Online sales tax is a complete mess, and it’s the last thing a Shopify seller wants to worry about. In this blog we will help you understand the basics of your sales tax obligations. In addition, we will take you through the steps for Shopify sales tax setup.
Remember, you only want to setup Shopify to collect sales tax in states that you already have registered for a sales tax permit in. 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 sales tax permit in a state you don’t already have nexus in. For more information on both of these things, check out these videos: What Online Sellers NEED to Know about Sales Tax Nexus and How to Register for Sales Tax.
How Does Sales Tax Work on Shopify?
Does Shopify collect sales tax for sellers?
Shopify is not required to collect and remit sales tax in 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 sales tax for its sellers. So, the Shopify seller is responsible for remitting sales tax to the states.
Remember that any sales tax you collect, you technically don’t own. Sales tax funds are typically 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 sales tax out-of-pocket if the state comes after you. And you may owe some penalty fees.
In what states do I collect sales tax in my Shopify store?
This is a complicated question. Every state has differing laws as to whether you need to collect sales tax in their state. You need to start by collecting sales tax 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 sales tax in that state, make sure you register for a sales tax permit. We cannot stress the importance of this enough!
As your business grows, you will need to start registering, collecting, and remitting sales tax in more states. If you have a “physical presence” (employees, warehouses, etc.) in any state, you will need to register, collect, and remit for sales in those states. Then, as your sales in any state approaches $100K or 200 transactions, you will want to check for that state’s economic nexus laws (view economic nexus laws by state here). 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.
For more help on where you should collect sales tax, watch our YouTube video “Ecommerce sales tax | When do sellers need to collect?”.
How to Setup to Collect Sales Tax in Shopify
Setting up your Shopify store to accurately collect sales tax can be more complicated than anticipated. But here are the basic steps we suggest you go through:
- Tell Shopify where to collect sales tax
- Setup your sales tax shipping options
- Tell Shopify which products should collect sales tax
- Add warehouse locations
- Add information for sales tax exempt customers
Let’s dive into each with screenshots and explanations. You can also view our walk-through of these steps in our YouTube video “Shopify sales tax setup for stress-free compliance | Walk-through guide”.
Tell Shopify where to collect sales tax
First, you need to tell Shopify in what states it should collect sales tax from customers. As referenced above, you should always start with the state your business is located in (after registering for a sales tax permit!).
On the home page, click “Settings”:
Then click on “Taxes and Duties”:
Then click on the United States:
Then click on “Collect Sales Tax”:
Finally, in the dropdown menu, choose any states where you should be collecting sales tax due to a physical or economic presence. Depending on your Shopify version, you may need to enter your sales tax permit, instead of your zip code:
Setup your sales tax shipping options
Now, you need to make sure that you collect taxes on shipping rates. Go back to “Settings” and “Taxes”. Down at the bottom you will see a “Tax calculations” section. Select the box that says, “Charge tax on shipping rates”:
Tell Shopify which products should collect sales tax
Now Shopify needs to know which products in your store you want to collect sales tax for in the states you have entered. Not all products are taxable. For example, you shouldn’t collect sales tax on gift cards.
And states also have differing laws (yeah, not cool). For instance, in New York, certain clothing and footwear with a price tag of less than $110 per item are tax-exempt (learn more). So, you may want to check the taxability of your products in each state you have nexus. Either search online or reach out to sales tax experts.
For your taxable products, go to “Products”, then “All products”. You’ll need to edit each variant of the products you want to collect sales tax for:
When you go to edit each variant, select the box “Charge tax on this variant”:
Add warehouse locations
Now you need to enter your warehouse locations that are fulfilling orders:
This step helps Shopify know what rates to charge. For example, if product is shipped from a warehouse to a customer in the same state as the warehouse, the sales tax rate may differ from if that product was shipped to another state.
Add information for sales tax exempt customers
Finally, you may not be required to collect sales tax for all your customers. The most common exempt customer you may have is a reseller that buys product through your Shopify store and resells that product. Other tax-exempt entities are government organizations and non-profits. These are likely repeat transactions, and you don’t need to collect sales tax from these customers. For these customers, you need to get a tax-exempt certificate from them before not collecting sales tax.
To mark these customers in your Shopify store as tax-exempt. Go to “Customers”, then “Tax Settings”:
Then make sure the “Collect tax” box is deselected, and you can enter a reason as to why:
Final Thoughts & Next Steps
We hope this blog contains helpful information to get your sales tax settings configured. Some of the information provided has probably brought up more questions and we’re happy to help you get the answers. You may also find it helpful to take our sales tax maturity assessment to clearly see where you are and how to get the help you need. If your business is larger than $1M in annual sales, you are reaching a point where you may need help from sales tax experts. Don’t hesitate to reach out to us for help here.
Regardless of whether you’re ready to outsource or not, we encourage you to download our 10 Steps to Ensure Sales Tax Doesn’t Burn Down Your eCommerce Business. You need to know what to expect with sales tax, and this is a great way to do that. It is a complete guide to online sales tax compliance, and will help you have much more peace of mind with this issue.
Our final recommendation is that you check out our masterclass The Uncomplicated Truth about Sales Tax. Make note, especially, of the three things you must NOT do when you’re setting up your sales tax. Believe me, you don’t want to miss it!