Sales Tax Compliance Glossary for E-Commerce Founders: Understand Sales Tax Terms, Nexus and More

Wrestling with the world of sales tax compliance can be really tough. So many terms. So many rules.

And every state has its own drama! Thresholds, nexus, deadlines, forms that look like riddles.

Plus, let’s be honest: you can’t call your CA every time a new term pops up or a dropdown asks you something obscure. It’s tiring. Mentally draining. And just too much when you’re already running a whole business.

So, we’ve put together this founder-friendly glossary of sales tax terms you’ll actually come across, especially tailored for busy e-commerce sellers like you.

Oh, and if you’re ready to offload the entire sales tax compliance headache? Book a quick demo with our tax pros. They’ll help you untangle even the messiest state-by-state compliance threads.

Core Tax Concepts

Let’s start with the word “sales tax” itself.

What Is Sales Tax?

Sales tax is a small percentage of the selling price that’s added to a customer’s bill at checkout. You, the seller, collect it from the buyer, and then pass it along to the state.

Basically:  The customer pays it. You collect it. The state gets it.

Let’s say you’re selling a handmade mug on Shopify for $1,000.

If the sales tax rate in your buyer’s state is 6%, the buyer pays $1,060.

That $60? Not yours. You’re just holding it temporarily until you remit (read: send) it to the state tax department.

And no, not all states handle this the same way. Some will collect it for you (like if you sell on Amazon), and others want you to register, track, and file it.

🔖 Read our Sales Tax Guide here

What Is an Indirect Tax?

It’s a tax your customer pays, but you’re responsible for passing it to the government.

Think of it like this: The tax is baked into the price. The buyer may not see it, but they’re still paying it, and it’s your job to collect and remit it.

Example: You sell a product for $100. Your customer pays $108 (after 8% tax). That extra $8? It’s an indirect tax. It’s not your profit, you’re just the middleman.

Remember: Direct tax = you pay out of your own pocket (like income tax).  Indirect tax = you collect on behalf of the government.

🔖 We have a small guide to build more clarity. Read Indirect Taxes Explained with Examples

What Is Goods and Services Tax (GST)?

GST is a version of indirect tax used in countries like Canada, India, Australia, and more.

It’s usually a single, combined tax applied to both goods and services. It’s often structured to make compliance simpler across different states/provinces inside a country.

If you sell into India or Canada from abroad, you might be required to register for GST and charge it at checkout.

🔖 You’ll never deal with GST in the U.S., but global sellers? You might need to know this. Read more about GST here. 

What Is Value-Added Tax (VAT)?

VAT stands for Value-Added Tax. It’s the European version of a sales tax, but it works a little differently. It’s a consumption tax, which means it’s ultimately paid by the end consumer, just like sales tax.

But here’s the twist: VAT is charged at every stage of the supply chain, from manufacturing, to distribution, to retail.

💡 Example:

A manufacturer buys raw materials → pays VAT
The distributor buys the finished product → pays VAT
You (the seller) sell it to the customer → charge VAT
But everyone along the way claims back the VAT they paid…
Except the end customer. They pay the full amount, and can’t claim it back.

You’ll run into VAT if you’re selling on:

• Amazon Europe

• Etsy international

• Shopify stores shipping to the EU or UK

What Is a Tax Jurisdiction?

A tax jurisdiction is basically a region that controls its own tax laws. This could be a state, a county, a city, or even a local district.

What is a Zero Return (and Why Should You Care)?

A Zero Return is a type of sales tax return that you file when your business did not collect or owe any sales tax during a specific filing period.

Even if you had no sales or only made tax-exempt sales, if you are registered for sales tax in a state, that state still expects you to submit a return for the period.

Filing a zero return simply communicates to the tax authority:

“I had no taxable transactions this period, but I’m fulfilling my filing obligation.”

Remember, failing to file a return, even with no sales, can result in:

• Penalties for non-compliance

• Interest charges

• Potential account suspension or revocation

📌 Best Practice: Always file your return by the due date, even if the return amount is zero. Many states issue automatic penalties for non-filing, regardless of whether any tax was actually due. Keeping up with zero returns is a simple way to stay compliant and avoid unnecessary fines.

Nexus & Sales Tax Compliance Requirements

In simple terms, nexus means a connection between your business and a state. If your e-commerce business has a connection with a U.S. state, that state can legally require you to collect sales tax from buyers who live there. 

