E-Commerce Tax Laws

Internet and e-commerce businesses operate in a tax environment that is more complex than traditional brick-and-mortar commerce. Even small online sellers can face multi-state sales tax exposure, marketplace compliance obligations, and federal and state income tax issues driven by where customers are located, where inventory is stored, and how digital products and services are delivered. For larger companies, tax risk expands into economic nexus management, resale certificate compliance, SaaS taxability, international VAT/GST exposure, transfer pricing, and audit defense.

We advise businesses, founders, creators, and online operators on the tax and compliance issues that arise in modern digital commerce. This page provides a practical overview of the current internet and e-commerce tax landscape, with an emphasis on the types of issues that most often trigger audits, penalties, or disruptive disputes.

1) Why E-Commerce Tax Compliance Is Different

E-commerce allows businesses to sell into multiple states (and countries) without any physical storefront. That convenience comes with tax consequences:

A single website can create tax nexus in dozens of states.
Inventory stored in third-party warehouses can trigger physical presence nexus without the seller realizing it.
Marketplace platforms may collect and remit sales tax in some states--but not always for every product type, jurisdiction, or transaction.
Digital goods and services (e.g., downloads, subscriptions, SaaS) face inconsistent tax rules across states.
Marketing and fulfillment structures can create unexpected tax exposure.

Because tax obligations can be triggered by where the customer is, where the seller is, and where operational activities occur, online businesses must manage tax compliance as an ongoing operational discipline rather than a once-a-year task.

2) Sales Tax and Economic Nexus After South Dakota v. Wayfair, Inc.

A central driver of modern e-commerce tax compliance is the U.S. Supreme Court's decision in South Dakota v. Wayfair, Inc. 585 U.S. 162 (2018) which allowed states to require out-of-state sellers to collect and remit sales tax based on economic nexus--typically measured by sales volume or transaction count into the state.

Practical impact for online businesses

Even if you have no employees, offices, or physical presence in another state, you may still have a duty to:

Register for sales tax
Collect and remit sales tax
File periodic returns
Maintain exemption documentation (e.g., resale certificates)

Most states set economic nexus thresholds (often around $100,000 in sales or 200 transactions, though thresholds vary and are subject to change). Online sellers should treat nexus monitoring as a continuous process, especially when marketing campaigns or platform growth changes the geographic distribution of customers.

3) Marketplace Facilitator Rules: Amazon, Etsy, Shopify, and Platform Collection

Many states have adopted "marketplace facilitator" laws, which generally require a marketplace platform (rather than the individual seller) to collect and remit sales tax on marketplace transactions. This can reduce compliance burdens--but it is not a total solution.

Common pitfalls

Multiple channels: Sellers may rely on marketplace collection for Amazon or Etsy sales but forget that direct sales through Shopify, WooCommerce, or a custom site still create independent obligations.
Mixed transactions: Some states treat certain goods, subscriptions, or bundled offerings differently.
Returns and chargebacks: Taxability and remittance can vary based on refunds, returns, and partial refunds.
Documentation and audits: Even if a marketplace collects the tax, sellers may still face documentation requests or audit inquiries.

So, businesses should map each revenue channel, identify who is responsible for tax collection in each state, and confirm that invoicing and accounting systems accurately classify tax collected and remitted.

4) Taxability of Digital Products, SaaS, and Online Services

One of the most challenging areas of e-commerce tax compliance is the tax treatment of:

Digital downloads (music, video, ebooks, software)
SaaS subscriptions
Streaming and access-based services
Online coaching, courses, and memberships
Digital advertising services
Bundled product + service offerings

States differ significantly on whether these products are taxable, exempt, or taxable only under specific conditions. For example:

Some states tax SaaS as a form of software; others do not.
Some states tax digital products similarly to tangible goods; others impose special rules.
Bundled transactions may be taxed differently depending on whether the taxable component is "de minimis" or dominant.

For high-revenue online businesses, these differences can create significant financial exposure if the taxability rules are misapplied across states.

