The Ultimate Shopify Sales Tax Guide

Whether you run your business entirely through Shopify or have brick-and-mortar stores and branched out to reach more potential customers, figuring out your sales tax obligations and navigating Shopify tax collection can be confusing.

Let’s say your business is located in New York State. Through Shopify, you might sell to customers in dozens of states and countries. How do you keep track of whether you have to charge sales tax and how much you should be charging in each tax jurisdiction?

While online stores previously didn’t have to charge sales tax in states they didn’t have a physical presence in, in 2018 that changed when the Supreme Court overturned physical presence requirements for sales tax. The South Dakota v. Wayfair case established that if companies had an economic presence, then states could require that they charge sales tax for economic activity related to their state.

That’s created sales tax challenges for Shopify sellers of all sizes. For smaller sellers, it’s not always clear if they make enough sales in a jurisdiction to be required to charge sales tax. For larger sellers, they have to grapple with managing Shopify sales tax collection and reporting obligations in an overwhelming number of jurisdictions. Adding to that complexity is the fact that, despite being a great ecommerce sales platform, Shopify’s tax reporting and collection functionalities are limited.

In this comprehensive guide, we’ll unravel the intricacies of navigating sales taxes on Shopify to help you understand your responsibilities and simplify your tax reporting.

Should I Charge Sales Tax on Shopify?

Whether you’re legally liable to charge sales tax on Shopify will depend on a number of factors including where you’re located, where your customers are located, the type of products and services you sell, and the volume of products you sell.

Let’s break down the critical considerations when it comes to whether or not you should be charging sales taxes.

Types of Sales Taxes

Sales tax isn’t one-size-fits-all. It can vary by state, jurisdiction, and municipality. In some places, you might have to charge a municipal and state sales tax for each transaction and then file and remit those taxes all separately.

What makes sales taxes even more perplexing is that they often only apply to specific goods and services. For instance, a pair of shoes may be taxed at a different rate from a digital service subscription and children’s clothing might be taxed in one jurisdiction and not another.

Keeping track of these rules is complicated enough if you’re dealing with just one tax jurisdiction but the reality is that many Shopify store owners are dealing with dozens of tax jurisdictions.

Tax Thresholds

Determining whether you’re liable for taxes can also be challenging when you’re an online business. There are two types of sales tax ‘nexus’ that determine if you have to charge sales taxes: physical and economic.

Having a physical nexus in a state is pretty straightforward – you have a business that has a physical location, inventory, and/or employees in a state. Economic nexus, meanwhile, is more complicated. As a remote seller, you achieve an economic nexus in a jurisdiction when you do a certain level of economic activity in that jurisdiction.

Tax thresholds for economic nexus vary from one jurisdiction to another, and whether you’re required to file in any jurisdiction hinges on your sales volume and/or your transactions in a particular location.

Meeting these thresholds is known as achieving an economic nexus. Typically, this happens when you either reach a certain amount in sales and/or a number of transactions in that state or jurisdiction. However, the threshold for reaching that economic nexus varies by state, and in some sales even tax-exempt goods and services may count towards meeting that economic threshold in some states.

For example, in Kansas, the sales tax threshold is $100,000 in sales including exempt sales. In contrast, in New York State, the tax threshold is $500,000 in sales and 100 transactions including non-taxable retail sales but excluding services.

Tax Rates

Once you’ve established that you have to charge sales tax, you’ll need to figure out how much you’ll need to charge. Different locations have different tax rates and these rates can change. They also range considerably from 7.25% for California state sales taxes to just 2.9% in Colorado.

Tax Exemptions

Some states have sales tax exemptions on certain types of goods and services. That means that you could have to charge sales tax on some items in your stores but not on others. To give you an example of the range of sales tax being charged, Virginia charges a sales tax of 5.3% but has tax exemptions on things like protective equipment, software, and data center equipment. It also charges reduced sales tax rates of just 1% on food, clothing, and medicine.

