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:
- Go to Settings and click on ‘Taxes and Duties.’
- Click on ‘Manage Sales Tax Collection’ and click on your country or region.
- Click on ‘Collect Sales Tax.’
- 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.
- Click on ‘Collect Tax.’
- 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