Online sellers spend more time than any other group choosing a formation state, and it is the decision that matters least to them. Since the Supreme Court decided South Dakota v. Wayfair in 2018, a state's power to require sales tax collection turns on the seller's economic connection to that state, not on physical offices and not on where the articles were filed. A seller formed in Wyoming and a seller formed in New Jersey face identical obligations in Texas if they cross the Texas threshold.
What follows is the map of obligations that actually attach: the economic nexus thresholds, the marketplace facilitator shift, what a resale certificate does and does not cover, and the separate question of registering the entity itself in a state where inventory sits. The formation mechanics are in the formation guide, and the perennial state-choice question is answered in the best state analysis.
The Formation State Is the Least Important Decision You Will Make
A limited liability company is the right structure for almost every online seller, for the same reasons it suits any small trading business: it separates inventory financing and platform disputes from personal assets, it gives suppliers and payment processors a legal counterparty, and it holds the trademarks. None of that depends on which state issued the certificate.
The pitch for forming in a no-income-tax state is that it saves tax. It does not, for an operating business. State income tax follows where income is earned, sales tax follows nexus, and a seller who forms in one state while working from another usually ends up registering in both. What the second registration adds is a second annual report, a second registered agent and a second set of deadlines: the fee file records a foreign registration for a limited liability company at $750 in Texas, $250 in New York, $180 in Washington, $150 in Arizona and $70 in Pennsylvania, on top of whatever the original formation cost. The state choice guide works through the exceptions, which are narrow.
The one structural decision worth making early is whether each brand sits in its own entity. Sellers running several unrelated storefronts sometimes separate them so that a platform suspension or a product claim on one does not reach the others. That is a real benefit with a real recurring cost, and the deciding factor is usually whether the brands share inventory and a warehouse.
Economic Nexus: the Threshold Is Different in Every State
Wayfair removed the physical presence requirement and let states set a sales threshold instead. The thresholds are not uniform and they have moved since 2018. South Dakota, the state that brought the case, originally used a two-part test of $100,000 in sales or 200 separate transactions. Senate Bill 30 removed the transaction count entirely with effect from 1 July 2023, so the current rule is registration once a remote seller has more than $100,000 in gross sales into South Dakota in the previous or current calendar year. Several other states have made the same simplification, which is good news for low-price, high-volume sellers who used to cross 200 transactions on a few thousand dollars of revenue.
Texas sets a materially higher bar: a remote seller must obtain a permit and collect once total Texas revenue exceeds $500,000 in the preceding twelve calendar months. Washington uses more than $100,000 in combined gross receipts sourced or attributed to Washington in the current or prior year, and that threshold covers retail, wholesale and service income together rather than retail alone. The practical implication is that a seller must track revenue by destination state and compare against a different number in each one, which is a bookkeeping problem before it is a tax problem. The bookkeeping guide covers the reporting structure that makes this answerable, and the seller's permit guide covers registration itself.
Form the entity, then map the states
We file the LLC with the state fee at cost and register you for sales tax where you already have an obligation. Or keep reading and file it yourself.
Inventory in a Warehouse Creates Nexus With No Threshold at All
Economic nexus gets the attention. Physical nexus is what catches fulfilment sellers, because it has no dollar threshold to cross. Washington's Department of Revenue lists, among the activities that create physical presence nexus, having a stock of goods in Washington including inventory held by a marketplace facilitator or another third party. One pallet is a stock of goods. California is equally direct: retailers that store inventory in California are generally engaged in business in the state and must register with the CDTFA and pay sales tax or collect and pay use tax on sales delivered into California, and that expressly includes retailers whose inventory sits at a California fulfilment centre owned and operated by a third party.
This is the mechanism that turns a single seller into a multi-state taxpayer without any decision being made. A fulfilment network moves stock between warehouses to shorten delivery times, and the seller acquires physical presence in each state the stock lands in. The seller usually finds out months later, from a notice.
Two defences are worth building. The first is a monthly inventory-by-state report pulled from the fulfilment platform, so the map is a fact rather than a guess. The second is a decision about whether to restrict distribution to fewer states, which some sellers do precisely to keep the registration count manageable. Neither is a tax structure. Both are operational choices with tax consequences.