Tax Registration

Once you achieve the status of economic nexus in a state, you have to register for sales taxes in that state and start collecting, filing, and remitting taxes. Registering for taxes can be a cumbersome process if you’re doing it in multiple states – but some tax software will thankfully do it for you. Once you register for taxes in a particular state, you’ll also have to upload your tax registration numbers to Shopify.

Does Shopify Collect Sales Taxes?

Shopify does offer a solution for collecting taxes at no cost as part of its normal offerings to sellers but it’s not without its complexities. This is especially true if you’re selling in multiple jurisdictions. While Shopify can collect sales taxes for your business, it’s your responsibility as a seller to check the rates you’re supposed to be charging to ensure that Shopify’s sales tax rates are accurate.

Here is the section where they address this in their Help Center:

“Shopify uses many default sales tax rates, which are updated regularly. If you use the default rates, then you need to confirm that they are current and correct for your particular circumstances. You can override them whenever necessary.”

That’s a time-consuming process if you charge taxes in multiple jurisdictions. That also means that Shopify won’t likely update the rates you’re charging if there are any sales tax holidays in a jurisdiction, which could mean your customers in those jurisdictions could get upset — or go to your competitor.

Shopify relies on its sellers to determine where they should be charging taxes. Due to the complexities, the company suggests sellers contact a tax professional to help them figure out where they need to register and to help them register to charge taxes in all those jurisdictions. For those who want additional support from Shopify, they also offer a paid service called Shopify Tax but for an additional fee.

How to Set Up Shopify Sales Tax Collection

Once a seller has determined where they need to collect taxes and registered to charge taxes in the state(s) they need to and has a tax number, they then need to go to Shopify’s sales tax settings to make the change.

Steps for setting up Shopify sales tax collection:

1. Go to Settings and click on ‘Taxes and Duties.’
2. Click on ‘Manage Sales Tax Collection’ and click on your country or region.
3. Click on ‘Collect Sales Tax.’
4. In the ‘Tax Number’ field, enter your tax number. If you want to start collecting taxes before getting your tax number, you can just leave this field blank and update it when it arrives.
5. Click on ‘Collect Tax.’
6. Optional: If you have to collect taxes in multiple jurisdictions, click ‘Collect Sales Tax’ again and start at step 4 again. Repeat until finished.

Keep in mind, that you’ll have to add each separate jurisdiction’s tax number separately.

One way to simplify your Shopify tax collection is to use an approved sales tax app from Shopify’s app store like TaxCloud’s Simple Sales Tax. Apps like these connect your Shopify data with their tax software which includes things like tax calculators, alerts for when you’re approaching economic nexus, advanced reports, and more to ensure you’ll always know how much you owe and where you owe it.

This will provide you with peace of mind by ensuring you’re charging taxes in all the places you’ve achieved economic nexus and that you’re charging the right rates.

Does Shopify Remit Sales Tax?

It’s important that Shopify sellers understand that even though Shopify can collect sales tax on your behalf, it does not offer you the option to file or remit sales taxes on your behalf.

If you want to simplify the process of Shopify tax filing and remittance, you can use something like TaxCloud’s Simple Sales Tax Shopify app and then get the add-on TaxCloud service that can handle both tax filing and remittance for you.

Does Shopify Report Sales Tax to States?

Unfortunately, Shopify doesn’t report sales tax to states on your behalf. You’ll need to handle your Shopify tax reporting yourself. Depending on your situation, your taxes have to be remitted on an annual, quarterly, or monthly basis. You’ll have to check with each jurisdiction you have to file sales tax in to figure out how often you should be filing them.

If you’re required to file monthly, each tax jurisdiction will have different deadlines for how soon after the end of the previous month you’ll have to file your sales taxes. While some states stick to the same day every month by choosing the last day of the month or the 20th day of the month, others shift their filing dates around slightly throughout the year. TaxCloud publishes the dates every month on our blog so you don’t have to search everywhere for the dates.

Sales tax software like TaxCloud can help you out with this if you would prefer to focus on your business instead of your store’s Shopify tax reporting.

Does Shopify Provide Tax Documents?