So, What Is a Sales Tax Nexus?

This is a broad term. It refers to any state where your business activities trigger a requirement to collect sales tax. It could be due to physical operations, revenue thresholds, or third-party arrangements.

If you have sales tax nexus in a state, you’re responsible for:

• Registering with the state tax authority

• Charging the correct sales tax on customer orders shipped there

• Filing sales tax returns

• Paying the collected tax to the state

What Is a Physical Nexus?

Physical nexus means your business has a tangible presence in a state. If you operate in the U.S. or sell to U.S. customers, this is one of the most straightforward ways to create a sales tax obligation.

For e-commerce sellers, physical nexus happens if you:

• Store inventory in a state (like at an Amazon FBA warehouse)

• Have an office, studio, or store there

• Employ people or contractors who live and work in that state

• Attend trade shows, craft fairs, or do installations/sales events in a state

• Drop-ship from a third-party supplier located in that state

In simple terms:  If your business physically touches a state in any way, you likely have physical nexus there. And that means you need to collect sales tax on orders shipped to customers in that state.

What Is an Economic Nexus?

Economic nexus has nothing to do with where you live or store products, it’s purely about your sales volume into a state. Most U.S. states now follow economic nexus laws. That means:

If you sell a lot in a state, even if you’ve never been there, you can still be required to collect sales tax.

Let’s say, you run your Shopify store from India and sell to U.S. customers. If your total sales to customers in Illinois hit $120,000 in a year, then you’ve triggered economic nexus in Illinois. 

Even if you’ve never set foot there, you’re now required to:

• Register with the Illinois tax department

• Start charging sales tax to buyers in Illinois

• File returns and remit the tax collected

✅ For e-commerce sellers, economic nexus is triggered if you:

• Cross a sales revenue threshold (e.g., $100,000 in sales to that state)

• Or process a certain number of transactions (e.g., 200+ separate orders)

What Is a Remote Seller?

A remote seller is any business that sells into a U.S. state without having a physical presence there.

Let’s say you’re running your e-commerce brand from another state or even another country, and you ship products to customers in California or Texas. You don’t have a warehouse or office there, but you’re still selling. That makes you a remote seller in those states.

This became especially important after the Wayfair v. South Dakota ruling in 2018. Before that, states could only require you to collect sales tax if you had a physical footprint in their state. But Wayfair changed the scenario.

Now, if your sales cross a certain threshold (like $100,000 in revenue or 200 transactions), you’re legally required to:

• Register in that state

• Collect sales tax from customers

• File and remit that tax on a regular basis

What Is Filing Frequency?

Filing frequency refers to how often you need to submit sales tax returns once you’re registered in a state.

Most states assign you a frequency based on your sales volume:

• Monthly if you’re collecting a lot of tax

• Quarterly if you’re somewhere in the middle

• Annually if you’re just getting started or only make occasional sales

But remember, you don’t choose this. Your state does. And it can change if your sales go up or down.

Also, even if you made zero sales, many states still expect a zero return. Not filing it can lead to penalties, interest, or your account being flagged as non-compliant.

So, when the state gives you a frequency, mark those dates in your calendar like your next big sale depends on it, because it kind of does 🙂

What Is a Sales Tax Permit?

A sales tax permit is the official document that allows you to collect sales tax from customers in a given state. Without it, you’re technically not allowed to charge tax at all.

When you register with a state’s Department of Revenue, you’ll fill out a form with details like:

• Your business name and EIN

• Business address

• Product types

• Estimated sales volume

Once approved, you’ll get your permit and be legally cleared to collect and remit sales tax.

But here’s where sellers often slip up:

• They start collecting tax before getting the permit (that’s a compliance issue)

• They submit incorrect details like a mismatched EIN

• They assume one permit covers all states, but each state requires its own permit

Some states process permits in 1–3 days. Others take 2–4 weeks. And any errors in your application can drag things out even more.

So, be careful about it. Hire a professional if you are confused. 

📌 doola’s Pro Advice for the Doe’rs: Always double-check your business details, and don’t wait until the last minute. If you’re approaching a state’s economic nexus threshold, it’s better to start registering early.

E-commerce Specific Sales Tax Compliance Terms

Now, let’s go over some specific sales tax terms that have gained a lot of traction lately in the e-commerce world.

What Is Product Taxability?