Marketplace Facilitators, Resale Certificates and What Still Falls to You
Marketplace facilitator laws moved the collection duty from thousands of small sellers to a handful of platforms. California's Marketplace Facilitator Act took effect on 1 October 2019, and where a facilitator meets the conditions it becomes the seller and retailer for those transactions and is responsible for paying sales tax or collecting and paying use tax. If all of your sales run through such a marketplace, you may not need to register separately in that state.
Two things survive the shift, and both are commonly missed. First, direct sales from your own website are not marketplace sales. A seller with 90 percent of volume on a marketplace and 10 percent direct still has its own obligation on that 10 percent once a threshold is crossed. Second, physical nexus created by inventory does not disappear because a platform collects. The registration question and the collection question are separate.
Resale certificates are the other half of the picture. A properly completed resale certificate lets you buy inventory without paying tax because the tax will be collected on the eventual retail sale, and it also supports your position when you sell to a marketplace operator for resale. Misuse is expensive: California charges the tax that would have been due plus interest, a penalty of 10 percent of the tax or $500 whichever is greater, and 25 percent where there is fraud or intent to evade. On the entity's own income tax nothing here is unusual; the tax guide covers the pass-through defaults and the S-corp switch guide covers the point where the election starts to pay.
First 90 Days for an Online Seller
Nexus review belongs early, because retroactive registration is far more expensive than prospective registration.
That last step is a different question from the rest, and sellers routinely conflate the two. A sales tax permit registers you with a revenue department. Qualifying to do business registers the entity with the Secretary of State, and the two agencies have different tests. Washington, for example, requires a business licence application and issues a Unified Business Identifier once a business registers there. The foreign qualification guide covers where the line falls, and the requirements summary covers the documents each state asks for.
The Risk in Numbers: What a Back Assessment Looks Like
Sales tax is a trust tax. The seller was supposed to collect it from the customer, so a state assessing unpaid tax years later is not asking for a share of profit; it is asking for money the seller should have held. That is why assessments hurt out of proportion to the rate.
- $67,500 tax at a 7.5 percent combined rate, payable whether or not it was ever collected from customers
- $6,750 a 10 percent late payment penalty on that figure
- 25 percent penalty instead, where the state finds fraud or intent to evade
- $500 or 10 percent whichever is greater, for each misuse of a resale certificate
- $1,000 to $5,000 plus up to a year, for continuing to sell in California after a permit is revoked
- Interest from each original due date, which on a three-year gap is often a fifth of the tax again
The seller who registered when inventory first landed in that state pays the tax as it is collected and never sees any of the rest. Voluntary disclosure programmes exist in most states and typically limit the look-back period and waive penalties, which makes an early, deliberate cleanup far cheaper than waiting for the notice.
Three Online Sellers in Practice
Example 1: Foxglove Supply Co.
A skincare brand sells only from its own site and ships from a rented unit in its home state. It registers at home, takes a resale certificate for ingredient purchases, and tracks revenue by destination. It crosses $100,000 into Washington in month nine and registers there; Texas revenue reaches $310,000, still under the $500,000 threshold, so no Texas permit is required yet.
Outcome: Two registrations instead of fifty, because the thresholds were tracked by destination from the first month.
Example 2: Harbor Knot Outfitters
An outdoor gear seller ships everything into a national fulfilment network. Within a quarter its stock is sitting in warehouses in four states it has never visited. Because inventory is a stock of goods, each of those states treats the seller as physically present, and no sales threshold has to be crossed. The marketplace collects on marketplace orders, but the seller's own website orders remain its own responsibility.
Outcome: The registration count was set by a logistics algorithm. A monthly inventory-by-state report is the only way to see it coming.
Example 3: Pennant Paper Goods
A stationery maker sells exclusively through one large marketplace that collects and remits in every state under facilitator laws. It holds no inventory outside its home state. It registers at home, keeps its resale certificate current for paper stock, and files nowhere else. Two years later it launches its own website, and the direct sales create obligations the marketplace no longer covers.
Outcome: The simplest possible position lasted exactly until the first direct order. The launch, not the revenue, was the trigger.
Five Mistakes Online Sellers Make
Mistake 1: Choosing a formation state to avoid sales tax
Why it hurtsSales tax follows the customer and the inventory, not the certificate. Forming out of state usually adds a foreign registration rather than removing an obligation.
PreventionForm where you operate and treat nexus as a separate map.
Mistake 2: Ignoring inventory held by a fulfilment network
Why it hurtsA stock of goods in a state creates physical presence with no threshold, and Washington and California both say so in plain terms.