Shopify does not provide detailed tax reports to sellers unless they are using certain of Shopify’s premium services. Without premium services, the tax forms Shopify provides might not be sufficient for your reporting needs.

Here are the reports available on Shopify:

Tax Finance Report: This is a simple summary of the sales taxes that were applied to your sales. It is not broken down by state, county, or tax jurisdiction.

Sales Finance Report:  This is a report that can help with sales tax reporting as it includes all information about your orders including billing and shipping locations.

Premium Report – US Sales Tax Report: This Shopify tax form provides a much more detailed summary of your sales tax information for US orders. Tax reporting is broken down by state, county, and tax jurisdiction. However, you can only access this report if you are using Shopify Tax.

It’s not clear, however, whether any of these reports are provided in real-time or automate sales tax recalculations for returns. If they do not, that could result in significantly overpaying your sales tax obligations or require additional work to calculate.

How to Simplify Your Shopify Tax Reporting

Simplifying your tax reporting on Shopify is essential to ensure compliance and reduce the risk of errors. TaxCloud’s Simple Sales Tax can be a game-changer for businesses using Shopify and can even provide you with real-time Shopify tax forms and reports that integrate with QuickBooks and other accounting platforms.

Here’s how TaxCloud’s Shopify app helps:

Ensures Accurate Tax Collection: TaxCloud verifies that you’re charging the correct tax amount, reducing the risk of errors.

Flags When You Reach a Tax Threshold: Don’t try to keep track of all the economic nexus rules. TaxCloud’s Simple Sales Tax keeps track of them for you and will notify you when you’ve reached a threshold and need to register and start collecting tax in a new jurisdiction.

Notifies You of Tax Obligations: It keeps you informed about where and when you need to file taxes, preventing missed deadlines.

Return-Ready Tax Reports: TaxCloud’s Simple Sales Tax gives you return-ready sales tax liability reports broken down by jurisdiction. It also recalculates your sales taxes when you get returns.

Assists in Audits: In case of an audit, TaxCloud can provide you with the necessary documentation and support.

Start streamlining your Shopify sales tax process today and enjoy the peace of mind that comes with accurate and hassle-free tax reporting. Learn More

The Shopify Business Top 4: Shopify Sales Tax, Shipping, and More

Shopify is one of the biggest and most well-known ecommerce platforms — and for good reason. The platform is easy to use and streamlines creating an online store. You don’t have to be a tech genius to create a beautiful, intuitive store with Shopify. Sales tax, payment processing, inventory management, and other essential processes can be part of your Shopify platform, or you can choose to integrate separate platforms with your Shopify store.

Do You Need to Add Integrations to Shopify?

Technically, you don’t need to use separate apps or platforms with Shopify. The platform has plenty of tools to get you set up and to help you manage your business. That said, you may want to use a separate integration with your Shopify platform.

The options available from Shopify might not meet your needs or go far enough. For example, on Shopify, sales tax calculations and collection are included in Shopify Tax, but the feature doesn’t remit taxes for you.

If you want to build your Shopify ecommerce tech stack, start with the following.

Shopify Payment Processing

Shopify has its own payment processor, plus the option of choosing from more than 100 other payment gateways.

Why might you choose a separate payment processor? Two reasons: cost and options. Not everyone likes to pay with a credit card online, so it can be worthwhile to allow payment options like PayPal or GooglePay.

Different processors charge different rates to run a payment, so you might prefer to work with one that charges a lower fee.

Shopify Shipping

Fast, accurate shipping means happy, repeat customers. You can ship items independently, or work with a fulfillment service to manage shipping. As your company grows, a fulfillment service starts to make sense.

Shopify’s built-in shipping feature helps you print labels and can connect you to a fulfillment service if that’s the best option for your business.

But, it’s always worthwhile to shop around and look for a separate fulfillment service provider, if needed. Plenty of fulfillment services work with Shopify. Choose the one that has the best cost, service, and accuracy.

Shopify Inventory Management

You can’t sell what you don’t have in stock. Similarly, you can’t sell products no one wants to buy. Inventory management keeps your store stocked with the bestsellers and helps you avoid ordering too many units of the duds.

