Accounting for small online sellers: what changes when you sell products over the internet

Plenty of small businesses sell online as a side channel or a primary revenue stream without thinking of themselves as ecommerce companies. A landscaper who sells branded merchandise. A baker who ships to customers in other states. A consultant who sells digital templates. A retailer who moved part of their business online. None of these owners woke up planning to navigate multi-state sales tax, but each may already have obligations they do not know about.

Selling products over the internet changes your accounting in three specific ways: it creates sales tax exposure in states where you have no physical presence, it requires inventory tracking that service-business bookkeeping typically does not handle, and it produces payment processor deposits that do not match your actual revenue and have to be reconciled against detailed processor reports. All three are solvable. None of them goes away by itself.

Sales tax after the Wayfair decision

Before 2018, a state could only require you to collect its sales tax if you had a physical presence there: an office, a warehouse, an employee, or inventory stored in a fulfillment centre. That physical-presence rule was overturned by the Supreme Court in South Dakota v. Wayfair, Inc. The ruling held that a state can require an out-of-state seller to collect and remit sales tax based purely on economic activity in the state, with no physical presence required.

Every state with a sales tax has now enacted an economic nexus law. The thresholds and tests vary significantly by state, and the familiar "$100,000 or 200 transactions" shorthand that circulated after Wayfair is out of date in a growing share of the country. A few concrete examples show why checking each state's current rule matters more than applying one nationwide number.

Illinois uses a threshold of $100,000 or more in cumulative gross receipts from sales of tangible personal property to Illinois buyers over an applicable 12-month lookback period. Its 200-transaction alternative was repealed effective January 1, 2026.

Utah uses a threshold of more than $100,000 in the previous or current calendar year. Its 200-transaction test was repealed effective July 1, 2025.

California uses a threshold of more than $500,000 in cumulative sales of tangible personal property to California buyers in the current or prior calendar year — materially higher than the most common threshold.

These three examples alone show why a single spreadsheet column labelled "nexus: $100,000 or 200 orders" produces wrong answers. The relevant question for a landscaper selling branded hats online is not just where the business is located, but where customers receive the hats, how much the business sells into each state, whether a marketplace handled the order, and whether any other activity creates physical presence.

Marketplaces do not remove all your obligations. A marketplace facilitator typically collects and remits sales tax on transactions it facilitates. But that collection generally covers only the sales made through that platform. Your own direct website is your responsibility even if Etsy or Amazon handles the platform orders. Additionally, Washington includes all retail sales — both marketplace and direct — when calculating whether a seller has met its registration threshold, meaning a seller can meet the threshold through platform sales even if the facilitator collected the tax on those sales.

FBA inventory creates physical nexus separately. California treats inventory maintained in a state as a form of physical presence, subject to the facts of the storage arrangement. A seller using Amazon FBA should determine where Amazon is storing their stock, because a California warehouse creates California nexus regardless of sales volume.

Product classification affects taxability. Not all products receive the same tax treatment in the same state. Washington generally exempts bakery items such as bread and cakes from retail sales tax unless the seller provides eating utensils — ordinary bags are not eating utensils. Washington generally taxes digital goods subject to applicable exemptions and sourcing rules. A baker shipping boxed bread and a consultant selling a downloadable template can face opposite tax treatment on sales to the same Washington customer. Build a product list that separates physical goods, digital goods, and services before configuring any checkout platform's tax settings, and verify taxability by product type and destination state rather than applying a single taxable checkbox to the whole store.

Inventory: tracking what you have, what it cost, and when it was sold

Service businesses generally have no inventory to track. Online product sellers do, and the accounting treatment is meaningfully different.

Inventory is an asset on your balance sheet until it is sold. When a sale occurs, the cost of the items sold moves from the inventory asset account to cost of goods sold on your income statement. The IRS describes cost of goods sold by starting with goods available for sale and subtracting ending inventory. Gross margin then compares product revenue with the cost of those specific products, rather than with whatever happened to be purchased that month.

An illustrative example: a seller buys 10 shirts at $20 each and sells one for $35. That sale generates $35 of product revenue and $20 of cost of goods sold, leaving $15 of gross profit before selling fees, shipping, and other costs. Charging the entire $200 purchase against that first sale would both overstate the product's cost and hide the value of the nine shirts still in inventory.