PreventionPull an inventory-by-state report monthly and register where stock actually sits.
Mistake 3: Assuming the marketplace covers everything
Why it hurtsFacilitator laws cover marketplace transactions. Direct website sales, wholesale orders and inventory nexus all remain the seller's own problem.
PreventionSplit reporting between marketplace and direct channels from the first month.
Mistake 4: Using a resale certificate for supplies
Why it hurtsThe certificate covers goods bought for resale. Misuse costs the tax, interest, and 10 percent or $500 whichever is greater, or 25 percent for intent to evade.
PreventionSeparate resale inventory from operating supplies at the purchase order, not at year end.
Mistake 5: Treating a tax permit as business registration
Why it hurtsA sales tax permit is issued by a revenue department. Qualifying to do business is a Secretary of State filing with a different test and its own annual report.
PreventionAnswer both questions per state, and diary the annual report each qualification adds.
Sellers who manufacture their own goods pick up product and permitting obligations on top of all of this; the manufacturing guide covers those. Sellers shipping their own freight should read the trucking guide before buying a truck, and sellers moving into food should read the restaurant guide for the permit stack that comes with it.
Form where you work. Register where the goods and the customers are.
For an online seller the entity is straightforward and the map is the hard part. Track revenue by destination state against each state's own threshold, watch where a fulfilment network puts your inventory, split marketplace sales from direct sales, and keep the resale certificate for what it actually covers. The formation state is close to irrelevant to any of it.
Online seller tax and entity questions
Where should an online store be formed?
In the state where you actually operate, in almost every case. Sales tax obligations follow economic nexus and inventory location rather than the state of formation, so forming elsewhere usually adds a foreign registration and a second annual report without removing a single tax duty.
What is economic nexus after Wayfair?
It is the rule that a state may require a remote seller to collect sales tax once the seller crosses a sales threshold in that state, with no physical presence required. South Dakota now uses more than $100,000 in gross sales in the previous or current calendar year, having removed its 200-transaction test with effect from 1 July 2023.
Do sales thresholds work the same everywhere?
No. Texas requires a permit once total Texas revenue exceeds $500,000 in the preceding twelve calendar months, while Washington uses more than $100,000 in combined gross receipts sourced to Washington in the current or prior year, measured across retail, wholesale and service income together.
Does storing inventory in another state create an obligation?
Yes, and with no threshold to cross. Washington lists having a stock of goods in the state, including inventory held by a marketplace facilitator or another third party, as physical presence nexus. California says retailers that store inventory in the state, including at a third-party fulfilment centre, are engaged in business there.
If a marketplace collects tax, do I still need to register?
Sometimes. Where a marketplace facilitator meets the statutory conditions it becomes the seller for those transactions and collects the tax. Your own direct website sales are not covered, and inventory sitting in a state creates an obligation that the facilitator's collection does not extinguish.
What does a resale certificate actually cover?
Goods you buy to resell, which is why no tax is charged at purchase. It does not cover operating supplies or equipment. California charges the tax plus interest for misuse, along with a penalty of 10 percent of the tax or $500 whichever is greater, rising to 25 percent for fraud or intent to evade.
Is a sales tax permit the same as registering the business in that state?
No. A sales tax permit comes from a revenue department and lets you collect tax. Qualifying to do business is a Secretary of State filing that makes the entity itself recognised in that state, with its own fee, registered agent and annual report. Inventory in a warehouse can raise both questions at once.
Form the entity, then register where you already have nexus.
LLC formation with the state fee at cost, plus sales tax registration in each state where inventory or revenue has already created an obligation.
Written from the state revenue sources below, each read on 13 August 2026. Thresholds change by legislation; confirm with the state before you register or decline to.
- South Dakota Department of Revenue, 2023 legislative updates
- Texas Comptroller, remote sellers
- Washington Department of Revenue, physical presence nexus
- Washington Department of Revenue, out-of-state reporting thresholds
- California CDTFA, online marketplaces and fulfilment centres
- California CDTFA Publication 73, your California seller's permit
Disclosure. File.Business is a private filing service, not a government agency and not a law firm. We prepare and submit filings at your direction, and nothing on this page is legal or tax advice. Filing fees, deadlines, and statutory references are current as of the last-updated date shown above and can change. Confirm current requirements with the relevant state or federal agency before you file.
