Shopify Sales Tax: Are you setting it up the WRONG way?

0:49 Manage tax collection and nexus monitoring

And on this page you can see there's three parts under here. Manage tax collection, tax rates and exemptions, and reporting. These are all new things that's been added since I last talked about Shopify and I've actually really liked them.

So this one, manage tax collection, monitor your liability and collect taxes. If you click on that, and there's three of the categories, action required, monitor required. This is when you are approaching the economic nexus threshold. And no action required. This is the places, the states you're selling into. If you are not reaching the threshold, all the states will be under here. This is for the states that you clearly pass the threshold, and this is for the states that you're approaching threshold.

1:39

So on here it lists all the states, and if you click on show detail, it'll show you that your data, which is how much you've sold. So for example, for this client of ours, they've sold $20,362 into New York and the threshold is $500,000 and the order amount is 213. The original threshold is 100. So they've passed the 100 sales threshold but not the $500,000 revenue threshold.

And if you look at this, the requirement shows that you have to pass the $500,000 and 100 orders to then pass the economic nexus threshold. And that's why even though they passed the original, the transaction threshold, they haven't sold over $500K. So that's why it's still under no action required instead of action required. And under the original requirement, it also tells you whether the data is the past four quarters or sometimes it's the past year.

2:43

So we can look at Connecticut as well. So Connecticut, it shows the requirement is a $100K and 200 orders in the past 12 months. So on here, this shows data from the past 12 months, that your sale is $7,000, which is lower than a $100K threshold, and your order is 86, which is lower than 200 as well. So both are lower. So you do not reach the economic nexus threshold for Connecticut.

And same applies for all of these states. You can click on them. You can look at what the requirements are, and once the states are in this stage, I would really keep an eye on it. Maybe like every month go back and check on it, and once it says you've passed the threshold, these are the states that you need to register. But just remember, all of these are based solely on your Shopify sales. If you are selling on other channels, you'll have to combine all of that together. So this is the first new feature.

3:43 Product categories and tax reports

And then the tax rates and exemptions. Here it's more like Amazon. You can categorize all of your products by clicking on this product category. A lot of these are taxed differently. So if I say this is apparel, if I say this is clothing or clothing accessory, Shopify actually knows how all of these are treated differently for tax purposes, and it's so great. So we don't have to just rely on setting up product overrides all the time.

So when you are setting up a product, make sure to tell them what your product is, because a lot of these are taxed differently, like software, sporting goods. Toys and games are probably different. I think toys and games are pretty much all taxable, except maybe like if you're selling into the EU, like if it's a baby toy, then it might be subject to a lower rate. And if it's a gift card they will know to not tax gift cards. So this is super awesome. So make sure you have all of these done, and if you don't, they will tell you. They will tell you that you have products that you need to categorize.

5:02

Okay, and then reporting. Download tax reports and file taxes. I think this is the best part, the best improvement that Shopify's made, because if you click on this it tells you where you need to file sales tax and you can download from here to see how much you need to file to each state. I think it's so great.

So if we do like last month, because we're in March right now, there you can just export it and it tells you which county, which is something that we struggle with so much trying to file sales tax returns. So you can just export this and use this to report your sales tax. I think this is awesome.

5:56 Turning on collection where you have nexus

So these are the new things that added to Shopify since I last talked about Shopify. But everything under here is still the same. Where you have nexus, you need to go in here and click on collect sales tax and, on the dropdowns, select the states that you have sales tax for and put in a sales tax ID. This is optional. A lot of our clients put their FEIN until they get the sales tax ID from that specific state. So you can do that as well.

And after you add this one, manage tax liability, this will take you this and the manage tax collection. These two are the same thing right here. Let's just see what this is. It's a note on telling you registration nexus. So you can read about that, too, if you want to.

6:41 When you still need an override

Okay, so here the categorization. So you really want to add categories. If you don't have those categorized, this will tell you you have certain amount of products you need to review and add a categorization, because it says your products may be subject to special state tax rules. When you categorize your products you can be more confident that you're collecting more accurate tax rates.

Just as an example, if you are selling clothing and you are in Pennsylvania, you probably add Pennsylvania here under collect sales tax and choose Pennsylvania and then add it. Select sales tax and it'll show up there. And then all of your products, if they're categorized as clothing, you actually won't collect any tax on them, because clothing, most of the general use clothing, are exempt in Pennsylvania.

