Sales tax and 1099s for e-commerce sellers

Two compliance jobs catch online sellers out more than any others. Both are boring. Both are cheap to get right in advance and expensive to fix afterwards. Neither is a reason to panic, and neither is something you can safely leave until your accountant asks.

What follows is the operator's version. It is not tax advice for your specific facts, and where a rule varies by state, that is said rather than smoothed over.

Sales tax starts with nexus, not with sales

Nexus is the connection with a state that obliges you to register, collect tax from buyers there, and file returns. It comes in two flavors.

• Physical presence: an office, an employee, in some states a contractor, and — the one sellers forget — inventory stored in the state, including inventory a marketplace moved into a warehouse on your behalf.
• Economic presence: since the 2018 Supreme Court decision in South Dakota v. Wayfair, a state may require collection based on your sales into that state alone, with no physical footprint at all.

Every state sets its own economic threshold, some pair a dollar figure with a transaction count, and those rules change. Do not carry one state's number in your head as though it were federal. The part that stings is that nexus is assessed state by state, and the obligation begins when you cross the line, not when you notice you crossed it.

What the marketplace does and does not do for you

Marketplace facilitator laws make the platform responsible for collecting and remitting sales tax on the sales made through it. If you sell on a large marketplace, that is real relief and you should take it. It does not do three things.

• It does not cover your own store. Sales through your own checkout are yours to collect on, in every state where you have nexus.
• In several states, marketplace sales still count toward your economic threshold. You can be pushed over the line by sales you never had to collect on, and then owe registration and returns on your direct sales.
• Once registered, you may still have to file a return reporting the marketplace sales, even though someone else remitted the tax. A zero-liability return is still a return, and missing it still earns a penalty.

Register, then collect, then remit — in that order

Collecting tax in a state where you are not registered is not a head start; in most states it is illegal. Register first, then turn collection on for that state in your platform's tax settings.

Let the tax engine calculate, but spot-check it. Product taxability genuinely differs: clothing, groceries, supplements, digital goods, and subscriptions are all treated differently from one state to the next, and whether shipping is taxable can turn on how you present it on the invoice. If you sell wholesale, collect the resale or exemption certificate at the time of the sale and keep it — an auditor asks for the certificate, not for your recollection of the conversation.

Once you are registered, the state assigns your filing frequency — monthly, quarterly, or annually, and it can change as your volume changes. You file on that schedule even in months with nothing to report.

If you are already behind

Registering today and collecting from tomorrow fixes the future. It does not clear the past, and in some states registering draws attention to it.

Most states run a voluntary disclosure program: approach them before they contact you and you can generally agree a limited look-back period with penalties abated. Once a nexus questionnaire arrives in your inbox, that option narrows considerably. You also do not have to fix everything at once — rank the states by exposure, deal with the largest first, and work down.

1099s: the January problem you solve in March

Payments to contractors and certain vendors are reported to the IRS on Form 1099-NEC, which is due to both the recipient and the IRS at the end of January. That deadline is the reason this work has to happen during the year rather than after it.

The dollar threshold that triggers a 1099 has been changed by recent legislation, so confirm the current figure for the tax year you are filing rather than the number you memorized. In the meantime the practical rule does not depend on it: collect a Form W-9 from every vendor before you make their first payment. At the point you pay someone you have no idea whether they will cross the threshold by December, and a contractor who has moved on is far harder to chase in January than in March.

• Payments to corporations are generally excluded, but there are exceptions — legal fees are the one that catches people out. The W-9 tells you the entity type, which is precisely why you collect it.
• Payments made by credit card or through a third-party settlement network are reported by the processor on a Form 1099-K. You do not also issue a 1099-NEC for those, and doing so creates a real problem for the recipient. Sort your vendor payments by method, not only by amount.
• If a vendor will not provide a W-9, backup withholding may apply to their payments. Making the W-9 a condition of the first payment avoids the whole conversation.

The 1099-K reconciliation every seller hits

The 1099-K you receive from a payment processor or marketplace reports gross amounts processed — before fees, before refunds, before chargebacks — and on the processor's timing rather than the date the money reached your bank.

Your books, if they were built from bank deposits, show net. Those two figures will never agree, and the difference is not an error you can find in an afternoon in April. Record gross sales, then fees, refunds, and chargebacks as separate lines, every month. It is fifteen minutes with the monthly payout report, and it turns a year-end reconciliation into a formality.

Both of these obligations get more expensive with time. Nexus keeps accruing whether or not you are watching it, and missing W-9s get harder to collect the longer you leave them. An afternoon on a nexus review and a tidy vendor file is the cheapest compliance work you will ever do.