I worked for a company that handled all this mess because they had a tax nexus in all states. There's companies that deal with this whole mess for you, and they keep all of their data up to date with the different tax laws. All you have to do is classify each product in one of about 100,000 categoires and you're set. It was easy for us because everything fell into like 3 categories, but I'd hate to be Amazon having to go through and classify their whole inventory.
Tax law is horribly complex... in some states you pay the selling point's tax rate, some states you pay the recipient's tax rate. And then you fall into crazy tax holidays. In Texas we have a pre-school tax holiday. All school supplies are tax free, along with clothing, and sporting goods (in case your kids are taking baseball for example) except for luxury items like golf equipment. It starts getting crazy when you start asking "Do golf shoes count as clothing, sporting goods, or golf equipment?" The category system helped you get it all figured out.
The last update I remember seeing had an categories for water heaters, based on their power effency and size. My guess is some state gives you a tax break on high efficency water heaters.
Other then huge volume sellers like Amazon that sell a crazy amount of different items, I really don't see the burden of doing it as being very hard. All you have to do is during checkout, hit a database (provided by the tax company) for their correct city/state/zip/in-city info. Match it against quantity, orderitem amount, category, etc, and you're done.
I didn't name any companies here because I'm not promoting any of them, I'm just saying the burden isn't really that high. You just pay the tax company to figure out the taxes for you, and for us it was a minimal cost, once a month we just updated our raw data and we're done.