How to Calculate Sales Tax for Your E-Commerce Business

Calculating sales tax correctly is essential for e-commerce businesses. With over 12,000 tax jurisdictions in the US, each with different rates and rules, it can get complicated fast. This guide breaks down how to calculate, collect, and remit sales tax properly.

Tax Calculation

Sales Tax Basics

The Formula

Basic sales tax calculation:

Sales Tax = Taxable Amount × Tax Rate

Example:

• Product price: $100
• Tax rate: 8.25%
• Sales tax: $100 × 0.0825 = $8.25
• Total: $108.25

Origin vs. Destination Based

States use different sourcing rules:

Example:

• You're in Dallas, TX (8.25% rate)
• Customer in Houston, TX (8.25% rate)
• Texas is origin-based → Charge Dallas rate (8.25%)

Destination example:

• You're in Seattle, WA (10.25%)
• Customer in Spokane, WA (8.9%)
• Washington is destination-based → Charge Spokane rate (8.9%)

Understanding Tax Rates

Rate Components

Total sales tax often includes multiple layers:

Finding Rates

For each customer, you need to determine:

1. State rate
2. County rate
3. City rate
4. Special district rates

Resources:

• State Department of Revenue websites
• Tax automation software
• Address validation services

What's Taxable?

Generally Taxable

Common Exemptions

Many states exempt:

• Groceries (unprepared food)
• Prescription medications
• Certain clothing (some states)
• Manufacturing equipment

Shipping Taxability by State

Calculating Tax: Step by Step

Step 1: Determine if You Have Nexus

You only collect tax in states where you have nexus:

• Physical presence, OR
• Economic nexus (sales thresholds)

Step 2: Identify Taxable Items

Not everything may be taxable:

• Check state rules for your products
• Some items may be exempt
• Different rates for different categories

Step 3: Find the Correct Rate

Based on sourcing rules:

• Origin-based: Your location
• Destination-based: Customer's location

Step 4: Calculate Tax

Simple example:

Taxable items: $150.00
Tax rate: 7.5%
Tax: $150.00 × 0.075 = $11.25

With shipping (taxable state):

Taxable items: $150.00
Shipping: $12.00
Total taxable: $162.00
Tax rate: 7.5%
Tax: $162.00 × 0.075 = $12.15

With exempt items:

Taxable items: $150.00
Exempt items (groceries): $50.00
Total taxable: $150.00
Tax rate: 7.5%
Tax: $150.00 × 0.075 = $11.25

Multi-State Complexity

Scenario: Selling to Multiple States

You sell to customers in:

• Texas (origin-based, you're here)
• California (destination-based)
• Oregon (no sales tax)

Texas customer:

• Use your origin rate
• Charge your local rate to all TX customers

California customer:

• Use destination rate
• Look up rate for their specific address

Oregon customer:

• No sales tax
• Charge $0 tax

Managing Multiple Rates

With thousands of rates nationwide, manual tracking is impractical. Options:

Tax Automation Tools

E-commerce Platform Options

Dedicated Tax Services

How They Work

1. Customer enters address
2. Service validates address
3. Service calculates exact tax
4. Tax applied at checkout
5. Data tracked for filing

Collecting Tax on Marketplaces

Marketplace Facilitator Laws

On major platforms, the marketplace often handles tax:

What You Still Do

Even when marketplaces collect:

• Register in your home state
• Get your resale certificate
• File required returns (even if $0)
• Track for your records

Filing and Remitting

Filing Frequency

States assign filing schedules based on your volume:

What You File

Each return typically includes:

• Gross sales
• Exempt sales
• Taxable sales
• Tax collected
• Tax due

Payment Methods

• Electronic payment (ACH)
• Credit card (may have fees)
• Check (some states still allow)

Record Keeping

What to Keep

Tracking Tools

For multi-channel sellers, software like Raidframe can help track sales across platforms and prepare for tax reporting.

Common Calculation Mistakes

Mistake 1: Using Wrong Rate

Always verify rates—they change frequently. Don't rely on memory.

Mistake 2: Taxing Exempt Items

Some products are exempt. Configure your systems correctly.

Mistake 3: Missing Shipping Tax

Know which states tax shipping. Configure accordingly.

Mistake 4: Incorrect Sourcing

Origin vs. destination matters. Use the right one for each state.

Mistake 5: Rounding Errors

Follow state-specific rounding rules. Some round up, some down, some to nearest cent.

Special Situations

Discounts and Coupons

Manufacturer coupon:

• Tax usually on full price
• Varies by state

Store discount:

• Tax on discounted price

Returns and Refunds

When refunding:

• Refund the tax collected
• Track for your returns

Gift Cards

• Purchase: No tax
• Redemption: Tax on items purchased

Getting Help

When to Use Professional Help

Consider a tax professional if:

• Multi-state operations
• Complex product mix
• Audit or notice received
• Unsure about compliance

Resources

• State Department of Revenue
• Tax automation provider support
• CPA/tax attorney

Summary: The Tax Calculation Process

1. Determine nexus → Where do you collect?
2. Identify taxable items → What's taxed in each state?
3. Apply correct rate → Origin or destination?
4. Collect at checkout → Calculate and add tax
5. Track and record → Keep detailed records
6. File and remit → Submit returns and payments

Start With the Basics

Before worrying about collection, make sure you can buy inventory tax-free. Get your resale certificate.

Apply for Your Resale Certificate →

Need help with sales tax compliance? Contact us for guidance.