Product taxability refers to whether a specific item you sell is considered taxable in a particular state, and how that tax is applied.

Not all products are treated the same across the U.S. For example:

• Clothing may be fully taxable in one state but tax-exempt under a certain price in another.

• Basic groceries are usually tax-exempt, but prepared food and snacks often aren’t.

• Supplements are especially tricky. Some states treat them as taxable, while others exempt them if they’re labeled as food or medicine.

Watch out: If you’re selling online, your sales platform or tax software needs to account for these differences automatically. Otherwise, you risk either overcharging your customers or under-collecting, and both can lead to problems.

What Is Digital Goods Taxability?

Digital goods taxability covers how states treat non-physical products, like eBooks, online courses, downloadable templates, music, or software.

Some states consider digital goods taxable, while others do not:

• California doesn’t tax digital goods.

• New York taxes things like downloadable audio and video content.

• Washington taxes both digital goods and access to software over the cloud.

So, if you’re selling digital products on your website or through a platform, it’s important to know how each buyer’s state treats them. This directly affects whether you need to collect sales tax on that $20 eBook or not.

What Are Marketplace Facilitator Laws?

Marketplace facilitator laws are rules that require platforms like Amazon, Etsy, eBay, and Walmart Marketplace to collect and remit sales tax on your behalf.

If you’re selling through one of these platforms, they generally:

• Handle the tax calculation at checkout

• Collect the sales tax from your buyer

• Remit it to the appropriate state

This simplifies your life. But doesn’t always remove your responsibility completely.

Some states still require sellers to:

• Register for a permit

• File “zero returns” to confirm the marketplace handled the tax

So, while Amazon or Etsy might take care of the tax collection, you may still have compliance obligations depending on the state.

🔖 Read more: How to Start an Ecommerce Business With doola in 2025

What Is a Resale Certificate?

A resale certificate allows you to buy inventory from your suppliers without paying sales tax, as long as you’re buying the items for resale.

For example, if you’re sourcing products from a wholesaler and plan to resell them through your online store, you give the wholesaler a resale certificate. They don’t charge you tax, because it’s your job to collect it from the end customer later.

This protects you from getting taxed twice. Once when you buy, and again when you sell.

Important note:  Using a resale certificate for personal purchases is illegal and can trigger penalties. It should only be used for items you’re planning to resell.

What Is Average Order Value (AOV)?

Average Order Value (AOV) is the average amount a customer spends per order in your store. It’s calculated by dividing total revenue by total number of orders.

AOV matters for tax compliance because a higher AOV can make you hit economic nexus thresholds faster.

Let’s say a state requires sales tax registration once you hit $100,000 in sales:

• If your AOV is $25, it’ll take 4,000 orders to get there.

• If your AOV is $250, you only need 400 orders.

So, if you sell high-ticket items or bundles, you could trigger tax obligations in more states, more quickly,  even with fewer customers.

What Is Multistate Registration?

Multistate registration happens when you sell into multiple U.S. states and have triggered a sales tax nexus in more than one. Usually due to physical presence, economic thresholds, or marketplace activity.

In these cases, you’re required to:

• Register for a sales tax permit in each of those states

• Collect and remit tax based on their specific rules

• File regular returns, sometimes even when your marketplace is collecting tax for you

Managing all of these tasks manually can get overwhelming, which is why many sellers use doola’s all-in-one tax service to handle registration, sales tax rate calculation, and filing in one place.

doola can also help you avoid late filings, missed nexus triggers, or accidental over-collection.

Tools for Sales Tax Filing & Compliance

Handling sales tax compliance manually might be feasible in the very early days of an online business, but as you scale, automation becomes essential. Best automation tools for sales tax filing and compliance should have these core features: 

Real-Time, Accurate Tax Calculation

Any tool worth using should automatically calculate the right sales tax rate at checkout. That means accounting for the buyer’s exact location — down to city or ZIP — and applying the right rate based on what you’re selling.

In addition, every category of goods is treated differently by each state, and your tool needs to stay on top of those changes in real time.

Economic Nexus Tracking

The best tax automation tool should quietly track how much you’re selling in each state and let you know when you’re close to crossing a state’s economic nexus threshold. No more guessing or manually tallying up state-by-state numbers. 

Automated Filing and Remittance

Once you’re registered and collecting sales tax, the last thing you want is to miss a filing deadline or forget to send in payment.

