfect time for VDA

If you answered YES to questions 1, 2 (2+ years), 3 ($5K+), and Question 4 (no audit notice): Pursue VDA immediately

VDA Benefits vs. Getting Audited

Factor With VDA Without VDA (Audit)
Lookback Period 3-4 years maximum Unlimited (10+ years possible)
Penalties Waived (0%) 10-39% of tax owed
Interest Reduced or negotiated Full amount from date due
Attorney Fees $5K-15K $15K-50K+
Audit Risk Eliminated once complete High for 3-7 years
Timeline 3-6 months typically 12-24 months or longer
Example: $50K liability ~$60K total ~$90K-120K total

Comprehensive Sales Tax FAQ: Your Questions Answered

Q1: What is economic nexus and how does it affect my eCommerce business?
Economic nexus means you have a sufficient connection to a state based on your sales volume, even without physical presence. After the 2018 Wayfair decision, states can require you to collect sales tax once you exceed certain thresholds (typically $100,000 in sales). This applies to all online sellers, regardless of where they're located.
Q2: Do marketplace sales through Amazon, eBay, or Etsy count toward my nexus thresholds?
It depends on the state. Twenty-three states include marketplace facilitator sales when calculating your threshold, while 22 states exclude them. This means you need to track both marketplace and direct sales separately and understand each state's specific rules.
Q3: If Amazon collects sales tax on my behalf, do I still need to register?
Maybe. While Amazon handles tax collection for marketplace orders, you're still responsible for: (1) sales through your own website, (2) in-person sales, (3) B2B transactions in some cases, and (4) registering in states where you have physical nexus (like FBA warehouse locations if you also sell direct).
Q4: What creates physical nexus in a state?
Physical nexus is created by: inventory storage (including FBA warehouses), remote employees working from that state, offices or retail locations, attending trade shows (even 1-2 days in some states), using third-party fulfillment centers, having contractors or sales reps in the state, or owning property/equipment there. Physical nexus creates immediate tax obligations regardless of sales volume.
Q5: I have FBA inventory in 15+ states. Do I need to register in all of them?
It depends on whether your FBA inventory serves only marketplace sales or also fulfills direct website orders. If Amazon is the seller of record and collects tax on all those orders, some states (like Illinois) provide relief. If the same inventory fulfills your direct Shopify orders, you likely need to register in all FBA warehouse states for physical nexus.
Q6: What's the difference between a sales tax permit and an EIN?
An EIN (Employer Identification Number) is a federal tax ID issued by the IRS for income tax and payroll purposes. A sales tax permit is issued by each individual state and authorizes you to collect and remit sales tax in that specific state. They serve completely different purposes—having an EIN doesn't mean you're registered to collect sales tax.
Q7: Do I need to file a sales tax return even if I collected $0 in tax that period?
Yes! Zero returns must still be filed on schedule. States assess penalties ($10-100 minimum) for missing returns even with zero tax due. This is one of the most common and easily avoidable mistakes. Automated filing services handle this automatically.
Q8: How much does it cost to implement proper sales tax compliance?
For most small-to-medium eCommerce businesses: software costs $240-1,200/year, automated filing services $600-3,000/year, professional advice $1,000-5,000/year, and registration fees $0-500 one-time per state. Total annual investment typically ranges from $2,000-10,000, which prevents audit exposure of $20,000-200,000+.
Q9: What are the penalties for late registration or non-compliance?
Penalties range from 5-25% of tax due, plus interest at 3-18% annually (Wisconsin charges 18%). California can add 50% penalties for willful failure to remit collected tax. Over 3-4 years, total liability typically equals 140% of base tax owed. Some states like Mississippi classify willful evasion as a felony with fines up to $500,000 and prison time.
Q10: Which states are most aggressive about auditing eCommerce sellers?
California, Washington, Illinois, Massachusetts, Maine, and Wisconsin lead enforcement efforts. California's SCOP program conducted 66,091 permit checks in FY 2023-24, collecting $127.2 million. Washington imposes penalties up to 39% combined. Wisconsin charges 18% annual interest. These states use sophisticated technology, unlimited lookback periods, and aggressive audit tactics.
Q11: What is a Voluntary Disclosure Agreement (VDA) and when should I consider one?
A VDA is an agreement with states to come forward voluntarily about past non-compliance. Benefits include: waived penalties entirely, reduced lookback to 3-4 years (vs. unlimited), and audit protection. Consider a VDA if you have 2+ years of exposure, liability over $5,000, or nexus in high-enforcement states. Critical: VDAs aren't available once an audit begins. Professional fees are $5K-15K vs. audit costs of $50K-100K+.
Q12: Are digital products and SaaS taxable?
It varies dramatically by state. Twenty-eight states plus D.C. tax digital goods (downloads, ebooks, streaming). Approximately 25 jurisdictions tax SaaS. States like Louisiana and Maryland expanded digital taxation in 2025. Factors include: whether it's downloaded vs. cloud-accessed, permanent vs. subscription use, B2B vs. B2C customer type, and specific product classification.
Q13: Can I use one software to handle all my sales tax compliance?
Yes. Solutions like TaxJar, Avalara, Shopify Tax, and Anrok provide end-to-end automation including: real-time calculation across 11,000+ jurisdictions, economic nexus monitoring, product tax code management, exemption certificate handling, automated filing and remittance, and multi-channel integration. Choose based on your business size, sales volume, and specific needs.
Q14: What happens if I collect sales tax but don't remit it to the state?
This is the most serious violation. Collected tax is held "in trust" for the state—using it for business expenses is considered theft. Consequences include: severe penalties (California adds 50% if unremitted tax exceeds 25% of liability), criminal fraud charges in some cases, business closure, personal liability for business owners, and immediate enforcement action. Never use collected sales tax for operational expenses.
Q15: Do I need resale certificates for wholesale transactions?
Yes, if you sell to other businesses for resale. Without valid resale certificates, you're liable for the uncollected tax plus penalties (averaging 30%) during audits. Certificates must include: purchaser and seller information, tax ID numbers, product description, explicit resale statement, date, and authorized signature. Use automation platforms like Avalara ECM or TaxJar to manage collection, validation, and expiration tracking.
Q16: How long do I need to keep sales tax records?
Most states require 3-7 years of record retention, though some states have unlimited lookback periods for fraud or non-filing. Essential records include: complete transaction history, sales by jurisdiction, marketplace vs. direct channel breakdown, exemption certificates, filed returns with confirmation numbers, payment receipts, and nexus documentation.
Q17: What's the difference between origin-based and destination-based sales tax?
Origin-based means you charge tax based on where your business is located. Destination-based means you charge tax based on where the customer receives the product. Most states (and all for remote sellers) use destination-based sourcing, meaning you must calculate tax based on the customer's exact location—requiring rooftop-level accuracy, not just ZIP codes.
Q18: Can I deregister immediately if my sales drop below the threshold?
Not in all states. Some states have "trailing nexus" requirements. California, for example, requires continued collection for the remainder of the year plus the following year, even if you don't meet the threshold in year two. Always check state-specific rules before deregistering to avoid penalties for premature cancellation.
Q19: Are shipping charges taxable?
It depends on the state and how you handle shipping. Generally: if the product is taxable, shipping is taxable; if shipping is separately stated and optional, it may be exempt; if bundled with the product price, it's typically taxable. States have different rules, so proper configuration in your sales tax software is essential.
Q20: What triggers a sales tax audit?
Common triggers include: large discrepancies between 1099-K payment processor reports and filed sales tax returns, high percentage of exempt sales (20%+), late or missing returns, significant changes in reported sales year-over-year, industry targeting (FBA sellers currently at high risk), pre-audit questionnaires you ignored, and multi-state data sharing.
Q21: Should I use my sales tax software's automated filing service?
For most businesses selling in 5+ states, yes. Benefits include: eliminates missed deadlines and penalties, handles zero returns automatically, manages multiple filing frequencies, costs $50-75 per return (far less than penalty risk), and reduces administrative burden. The ROI is positive after preventing just one missed filing.
Q22: What states changed their sales tax rules in 2025?
Major 2025 changes include: 15 states eliminated transaction thresholds (Utah in July, Alaska in January); Washington expanded taxation to services in October ($9.4B package); Maryland began taxing IT services at 3% in July; Texas started taxing marketplace seller fees in October; Louisiana increased rates from 4.45% to 5.0%; Mississippi reduced grocery tax from 7% to 5%; and 408 local rate changes occurred in first half alone.
Q23: Do I need separate sales tax permits for each state?
Yes. Each state issues its own sales tax permit/certificate authorizing you to collect tax in that specific state. Some states also require local permits in addition to state permits. Registration fees range from free to $100 per state. States assign filing frequencies (monthly, quarterly, annual) at registration based on your expected sales volume.
Q24: What if I made a mistake on a filed sales tax return?
File an amended return as soon as you discover the error. Most states allow amendments and appreciate voluntary corrections. If you underpaid, expect to pay the difference plus interest (but penalties may be reduced for good faith errors). If you overpaid, you can request a refund or credit toward future returns. Don't ignore errors—they compound during audits.
Q25: How do I know if my business needs to collect sales tax for a specific state?
Use this checklist: (1) Do I have physical presence in the state (inventory, employees, office)? If yes, register immediately. (2) Did my sales to that state exceed $100,000 in the last 12 months? If yes, check that state's specific threshold and register. (3) Do marketplace facilitators handle all my sales to that state? If yes, you may not need to register unless you also have physical nexus. (4) Review quarterly—thresholds and situations change.


