Selling products and services on Shopify offers convenience for both buyers and sellers. However, operating an e-commerce business also involves various administrative responsibilities, including managing sales tax. In this comprehensive Shopify sales tax guide, we’ll explore the sales tax requirements on Shopify that you, as a business owner, need to manage and comply with. 

Does Shopify Automatically Collect and Remit Sales Tax On My Behalf?

No, Shopify does not automatically remit sales tax to tax authorities on your behalf. While Shopify can automate the calculation and collection of sales tax at checkout based on your store’s settings and the customer’s location, you are responsible for remitting the collected tax to the appropriate state or local tax authorities. This differs from platforms like Amazon, which acts as a marketplace facilitator and handles tax remittance for sellers.​

Understanding Sales Taxes on Shopify

Since 2018, tax regulations have mandated that sellers without a physical store presence must collect and remit sales tax on all sold items. For online businesses, understanding tax liability involves knowing about two types of sales tax nexus: physical and economic.

A physical nexus occurs when a business has a physical presence in a state, such as an office, employees, or inventory. An economic nexus is more complex and pertains to remote sellers. This type of nexus is established when a seller engages in a certain level of business activity within a jurisdiction.

The criteria for reaching an economic nexus, such as sales volume or number of transactions, differ across jurisdictions. The exact thresholds that trigger the requirement to file taxes vary by state, and in some cases, even tax-exempt goods and services can contribute to reaching these economic thresholds.

As mentioned, unlike platforms such as Amazon, which collect and remit sales tax on behalf of their sellers, Shopify does not perform these tasks because it is not classified as a marketplace facilitator. Consequently, sellers using Shopify are responsible for managing their sales tax obligations in states where they meet the nexus criteria.

Remember that sellers do not own the sales tax they collect. This money is gathered from customers and then forwarded to the respective state. Failing to collect the necessary sales tax could result in paying it from your own funds if the state pursues collection, and you may also face additional penalties.

Shopify Sales Tax Guide: Steps for Businesses After Reaching Sales Tax Nexus

When a business reaches the economic nexus threshold in a particular state or jurisdiction, it must take immediate action to comply with sales tax laws. The first step is registering with the state’s tax or revenue department. Businesses mustn’t begin collecting sales tax before completing this registration, as doing so can lead to legal issues.

Registration procedures and deadlines differ by state. For instance, in Texas, out-of-state businesses must register by the first day of the fourth month following the month they hit the nexus threshold. In Rhode Island, the registration and collection of sales tax must begin by January 1 of the year following the year the threshold was reached.

The type of goods or services being sold also affects tax obligations. States treat physical products, digital goods, and software services differently. Some states tax digital products like e-books, online courses, and software subscriptions, while others do not. Additionally, each state that taxes digital goods has its definition and criteria for what qualifies as a taxable digital product.

Where Does Shopify Help You When Filing Sales Taxes?

Shopify does not automatically handle tax collection for you. However, it provides tools to help manage it, especially after the changes in tax regulations in 2018. Shopify introduced features like Shopify Tax and various tax calculators to aid merchants.

Here’s an overview of Shopify’s tax management support and what responsibilities remain yours.

• Sales Tax Collection

Shopify offers functionalities to automate sales tax collection. You can configure tax rates within the platform based on customer location and your business’s nexus—either a physical or economic presence in a state. Shopify automatically calculates the sales tax for each transaction, easing the collection process. Nevertheless, it’s essential to recognize that you, as the merchant, are still responsible for sales tax registration, payment, and filing returns.

• Managing Nexus

Identifying your nexus is crucial; it can be due to a physical location like an office or economic activities such as reaching sales thresholds in a state. Once you establish a nexus, you must register for sales tax and begin collecting it. Shopify supports tracking your sales to determine if you meet the economic nexus criteria in any state, yet you must ensure you are registered accordingly.

• Product and Shipping Taxes

Shopify enables the management of tax settings specific to different products. Since not all products are taxable and tax rates can vary by product type and location, Shopify allows product categorization to automate correct tax applications. Additionally, Shopify calculates taxes on shipping fees, which is essential as some states tax these costs.

• Reporting and Compliance

A key feature of Shopify is its capability to produce detailed tax reports. These reports can be invaluable for tax compliance, detailing sales tax collected by state and product category to aid in tax filing preparation. However, consulting a tax professional to address your tax obligations fully is advisable, particularly if operating in multiple states.