The right tool should file your returns for you, monthly, quarterly, annually, whatever the state assigns, and also remit (pay) the tax you owe. This entire process should happen automatically, and ideally, you should get a confirmation once it’s done. 

Seamless Integrations With Your Sales Channels

You shouldn’t have to manually export CSVs from Shopify, Amazon, Etsy, or wherever else you’re selling. The tax management tool should connect directly to your storefronts and marketplaces, pull in the data, and give you a complete picture of your sales tax obligations.

If it can’t do that across platforms, it’s not built for e-commerce. Period.

Centralized Dashboard and Reporting

Your tool should give you a clean, real-time dashboard where you can see everything at a glance, where you have nexus, how much tax you’ve collected, what’s due next, and whether you’re on track.

And when it’s time to file, it should generate ready-to-use reports that break down your sales and tax by state.

Support for Exemption Certificates

If you sell to nonprofits, resellers, or tax-exempt entities, you’ll need to collect and store exemption certificates. An intuitive tool won’t just file those away, it’ll make sure those transactions are flagged properly and excluded from your taxable sales.

If you’re ever audited, those certificates are your protection. And the tool should help you stay organized.

Built-In Audit Trail and Recordkeeping

Your sales tax tool should be your audit insurance. It should store every transaction, every return, every payment, and every certificate, all in one place.

If a state asks questions, you should be able to download exactly what they need, without hunting through emails or spreadsheets. This is the kind of backup that saves e-commerce businesses.

Flexible, Founder-Friendly Pricing

Whether you’re just starting out or selling at scale, the pricing should work for your stage. That might mean per-filing payments, monthly subscriptions, or bundled packages.

What matters most is that you’re not locked into an overpriced, enterprise-level contract if you don’t need it.

Hands-Off Compliance Options

For founders who don’t want to deal with sales tax at all, some tools, like doola, offer business-in-a-box services where the formation and tax experts register your business in the necessary states, file your returns, and handle the entire paperwork.

This kind of white-glove support is especially useful if you’re a solo founder or selling from outside the U.S. 

Let doola Handle Sales Tax Compliance for You

Now, all these features come built into doola’s tax solution. Many e-commerce founders have recently gravitated toward doola after feeling overwhelmed by the endless maze of sales tax rules and compliance requirements.

Our message to entrepreneurs is simple: let us take care of the boring (but critical) tax work, so you can stay focused on building your dream.

If sales tax compliance is pulling your attention away from scaling your e-commerce store, it might be time to let doola “do it” for you, and put the focus back on your business goal.

Here’s what doola can do for you:

🎯 Multi-State Compliance Support

🎯 Filing and Remittance Process

🎯 Target Audience: U.S. vs. International Founders

Schedule a quick demo and simplify tax management with us.

FAQs

What is the difference between sales tax and VAT for U.S. e-commerce sellers?

Sales tax is added at the point of sale and collected by the seller in U.S. states. Only the end customer pays it. VAT (used internationally) is added at every stage of the supply chain and collected by all businesses involved, not just the final seller. In the U.S., you only charge sales tax if you have nexus in that state.

With VAT, registration often applies more broadly across countries.

What’s the easiest way to track where I have sales tax nexus?

Use a tool that has built-in nexus tracking, like doola, TaxJar, or Avalara. These tools monitor your sales by state and alert you when you’re close to crossing thresholds, like $100K in sales or 200 orders in a year; so you don’t have to manually calculate it.

How often do I need to file sales tax returns?

It depends on the state and your sales volume. Most states assign you a filing frequency, either monthly, quarterly, or annually, after you register. The more sales you have, the more often you’ll likely need to file.

And yes, most states require a return even if you made no sales that period.

What’s the risk of not filing a zero return?

Even if you made no sales, not filing a return at all can trigger penalties. States expect a return on file, even if it’s just saying “$0 collected.”

Missing a zero return might flag your account as non-compliant and lead to late fees, interest, or even license suspension.

How does AOV influence when I hit economic nexus thresholds?

If your Average Order Value (AOV) is high, you’ll hit revenue thresholds faster, even with fewer transactions. For example, if your AOV is $250, you only need 400 orders to reach a $100K threshold. But with a $25 AOV, it would take 4,000 orders.

So, a higher AOV can trigger nexus earlier, meaning you’ll need to register and collect sales tax in more states sooner.