There is an important distinction between tax accounting and management accounting for small sellers. IRS Publication 538 describes eligible small-business taxpayer alternatives to conventional inventory accounting, including treatment of inventory as non-incidental materials and supplies in some circumstances. The inflation-adjusted gross-receipts threshold for these alternatives is $32 million in average annual receipts over the relevant three-year period for tax years beginning in 2026. That threshold applies to specific conditions, so the number is not blanket permission for any seller below it to deduct all stock immediately. Confirm the applicable treatment for your business with your accountant. Even where a tax accounting alternative applies, tracking inventory units and costs throughout the year remains essential for understanding your actual product-level margins.

Returns complicate inventory accounting further. When a customer returns a product, revenue is reversed, inventory is restocked at cost, and any partial refund affects the margin calculation. If your accounting does not capture returns correctly, both revenue and inventory balances will be wrong.

Payment processor reconciliation: why your bank deposits do not match your revenue

When you sell through Stripe, PayPal, Shopify Payments, Square, or any other payment processor, the deposits hitting your bank account are not your gross revenue. They are a net figure after the processor's fees, potentially after refunds processed in the same period, and often representing several days of accumulated activity paid out together.

Consider a straightforward hypothetical: a seller charges $100 for a product plus $8 in sales tax. The processor withholds a $3 fee and sends $105 to the bank. The correct accounting records four separate events: the customer payment creates $108 in a processor clearing account (credit sales revenue $100, credit sales tax payable $8), the fee reduces the clearing account by $3 (debit processing-fee expense $3), the deposit moves 105fromtheclearingaccounttothebank,andtheproduct'scostmovesfrominventorytocostofgoodssold(40 in this example). The bank sees $105. Gross product revenue was $100. The $8 is a liability to remit to the state, not income — the IRS generally excludes separately stated sales tax collected on behalf of a taxing authority from the seller's gross income.

If a bookkeeper labels the $105 deposit as "sales," the record omits the $3 fee as a separate expense, misclassifies the $8 tax as revenue, and loses the $40 product cost. Stripe provides an itemised payout report distinguishing payments, refunds, disputes, fees, and other balance transactions, along with amounts not yet settled at period-end. Reconciling against that report rather than just the bank deposit is what produces accurate books.

In a real store with multiple transactions, refunds, and disputed charges, reconcile each platform's order report to gross receipts, tax, refunds, and fees as a separate step before matching to bank deposits.

Form 1099-K is a cross-check, not a second batch of revenue to enter. For federal reporting, a third-party settlement organisation must generally issue a 1099-K when a payee has more than $20,000 in payments and more than 200 transactions. Payment-card transactions have no comparable minimum threshold. This 1099-K reporting test is entirely separate from state sales-tax nexus thresholds. The IRS notes that the form reports gross payment transactions before adjustments for fees, credits, refunds, shipping, and discounts. Reconcile it to your detailed sales records rather than treating box 1a as your taxable sales figure.

What your bookkeeping system needs to handle online selling

A service-business bookkeeping setup generally requires modification to handle product sales. The additions needed are: an inventory asset account and a cost of goods sold account, a sales tax payable account to hold collected tax until it is remitted, a payment-processor clearing account for each major platform, accounts for refunds and returns separate from gross revenue, and a way to track sales by destination state for sales tax threshold monitoring.

A useful monthly close sequence for an online seller reconciles each platform's order data to gross receipts, tax, refunds, and fees; then reconciles processor clearing balances to bank deposits including unsettled amounts; then updates inventory for purchases, sales, and returns; then updates the running sales-by-state totals for nexus monitoring; and retains facilitator tax reports and proof of where inventory was stored.

None of these requirements need specialised ecommerce software. They require a chart of accounts structured for the business model, consistent categorisation discipline, and a bookkeeper who understands the difference between a payment processor deposit and the underlying revenue it represents.

How Inkle helps

Inkle Books handles bookkeeping for owner-operated businesses including those with product sales alongside service revenue. The monthly close covers transaction categorisation, account reconciliation, and financial statement production. If your business combines service revenue and product sales, the chart of accounts is structured to track them separately so gross margin by revenue type is visible.

Inkle Tax handles federal, state, and franchise tax filings. Multi-state sales tax registration and filing is a separate obligation from income tax preparation, with requirements that vary significantly by state, product type, and channel. Whether Inkle covers multi-state sales tax compliance for your specific situation is worth confirming during the onboarding conversation alongside your entity type and state mix.

Inkle handles bookkeeping and tax for owner-operated businesses across the US. See how it works or book a demo to talk through what your business needs.