What Shopify Doesn’t Handle in Tax Management: Your Responsibilities

When using Shopify for your online business, it’s important to understand what the platform can and cannot do regarding tax management. While Shopify offers tools to help with tax calculations and reporting, it doesn’t cover every aspect of tax compliance, and there are several responsibilities you’ll need to manage on your own or with the help of external services.

• Monitoring Tax Thresholds

Shopify does not provide automatic notifications when approaching state-specific sales tax thresholds, determining when you need to start collecting taxes in a new state. You are responsible for tracking your sales across states and determining when you’ve reached these thresholds, also known as “nexus.”

If you miss this, you could face penalties for failing to collect and remit taxes on time. You might consider using a third-party service to keep track of these thresholds more accurately.

• Tax Filing

Shopify does not file tax reports for you. Although Shopify can generate reports that summarize the taxes you’ve collected, these reports won’t automatically translate into a filed tax return. You’ll need to take these reports and use them to fill out your state tax returns.

Depending on the complexity of your business, you can use integrated tax services, such as Avalara or Vertex, which can automate much of this process and even handle the filing for you.

• Document Organization

While Shopify provides some tax documents, like Sales Tax Reports, these documents don’t include all the necessary information for your filings.

You may need to organize additional data or consult a tax professional to ensure everything is in order. For example, you might need to gather detailed sales records, categorized by product type and location, to complete your tax forms correctly.

• Manual Adjustments and Overrides

Although Shopify calculates taxes based on the information you provide, you may need to adjust tax rates or exempt certain products or customers manually. Shopify allows for tax overrides, but setting these up requires additional steps, such as creating manual collections for exempt items and configuring the appropriate tax rates for different regions.

This can be particularly important if you sell a mix of taxable and non-taxable goods or operate in multiple jurisdictions with varying tax laws.

Step-by-Step Process to Configure Your Shopify for Sales Tax

To configure your Shopify store for sales tax collection, follow these structured steps to align with tax regulations in various locations:

1. Determine Where to Collect Sales Tax

Begin by identifying the states where your business needs to collect sales tax, starting with your home state. Ensure you have obtained a sales tax permit for each state where your company has a physical presence or meets the economic nexus requirements. Each state has its threshold for what constitutes a financial nexus. For example, in some states, you must collect sales tax if your sales exceed $100,000 or 200 transactions within a year.​

Steps:

• Access the Shopify Admin dashboard.
• Navigate to ‘Settings’ in the bottom left corner.
• Select ‘Taxes and Duties.’
• Under ‘Manage sales tax collection,’ click on the United States.
• Select the states for tax collection and input your sales tax ID for each.

2. Classify Your Products for Tax Assessment

Assign your products to specific tax categories within Shopify to ensure the correct tax rates are applied. This classification is crucial because tax rates can differ based on the product type and location.

For example, if you list Pennsylvania as a region where you sell clothing, the system automatically exempts those products from sales tax collection. If you don’t specify the regions, you must use the product override feature to group all clothing items and apply a 0% sales tax rate for sales in Pennsylvania.

Steps:

• Go to ‘Products’ in your Shopify Admin.
• Click on ‘Manage Categories.’

Assign each product to the correct tax category, automatically allowing Shopify to apply any relevant exemptions.

3. Configure Sales Tax on Shipping Charges

Shopify generally calculates sales tax on shipping charges, but you may need to adjust these settings for certain regions to comply with local tax laws.

Steps:

• Log into your Shopify admin panel, go to ‘Settings,’ and then ‘Taxes.’
• Click on ‘Manage’ under the United States.
• In the ‘Manage sales tax liability’ section, click on ‘Show all liabilities.’
• Set up shipping tax overrides as necessary for regions with non-compliant default settings.

After these configurations, navigate to the sales tax liability dashboard and select ‘Show details’ to review Shopify’s assessment of your sales tax obligations.

4. Identify Non-Taxable Products

Not every product requires sales tax collection. In many states, digital goods and gift cards are often exempt from sales tax.

Steps:

• Navigate to ‘Products’ and choose a product to edit.
• In the pricing section, select the ‘Charge tax on this product’ checkbox if the item is taxable.

5. Input Warehouse Locations

Accurate sales tax calculations require the input of your shipping origins. This is essential for determining the correct tax rates, particularly if you ship from multiple warehouses.

Steps:

• Go to ‘Settings’ and then ‘Locations.’
• Enter your warehouse or fulfillment center locations.

This step assists Shopify in calculating correct shipping rates and sales tax based on the proximity of your shipping locations to the delivery address. It is crucial to differentiate between your office locations and shipping centers for precise tax calculations.