5) Inventory and Fulfillment: How Warehouses and 3PLs Create Nexus

Many online businesses use:

Amazon FBA
Third-party logistics (3PL) providers
Drop-shipping vendors
Print-on-demand fulfillment

These arrangements can create tax nexus because inventory stored in a state often counts as physical presence. Businesses can unintentionally trigger obligations in multiple states if inventory is moved or stored across warehouse networks without clear reporting.

Practical compliance steps

Identify where inventory is stored (by state and facility)
Track inventory movement
Confirm whether a 3PL relationship creates registration, collection, or reporting obligations
Ensure contracts clarify responsibilities for tax compliance and recordkeeping

6) Income Tax Nexus, Apportionment, and State Franchise Taxes

Sales tax is only part of the picture. Online businesses may also face:

State income tax filing obligations
Franchise or gross receipts taxes
Apportionment requirements based on where revenue is sourced

State income tax nexus standards vary, but online operations can trigger obligations through:

Employees or contractors working remotely in another state
Significant revenue from in-state customers
Fulfillment operations
Local marketing, affiliate, or sales activities

In California, businesses should also account for:

California franchise tax and filing requirements
Entity structuring (LLC, S-Corp, C-Corp)
Apportionment and sourcing rules for service revenue and digital revenue
Local tax issues (depending on city and business activity)

7) Common E-Commerce Tax Compliance Issues That Trigger Audits

Many audits and enforcement actions arise from a small set of recurring issues:

Failure to register in states where economic nexus is triggered
Misclassification of taxable vs. non-taxable products (especially digital goods and SaaS)
Improper exemption documentation (resale certificates and exempt sales)
Drop-shipping compliance issues (who collects, who remits, who holds certificates)
Marketplace reliance errors (assuming "the platform handles everything")
Inconsistent invoicing and accounting records
Late or incomplete returns and penalty accumulation

Because penalties and interest can be substantial, the cost of proactive compliance is often far lower than the cost of post-audit remediation.

8) International E-Commerce Tax: VAT/GST, Customs, and Digital Services Rules

If you sell to customers outside the United States, you may encounter:

Value-Added Tax (VAT) in the EU and other jurisdictions
Goods and Services Tax (GST) in countries such as Canada, Australia, and others
Digital services taxes and place-of-consumption rules
Customs duties and import compliance for physical goods

International tax obligations depend on:

Where customers are located
Whether sales are made through a marketplace that collects VAT/GST
How products are delivered (digital download vs. physical shipment)
Registration thresholds and local compliance rules
Whether your business is considered to be "targeting" customers in a jurisdiction

For digital services and downloads, many jurisdictions require foreign sellers to register and collect VAT/GST once sales exceed certain thresholds, and enforcement has increased over time as governments modernize tax collection on cross-border e-commerce.

9) Tax Strategy for E-Commerce Businesses: Compliance + Risk Allocation

E-commerce tax issues are not purely accounting issues--they are legal risk issues. Businesses should implement a structured compliance program that addresses:

Nexus monitoring (economic and physical)
Product taxability mapping (by state and product category)
Marketplace vs. direct channel allocation
Exemption documentation procedures
Contract terms with vendors, marketplaces, affiliates, and 3PLs
Audit readiness and record retention

For many businesses, the optimal solution involves a combination of:

Automated tax software integrations (where appropriate)
Legal review of product classification and liability allocation
Periodic nexus audits and compliance refreshes
Clear policies for refunds, chargebacks, and tax adjustments

10) How the Law Offices of Salar Atrizadeh Can Help

Our law firm supports clients in e-commerce tax matters by providing legal analysis and strategic guidance across:

Multi-state sales tax exposure assessments and compliance planning
Digital goods and SaaS taxability analysis
Marketplace and platform compliance strategy (including contract review)
Drop-shipping and resale certificate compliance
Structuring and risk management for online businesses
Audit response support and dispute strategy where tax authorities challenge filings

We focus on solutions that are operationally feasible, scalable, and designed to prevent disruption because internet and e-commerce businesses move quickly. If you operate an online business, sell digital products, run a SaaS platform, or sell across state lines, tax exposure can accumulate silently--and become expensive when discovered. Legal review and structured compliance can reduce risk, protect cash flow, and strengthen your position if a dispute arises.