Does Shopify Collect Sales Tax?

Running an ecommerce business is not a piece of cake since each state has its own unique rules and regulations related to sales tax.

Enter Shopify, a leading online store platform, which promises to simplify your selling experience. But most sellers often wonder does Shopify collect sales tax or not.

This guide is here to demystify how Shopify approaches sales tax collection, what you need to know as a seller, and tips to ensure compliance for your business while you chase those entrepreneurial dreams. 

We understand, managing sales tax can also be time-consuming, but doola Bookkeeping is here to help. It helps avoid any potential errors and ensures that your business remains in good standing with taxing authorities.

Ready to tackle the tax terrain with confidence? Let’s dive in!

Understanding Sales Tax in Ecommerce

Understanding sales tax obligations is crucial for ecommerce businesses as they expand their operations across different states. 

Being aware of key factors such as nexus and product taxability can help online sellers determine their responsibilities accurately and avoid any potential legal consequences.

What Is Sales Tax?

Sales tax is a consumption-based tax imposed on the sale of goods and services by retailers to end consumers. 

In the context of ecommerce, sales taxes are collected by online sellers when they make a sale to customers residing in states where they have an obligation to collect the taxes. 

It is usually collected from the end consumer and remitted to the respective government entity by businesses.

However, with the rapid growth of ecommerce, there has been confusion and controversy surrounding which businesses are required to collect sales taxes.

Key Factors That Determine Sales Tax Obligations

📑 Nexus (Physical/Economic Presence)

To determine whether you are required to collect sales tax for your online store, you need to understand sales tax nexus – which refers to having a substantial physical presence in a particular state. 

This can include having a physical location such as an office or warehouse, employees working remotely in that state, or even making frequent sales deliveries within that state.

Every state has its own set of rules for determining nexus, but it generally applies when a business has either a physical or economic presence in a particular state.

Physical presence can include having employees, offices, warehouses, or other property located within the state’s borders. 

On the other hand, economic presence means having significant sales into the state from out-of-state transactions. 

For example, if you sell on Shopify and exceed certain thresholds in terms of revenue or the number of transactions within a state, you may be considered to have economic nexus and be required to collect sales taxes.

Once you have determined where your nexus exists (if any), you need to register for a sales tax permit from each state where you have a nexus. This will allow you to collect and remit taxes accurately based on each state’s regulations and rates.

📑 Product Taxability

Another crucial factor in determining sales tax obligations for ecommerce businesses is product taxability. Some states exempt certain products from taxation, while others impose specific taxes on them.

For instance, clothing items may be exempt from taxation in one state but taxable in another.

Given these complexities and variations among states’ laws regarding nexus and product taxability, it can be challenging for ecommerce businesses to navigate sales tax regulations. 

However, online sellers must pay attention to these regulations, as failure to comply with state laws can result in penalties and back taxes.

Make sure to research each state’s laws regarding taxable goods if your store offers products across multiple categories.

Why Ecommerce Businesses Must Pay Attention to Sales Tax Regulations

With the Supreme Court’s landmark 2018 decision in South Dakota v. Wayfair, many states have adopted economic nexus laws that expand their reach to out-of-state sellers. 

This means that even small ecommerce businesses may now be required to collect sales taxes in multiple states, adding a significant burden on them.

Therefore, ecommerce entrepreneurs and business owners need to educate themselves about sales tax regulations and stay updated on any changes or developments. 

Utilizing sales tax software or consulting with a tax professional can also help streamline the process of collecting and remitting sales taxes.

To ensure sales tax compliance across different states and countries, doola offers seamless Tax Filing services. 

We help ecommerce businesses accurately calculate the appropriate sales taxes based on the customer’s location and automatically collect and remit them to the government.

Does Shopify Collect Sales Tax Automatically?

The short answer to whether or not Shopify collects sales tax automatically is yes, but with certain conditions. 

Since Shopify is not considered a marketplace facilitator in the US, unlike Amazon or eBay, it is not legally required to collect and remit sales tax on behalf of its sellers. This means that while Shopify can handle this process for you, it ultimately depends on the services you have chosen. 

Shopify will collect sales tax for you automatically if you select the additional service called Shopify Tax, and it only works for sales within the US. However, this service will not handle any sales to customers in the EU, Canada, or elsewhere around the world.

Shopify offers two free legacy tax services, Basic Tax, and Manual Tax, which offer a lower level of automated compliance.

These require significantly more work on your part to keep tax rates up to date and to monitor regulation changes, exposing your business to more tax liability in US jurisdictions.

How to Set Up Sales Tax Collection in Shopify

Setting up sales tax collection in Shopify ensures that your business is compliant with tax laws and regulations and helps you avoid any potential legal troubles in the future. 

Let’s quickly look at the steps to set up sales tax on your Shopify store:

Step 1: Determine Your Tax Nexus

The first thing you need to do before setting up sales tax collection in Shopify is to determine where you have an obligation to collect tax, which usually is your home state. 

However, you are required to register and collect sales tax if you have a nexus in other states. This can be based on different factors, such as having a physical presence or economic activity (e.g., reaching a certain threshold of sales) in that state.

Along with Nexus, you must check if the product is taxable in the state. If it is, you are required to get your sales tax ID or sales tax permit in the said state. 

Step 2: Enable Sales Tax Collection in Shopify

Once you have determined your tax nexus, you can enable sales tax collection in Shopify.

Log in to your Shopify account, go to Settings -> Taxes and Duties -> Manage Tax Service, and enable ShopifyTax. 