Your 2025 eCommerce Sales Tax Action Plan

Phase 1: Immediate Assessment (Complete in next 7 days)

Priority 1 - Critical exposure check:

  • Pull 12 months of sales data by state
  • Identify states exceeding $100,000 in sales
  • List all FBA warehouse locations
  • Map remote employee locations
  • Review states where you're currently registered
  • Calculate potential exposure: (Years × Annual Tax Due × 1.4)

Your Commitment to Compliance

This week I will:

  • _______________________________________________
  • _______________________________________________
  • _______________________________________________

Within 30 days I will:

  • _______________________________________________
  • _______________________________________________
  • _______________________________________________

My accountability partner: _____________________

Review date: _____________________


Take Action Today to Protect Your Business Tomorrow

You now have the knowledge. You have the tools. You have the roadmap.

The only question is: will you act before states come looking, or after?

The choice—and the savings—are yours.

Need expert guidance? As an eCommerce business consultant and Shopify expert, I help entrepreneurs navigate exactly these challenges.

Schedule a Consultation

📚 Series Navigation - You've Completed the Full Guide!

🎉 Congratulations! You've completed the comprehensive 2025 Sales Tax Compliance Guide.

Disclaimer: This article provides general information about sales tax compliance and should not be considered legal or tax advice. Sales tax laws change frequently and vary by jurisdiction. Always consult with a qualified tax professional or attorney regarding your specific situation. The information provided is current as of October 2025 but may change without notice.

Veronica Jeans

Veronica Jeans

eCommerce Strategist | Shopify Expert | 7-Figure Business Coach

I have integrated my extensive knowledge in the field of eCommerce and Shopify, along with my international financial expertise, to offer up a playbook for generating income online.