Dealing with online sales tax can be complicated and confusing. As a Shopify seller, tax compliance is the last thing you want to worry about with your online store, but since it's a necessary part of selling online, we'll help you understand the basics of your tax obligations. In addition, we will take you through the steps for Shopify sales tax setup.
Remember, you only want to set up Shopify to collect sales tax in states that you already have registered for a permit in. This is because it is illegal to collect tax in a state you don't have a permit in, so don't just go set up all states to collect right from the start. Also, don't register for a tax permit in a state you don't already have nexus in, that just makes things unnecessarily complicated before they have to be. For more on both of these, read our complete guide to sales tax nexus and how to register for a sales tax permit.
How does sales tax work on Shopify?
Does Shopify collect sales tax for sellers?
Shopify is not required to collect and remit sales tax on behalf of its sellers. Unlike Amazon or eBay, Shopify is not a “marketplace facilitator”. Therefore, Shopify doesn't fall under marketplace facilitator laws that require stores like Amazon or eBay to collect and remit taxes for its sellers. So, the Shopify seller is responsible for remitting sales tax to the states.
It's important to remember that a seller doesn't technically own any sales tax that they collect. These funds are collected from customers by the seller and then passed on to that state. If you don't collect sales tax when you should, you'll have to pay that tax out-of-pocket if the state comes after you, while potentially owing penalty fees.
In what states do I collect sales tax in my Shopify store?
This is a complicated question. Every state has differing nexus laws for when you need to collect sales tax in their state. You need to start by collecting taxes from customers in the state where your business is located (unless you live in Alaska, Delaware, Montana, New Hampshire, or Oregon). But BEFORE setting up your store to collect taxes in that state, make sure you register for a sales tax permit. We cannot stress enough how important this is for tax compliance!
As your business grows, you'll need to register, collect, and remit sales tax in more states. If you have a "physical presence" (employees, warehouses, etc.) in any state, you'll need to register there. As your sales in a state grow, you'll also want to check that state's economic nexus threshold, historically around $100,000 in sales, though the exact rules vary and continue to change: Indiana, North Carolina, and Wyoming dropped their 200-transaction count requirement in 2024, Alaska followed in 2025, and Illinois eliminated its own transaction threshold as of January 2026. Economic nexus is a fancy way of saying that if you are selling a lot of product to customers in a specific state, that state wants you to remit sales tax.
Setting up sales tax collection in Shopify
Once you know which states you need to collect in and you're registered in each one, the actual setup happens inside Shopify's tax settings. Since Shopify's admin interface changes periodically, we'd rather point you to Shopify's own always-current sales tax setup documentation than walk through specific click paths that may not match what you see today.
A few things worth knowing going in, regardless of what the settings screen looks like when you get there:
- Product categorization matters: Shopify can automatically apply the right tax treatment to different product types once you've categorized them, this is what lets something like tax-exempt clothing in Pennsylvania get handled correctly without manual overrides.
- Not everything is taxable: Gift cards, for example, generally shouldn't have sales tax applied.
- Your fulfillment location matters, not just your business address: If you ship from a warehouse in a different state than your office, Shopify needs to know that to apply the correct rate.
- You'll need to flag tax-exempt customers, resellers, nonprofits, and government buyers are the most common categories, and you should get a valid exemption certificate from them before you stop collecting tax on their orders.
- Product taxability varies by state. In New York, for example, clothing and footwear under $110 per item is tax-exempt. Read more about New York's rules.
Frequently asked questions
Does Shopify collect and remit sales tax for me automatically?
No. Shopify isn't a marketplace facilitator like Amazon or eBay, so it doesn't fall under marketplace facilitator laws. You're responsible for registering, collecting, and remitting sales tax yourself.
What should I do before I set up Shopify to collect tax in a state?
Register for a sales tax permit in that state first. Collecting tax before you're registered is illegal, even if you plan to remit it correctly later.
Where do I need to collect sales tax on Shopify?
Start with the state your business is located in, then expand as you establish physical nexus (employees, warehouses) or economic nexus (typically around $100K in sales) in other states.
Does my warehouse location matter for sales tax setup?
Yes. Shopify needs to know your fulfillment location, not just your business address, since the tax rate can differ depending on whether a product ships within the same state as the warehouse or across state lines.
Do I need to collect sales tax from every customer?
No. Resellers, nonprofits, and government entities are commonly tax-exempt, but you need a valid exemption certificate on file for each one before you stop collecting from them.
Is sales tax on a product the same in every state?
No. The same product category can be taxed differently state to state, for example, clothing and footwear under $110 is tax-exempt in New York but fully taxable in many other states.
Get your Shopify sales tax setup right the first time
Configuring Shopify correctly is only part of the picture, registering in the right states, categorizing products, and handling exempt customers all have to work together.
Not sure where you stand? Take our free Sales Tax Risk Assessment, 20 quick questions, about five minutes, for a personalized read on your exposure. If you're not finding all the answers you need here, you're welcome to schedule a consultation with one of our sales tax experts.
If your business is larger than $1M in annual sales, you're reaching a point where you may need dedicated tax expertise. Reach out to LedgerGurus for help with this or other ecommerce accounting needs.