With Shopify, you can manage inventory through the platform’s apps or a third-party option. When picking an app, consider the price, how well it integrates with your other apps, such as your shipping and payment processing apps, and its user-friendliness.

Shopify Sales Tax Management

You must collect sales tax if you sell through Shopify in the U.S. Shopify sales tax calculates and collects the tax for you on relevant sales. A Shopify sales tax report simplifies the filing process for you.

But, you may want a Shopify sales tax platform that does more. TaxCloud Simple Sales Tax for Shopify automatically moves your orders from Shopify to TaxCloud. From there, the platform produces a sales tax report, files your sales tax return, and remits payments automatically.

With TaxCloud’s Shopify sales tax app, you can feel confident that your business complies with the 11,000 sales tax jurisdictions across the U.S. You also get friendly support and customer service from a group of sales tax experts when needed.

Talk to us today to learn more about integrating sales tax software with your Shopify store.

The Top 5 Solutions to Build Your Ideal Ecommerce Tech Stack

To run your online store, you need an ecommerce tech stack to keep your business ticking and the orders coming in.

Your tech stack also keeps you compliant, so you don’t have to worry about a surprise tax bill or audit.

What’s an Ecommerce Tech Stack?

An ecommerce tech stack is a set of platforms, applications, frameworks, and solutions you use to manage your business. Think of a tech stack like a pizza. Certain tools and solutions rest on top of a base and you can add as many toppings (i.e., tools) as you want.

Ideally, the tools all play nicely together, so you can automate many repetitive and time-consuming business functions and sleep better at night.

What to Include in Your Ecommerce Tech Stack

As your online store grows and evolves, your tech stack will grow and evolve, too. While you can always add on to your tech stack as your needs change, using the following from the start will give your online store the best chance of success.

Ecommerce Platform

If your ecommerce tech stack is a pizza, then the platform you choose is the crust. It’s the base on which you build your store. All the other tools depend on it.

E-commerce platforms include Shopify, BigCommerce, WooCommerce, really the list goes on.

Each platform has its unique selling points, and one might appeal to you more than another. But generally, you want a platform that handles transactions, product pages, reviews, and fulfillment.

Payment Processing

Another must-have in your e-commerce tech stack is a payment processor. Think of it like the sauce on your pizza.

No one uses cash when shopping online. You need a tool that accepts digital payments, like PayPal, Square, or Stripe.

Your payment processor helps protect your customers from fraud, so review the security features carefully before choosing. Also, check the fees, which can vary.

Sales Tax Software

When you sell stuff online, you usually have to collect sales tax. And, you often need to collect sales tax in more states than you might think, thanks to something called nexus and a 2018 Supreme Court decision.

Sales tax software is the cheese on your ecommerce tech stack pizza. You might think you can do without it, but you’ll quickly realize something’s missing if you don’t have it.

Sales tax software calculates sales tax based on the products sold and customer location, collects it, and can even file your returns for you. The right sales tax solution will also include audit assistance in case you ever need it.

You get peace of mind knowing you’re complying with the 11,000 different sales tax laws, without thinking about it.

Shipping and Fulfillment

Your ecommerce platform might already include order shipping and fulfillment but if you’re not thrilled with how it works, investing in a solution dedicated to shipping and fulfillment can add another topping to your tech stack.

A fulfillment solution steps in and gets your orders shipped out ASAP. Most importantly, the solution ensures the right customers receive the right stuff. And, if shoppers have returns, the fulfillment solution can take care of those too.

Inventory Management

You don’t want to run out of your best-selling products or order too much of something that turns out to be a dud. Inventory management software is another topping to put on your tech stack. 

It keeps track of what you have in stock and what you sell. It keeps you from ordering stuff that’s not moving and can set up automatic reorders of products flying off the shelves.

Want more toppings on your ecommerce tech stack? You can add marketing tools, customer service solutions, buy-now, pay-later options, and returns solutions as your needs evolve.

Need to add sales tax software to your tech stack? Contact us today to learn how TaxCloud helps you calculate, collect and file sales tax.