6. Manage Tax-Exempt Customers

Some customers, such as resellers or non-profit organizations, qualify for tax exemption. For these customers, you must collect a tax exemption certificate and update their profile in Shopify to reflect their status.

Steps:

• Access ‘Customers’ and either select an existing customer or add a new one.
• Uncheck the ‘Collect tax’ option and specify the reason for their tax exemption.

Implementing these steps will help ensure your Shopify store correctly manages sales tax collection and complies with different regions’ tax laws.

Shopify Sales Tax by State

Shopify merchants in the U.S. must be aware of varying state-level economic nexus laws, which determine when they must collect and remit sales tax. Economic nexus refers to the obligation to collect sales tax in a state, triggered by either reaching a certain sales revenue threshold or a specific number of transactions.

Key Thresholds by State

• High Threshold States: Some states, like California, New York, and Texas, have higher sales thresholds of $500,000. You must collect and remit sales tax if your sales in these states exceed this amount.
• Standard Threshold States: Most states have set their economic nexus threshold at $100,000 in sales or 200 transactions within the state. These include states like Florida, Georgia, Illinois, and Virginia.
• Lower Threshold States: A few states have unique rules. For example, Oklahoma requires sales tax collection if sales exceed just $10,000, while Kansas requires it from the first sale.

Below is a comprehensive list of U.S. states with their respective economic nexus thresholds. This table excludes the NOMAD states—New Hampshire, Oregon, Montana, Delaware, and Alaska—which generally do not enforce a state sales tax. However, Alaska, listed below, does allow local jurisdictions to impose sales taxes and, therefore, sets economic nexus thresholds.

• Alabama: Sales exceeding $250,000
• Alaska: 200 transactions or over $100,000 in sales
• Arizona: Sales surpassing $100,000
• Arkansas: 200 transactions or more than $100,000 in sales
• California: Sales over $500,000
• Colorado: Sales above $100,000
• Connecticut: Both 200 transactions and sales over $100,000
• Florida: Sales beyond $100,000
• Georgia: Either 200 transactions or sales over $100,000
• Hawaii: 200 transactions or sales exceeding $100,000
• Idaho: Sales more than $100,000
• Illinois: 200 transactions or sales above $100,000
• Indiana: 200 transactions or sales over $100,000
• Iowa: Sales exceeding $100,000
• Kansas: Sales over $100,000
• Kentucky: 200 transactions or more than $100,000 in sales
• Louisiana: Sales exceeding $100,000
• Maine: Sales over $100,000
• Maryland: 200 transactions or sales above $100,000
• Massachusetts: Sales exceeding $100,000
• Michigan: 200 transactions or sales over $100,000
• Minnesota: 200 transactions or sales exceeding $100,000
• Mississippi: Sales surpassing $250,000
• Missouri: Sales above $100,000
• Nebraska: 200 transactions or more than $100,000 in sales
• Nevada: 200 transactions or sales exceeding $100,000
• New Jersey: 200 transactions or sales over $100,000
• New Mexico: Sales above $100,000
• New York: 100 transactions and sales exceeding $500,000
• North Carolina: Sales surpassing $100,000
• North Dakota: Sales over $100,000
• Ohio: Either 200 transactions or sales above $100,000
• Oklahoma: Sales exceeding $100,000
• Pennsylvania: Sales surpassing $100,000
• Rhode Island: 200 transactions or sales over $100,000
• South Carolina: Sales exceeding $100,000
• South Dakota: Sales above $100,000
• Tennessee: Sales exceeding $100,000
• Texas: Sales surpassing $500,000
• Utah: Either 200 transactions or sales over $100,000
• Vermont: 200 transactions or sales above $100,000
• Virginia: 200 transactions or sales exceeding $100,000
• Washington: Sales of more than $100,000
• Washington D.C.: Either 200 transactions or sales over $100,000
• West Virginia: 200 transactions or sales exceeding $100,000
• Wisconsin: Sales above $100,000
• Wyoming: Sales over $100,000

Conclusion

Managing sales tax on Shopify is crucial to running an online business. Although Shopify provides tools to assist with tax calculations, merchants remain responsible for compliance. Understanding where your business has a sales tax nexus—physical or economic—is essential for ensuring proper tax collection and remittance.

Key steps to avoid penalties are regularly monitoring sales thresholds, correctly categorizing products, and maintaining up-to-date registrations with relevant states. While Shopify streamlines many aspects of tax management, consulting a tax professional is advisable to ensure all obligations are met, especially when operating in multiple jurisdictions.

Frequently Asked Questions