After this, you must go to Manage Sales Tax Regions and select which regions or states you want to collect taxes from. 

Click on “Collect in a new region” and add the states in which you have a nexus, i.e., the US.

After enabling taxes, you will need to set up specific tax rates for each region/state where you have determined your business has a nexus. 

You can do this manually by entering the appropriate rate for each location or allow Shopify to automatically calculate the correct rates based on your products’ categories and location of sale.

Step 4: Customize Your Tax Settings

However, when it comes time to file, you must remit your tax dollars to the state, which requires you to open a US business bank account.

This is really the only manual work you have to do, but doola Bookkeeping will file taxes for you on your behalf, so you don’t even have to think about it.

Common Mistakes to Avoid

❌ Not Registering for A Sales Tax Permit

One of the biggest mistakes online retailers make is assuming that they do not need to register for a sales tax permit because they only sell online. 

This is not true, as each state has its own rules and regulations regarding sales tax collection and remittance. Research your state’s laws and register for a sales tax permit if required.

One common mistake when setting up sales tax in Shopify is not being aware of the nexus requirements in each state. 

❌ Forgetting About Nexus

Many states have expanded their nexus laws to include economic nexus, which means that if you reach a certain revenue or number of transactions in the state, you are considered to be in a nexus.

Since you are responsible for collecting sales taxes even without a physical presence, do thorough research and consult a professional to stay compliant.

❌ Using Incorrect Tax Rates

Using incorrect or outdated sales tax rates can result in overcharging or undercharging customers, which can lead to potential penalties and fines from taxing authorities. 

Another mistake is not regularly updating tax rates. Tax rates can change, so make sure to stay updated and adjust accordingly to avoid miscalculations.

To avoid this mistake, use an automated bookkeeping solution like doola, which ensures accurate taxation based on customer location.

By following these steps and avoiding common mistakes, you can ensure a smooth and compliant sales tax collection process for your online business.

What Sellers Need to Know About Tax Nexus

When it comes to setting up an ecommerce business, you must understand the tax nexus and how it affects your sales tax obligations.

Here’s what sellers need to know about tax nexus:

1. Physical Presence Nexus

Traditionally, having a physical presence in a state, such as a brick-and-mortar store, warehouse, or employees, establishes a tax nexus. 

This means that if you have any of these connections in a state where you sell your products, you would likely be required to collect and remit sales tax.

2. Economic Nexus

Many states have implemented laws that require out-of-state sellers with no physical presence but who meet certain economic thresholds (such as total sales revenue or number of transactions) to collect and remit sales tax.

3. Marketplace Nexus

With the rise of online marketplaces like Amazon and Etsy, some states have enacted laws that make these platforms responsible for collecting and remitting sales tax on the seller’s behalf. 

This means that even if you do not have physical or economic nexus in a state, your use of an online marketplace may still create a nexus for you.

4. State-by-State Variations

It is essential to note that each state has its own rules regarding what qualifies as triggering factors for establishing nexus and how it enforces its sales tax laws. 

This means that even if you do not have nexus in one state, you may still have it in another.

Staying Compliant with Sales Tax Laws

Sales tax laws vary by state and can be complicated, so it is essential to understand your obligations and stay compliant.

Along with the basics like determining nexus, registering for tax permits, and regularly updating tax settings, you must regularly review your records for any errors or discrepancies and rectify them immediately.

Furthermore, several states have implemented Marketplace Facilitator Laws, which shift the responsibility of collecting and remitting sales taxes from individual sellers to online marketplaces like Shopify. 

However, as an ecommerce entrepreneur, it is still your responsibility to ensure that all sales tax obligations are met, even if Shopify is handling the collection process. 

Make sure to review your tax reports and confirm that taxes have been accurately collected and remitted to ensure compliance and avoid any issues related to sales tax.

Ready to Simplify Sales Tax? doola Bookkeeping Can Help!

Managing sales tax can often be confusing and overwhelming for entrepreneurs who are just starting out. 

This is where doola’s bookkeeping software and dedicated services come in — to simplify sales tax and make the process smooth and hassle-free.

Our bookkeeping software is designed specifically for ecommerce businesses, making it easy to track and manage your sales tax obligations. 

It integrates seamlessly with your bank accounts, allowing you to collect and report sales tax on your online transactions automatically. 

But our services go beyond just providing software — we also have a team of dedicated experts who specialize in handling sales tax for ecommerce businesses. We stay up-to-date on the ever-changing laws and regulations surrounding sales tax, ensuring that your business stays compliant at all times. 

We can also assist with state registrations, filing returns, and any other related tasks so you can focus on growing your business.

Book a demo so you can confidently navigate this crucial aspect of running an online business on Shopify.

FAQs

Does Shopify file sales tax returns for sellers?

Yes, Shopify offers automated filing for US state and local taxes through third-party integration tools, allowing merchants to submit their collected taxes to the respective taxing authorities.

Can I use Shopify for international sales tax compliance?

Yes, you can manage the duty and import tax settings under Taxes and duties section of the Shopify admin. 

After the feature is activated, you can manage the settings for collecting duty and import taxes for countries and regions in the Markets section of the Shopify admin.

What happens if I don’t collect sales tax on Shopify?

Failure to collect and remit required sales taxes can result in fines, penalties, and legal consequences. 

Are there additional costs for enabling sales tax collection on  Shopify?

While the service is free on your first $100,000 of US sales, you will be charged a 0.35% calculation fee (0.25% for Shopify Plus merchants) after $100,000 on orders in states where tax collection is enabled.