But if you did not do that, you'll have to come over here and add a product override to create a collection of all the clothes and then add it to the state of Pennsylvania and say it's 0%. So I think, in most situations, this product categorization will catch all of the special taxability rules in the states and you won't need to do a product override.

8:04

The shipping overrides. Usually you don't need to add any shipping overrides either, because now Shopify is integrated in its system that they will know if a state is taxing their shipping or not. This is really just to, like, if you really need to override shipping where you know that even the states are charging tax on shipping, you don't want them to. This is where you can add it.

And same with the product override. It says here, if you create a tax override for a categorized product, the taxes will be calculated using the override in jurisdictions where it applies. For all other jurisdictions, the taxes will be calculated using the product category.

So for example, if we want to say that, we'll keep using Pennsylvania as an example, all I sell is clothing and there should be a product categorization to categorize all of my products to clothing. And Pennsylvania would show up on here. And if I just want to say I need to charge sales tax even though clothing is exempt, I know I have a certain amount of clothes, I don't know, for some certain like situation, if you decide if you really want to charge tax on clothing, you will go in here and you add a product override for the clothes and you select the state to be Pennsylvania and you put zero.

9:32

Or a better example, let me think of a better example. So if software, if we say something is software, it's really hard to define software. So let's see if I do business and apparel, electronics, hardware, software, computer software. Okay, if I do educational software. Okay, so it doesn't really let you drill down.

But for educational software, for software in general, a lot of the states say if it's a canned software, like you can go just get it from a shelf like Microsoft, Adobe, then those are taxable. But if it's personalized, if it's custom software, then it's more like a service. Then it's not taxable.

10:49

So here, let's just use an example. Let's use Utah. And Utah taxes canned software, but it doesn't tax personalized, customized software. So if all that I sell is software, put all of these as software, but I just want to make sure that those customized softwares are not gonna get taxed, then I would go over here. Filter. I would create a new collection of all my customized software on here, and then here I would select Utah, and I would put 0%, and I would say add override.

So then what happens is then Utah would know, even though for these software, because I further categorized these into customized versus canned software, then these customized software are not gonna be taxable. Again, the product categorization should be able to manage most of the taxability issues. You shouldn't really need to add shipping override or product override. But let us know in the comments if you have questions.

11:38 Locations and sourcing rules

And then go to tax reports. This just takes you back to the reports where you can use to file taxes. So that's taxes and duties under setting. And then we're gonna do locations under setting.

So the location really should be where you're shipping your product out of. And there is the different sourcing rule when it comes to US sales tax is destination versus origin. And all the different states kind of like use different sourcing rules. So that's why this is really important, that you want to tell them where you are shipping your products out of and where your office is, and you can add location and tell them it's different. Like whether you are fulfilling from this warehouse or not. If you are fulfilling it, you need to put in your fulfillment address, not your office address. Okay?

12:28 Product settings, exempt customers, and what to do now

So that's all you need to do under settings. And then the third part is under product. Every time you add a new product, I just want to remind everybody again that you want to check this box that says charge tax on this product, so you are not missing out, you don't have to pay tax out of pocket. You want to check this box for every single product that you list on your store.

And then the last thing is under customers. If you are selling to exempt customers, meaning if you're selling to a distributor that's gonna end up selling to an end user, or if you are selling to schools, to churches, to any exempt persons and entities, and you do not want to charge them tax, this is where you will go to change that. So the default is always collect tax on every customer, but if you just want to say, okay, I don't want to collect tax on this university, then I would uncheck this when you put in the customer's information.

13:30

Okay, so Shopify has so many good new features. I really want you guys to log into your Shopify store to put in the correct location and your company's information, put in where you are collecting tax, and then click on the monitor your taxes to see where you might be reaching your nexus footprint. Click on categorization to categorize all of your products. And then the last thing is click on those tax reports and see what information they provide for you to file your taxes.

I think the new Shopify tax setting section is so helpful. But let us know if you have any questions or if you need help with anything. If you are an ecommerce business owner that sells over 2 million and want to hand this off to someone to manage your Shopify settings, to help you file your taxes and deal with all the state notifications, let us know, because we're more than happy to help.

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