In 2024, U.S. ecommerce reached $1.192 trillion, with most online purchases involving taxable goods. Sales tax rates vary across more than 13,000 jurisdictions, and the applicable rate depends on state-specific sourcing rules, typically based on the shipping address, but sometimes the seller’s or billing address. Retailers must stay compliant with each state’s rules, including how shipping fees are taxed, especially if they have nexus in multiple states.
Understanding U.S. Sales Tax for Online Retailers
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Author: Ivana Picajkić
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Content accuracy validation date:
28.04.2025
Content accuracy validation time:
08:03h
In 2024, U.S. ecommerce hit $1.192 trillion, with over 80% of Americans shopping online. Most online purchases are physical goods that are taxable, which means retailers must know the correct sales tax rates to charge based on where the buyer is.
There are over 13,000 tax jurisdictions in the U.S., each with its own rules. What makes it trickier is that different states use different sourcing rules to decide which rate applies.
How is Sales Tax determined?
- For most online sales: Tax is based on the shipping address (this is called destination sourcing),
- Sometimes: Tax is based on the seller’s address (known as origin sourcing), but only in some states and for certain in-state sales like store pickups or deliveries,
- Rarely: Tax is based on the billing address, usually only when no shipping address is available, like with digital products.
Examples of state rules:
- Ohio: Uses the location where the order was received for in-state internet sales,
- Illinois: Uses destination sourcing for out-of-state orders and origin sourcing for in-state ones,
- Texas: Tax is based on where the sale is “consummated”, either where the order was taken or fulfilled,
- Virginia: In-state sellers use their business address; out-of-state sellers use the delivery address.
What about shipping fees?
Whether shipping charges are taxable depends on:
- The state,
- Whether the goods shipped are taxable,
- If the shipping fee is listed separately on the invoice.
In general, when shipping charges are applied to taxable items, those charges are also subject to sales tax.
Online retailers with sales across multiple states must apply the appropriate sales tax rate according to each state's rules. With thousands of tax jurisdictions in the U.S., compliance can be complex, but it is crucial for businesses that have a sales tax nexus, established through physical presence or economic activity in a state.
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