Introduction
There are a few things to keep in mind when it comes to taxes and ecommerce. First, you should know that there are different types of taxes that may apply to your business, depending on your location and business structure.
For example, in the United States, there are federal, state, and local taxes that may apply to your ecommerce business. You will need to research the specific tax laws in your country and locality to determine which taxes apply to you.
Second, you should keep good records of your sales and expenses so that you can accurately calculate and pay your taxes. This includes keeping track of inventory, sales receipts, and expenses.
You may also need to file quarterly or annual tax returns, depending on your location and business structure. In this article, we’ll share seven tax strategies for eCommerce Shopify sellers.
What is dropshipping and how does it work?
Dropshipping is a business model in which eCommerce entrepreneurs sell products without having to carry any inventory.
When a store owner receives an order from a customer, they simply contact the supplier, who will then ship the products directly to the customer’s door.
Dropshipping is a great way to start an online business with little up-front investment, and it’s relatively easy to set up and run.
However, there are a few things to keep in mind when dropshipping, especially when it comes to taxes. In this article, we’ll share seven tax strategies for eCommerce Shopify sellers.
What are the 7 main tax strategies for Shopify sellers?
The seven main tax strategies for Shopify sellers are given below:
- Determine where you have sales tax nexus and what products are subject to ecommerce sales tax
- Register for a sales tax permit
- Collect, report, and file your sales tax returns
- Set up sales tax collection
- Calculate how much sales tax you’ve collected
- Consider automating state sales tax bookkeeping and payments
- File your sales tax return(s)
Let’s discuss them one by one.
1. Determine where you have sales tax nexus and what products are subject to ecommerce sales tax
There are a few key things to keep in mind when it comes to taxes for Shopify sellers.
First, you need to determine where you have sales tax nexus and what products are subject to ecommerce sales tax.
nexus is the physical presence that a business has in a state that allows that state to collect taxes from the business. A common way for an out-of-state seller to have nexus is to have inventory stored in a state.
If you’re just getting started, the best way to determine if you have nexus in a state is to use the Streamlined Sales Tax Registration System. This system is used by 24 states and allows out-of-state sellers to register for sales tax in those states.
The next thing to consider is what products are subject to sales tax. In general, physical goods are taxable while digital goods are not. However, there are some exceptions. For example, in some states, digital products that are delivered on a physical medium (such as a CD) are taxable.
When it comes to sales tax, there are two types of transactions: exempt and non-exempt. Exempt transactions are not subject to sales tax, while non-exempt transactions are.
There are a few different ways to handle sales tax on your eCommerce store. The first is to include the sales tax in the price of the product. This is the simplest way to handle sales tax strategies, but it can lead to a higher price for your customers.
2. Register for a sales tax permit
As a Shopify seller, it’s important to be aware of the various tax strategies that can help you save money and stay compliant with the law.
One of these strategies is to register for a sales tax permit. This will allow you to collect and remit sales tax on behalf of your customers.
By doing so, you can avoid having to pay penalties or interest on late payments. Additionally, you can take advantage of tax-free shopping days and holidays to sell your products without having to pay sales tax.
Another strategy is to use drop shipping. This allows you to ship products directly to your customers from the manufacturer or supplier, without having to store the items in your own warehouse. This can save you money on storage and shipping costs. Additionally, it can help you avoid paying sales tax on products that you do not have in stock.
You can also take advantage of tax deductions and credits. For example, if you purchase inventory for your business, you may be able to deduct the cost of the inventory from your taxes. Additionally, if you have employees, you may be able to take credit for the payroll taxes that you pay.
Finally, you should consider hiring a tax professional to help you with your tax planning. A tax professional can help you determine which deductions and credits you are eligible for, and can also help you file your taxes in a way that minimizes your tax liability.
3. Collect, report, and file your sales tax returns
As a Shopify seller, you are required to collect and remit sales tax on all taxable transactions.
Depending on your state, this may include both online and in-person sales. To ensure compliance, it is important to understand the basics of sales tax collection and filing.
There are three main steps in the process: collecting sales tax from customers, reporting your taxable transactions to the appropriate state tax agency, and paying the taxes you owe.
The first step is to collect sales tax from your customers. You can do this by adding a sales tax line item to your invoices or by using a point-of-sale system that automatically calculates and collects sales tax.
The second step is to report your taxable transactions to the appropriate state tax agency. This is typically done on a quarterly or annual basis.
The third and final step is to pay the taxes you owe. This can be done electronically or by mailing a check to the state tax agency.
As an eCommerce seller, it’s important to be aware of the different tax strategies that are available to you. By taking advantage of these strategies, you can minimize your tax liability and keep more of your hard-earned profits.
1. Collect and remit sales tax on all taxable transactions.
2. Report your taxable transactions to the appropriate state tax agency on a quarterly or annual basis.
3. Pay the taxes you owe electronically or by mailing a check to the state tax agency.
4. Use tax software to automate the sales tax reporting and payment process.
5. Keep accurate records of your sales and purchases.
6. File your tax returns on time.
7. Seek professional help if you have questions or need assistance with your taxes.
4. Set up sales tax collection
Sales tax can be a complex issue for online sellers, as there are often different rates depending on the state or country where the sale is taking place.
However, Shopify makes it easy to set up sales tax collections for your store.
In the Shopify admin, go to Settings > Taxes. From here, you can add the relevant taxes for your country and state. You can also specify whether you want to charge tax on shipping and handling fees.
Once you have your taxes set up, Shopify will automatically calculate and collect the appropriate taxes for each sale.
5. Calculate how much sales tax you’ve collected
If you’re selling products online through Shopify, it’s important to be aware of the various tax strategies that can help you save money.
One key strategy is to calculate how much sales tax you’ve collected. This can help you determine whether you’re owed a refund or need to pay additional taxes.
To calculate your sales tax, start by adding up the total amount of all taxable sales made through Shopify. Then, multiply this figure by your state’s sales tax rate. For example, if you made $1,000 in taxable sales and your state’s sales tax rate is 6%, you would owe $60 in sales tax.
6. Consider automating state sales tax bookkeeping and payments
If you have a Shopify store selling products in multiple states, you know that keeping track of sales tax can be a daunting task.
Fortunately, there are several software solutions available that can automate the sales tax bookkeeping and payment process. This can save you a significant amount of time and money, and help you avoid penalties for failing to file or pay on time.
There are a few things to keep in mind when choosing a sales tax automation solution for your Shopify store. First, make sure the software is compatible with Shopify. Second, look for a solution that offers features like automated tax calculation, filing, and payment. And finally, be sure to compare pricing and reviews before making a decision.
The following are seven of the best sales tax automation solutions for Shopify stores.
1. TaxJar
2. Avalara
3. Quaderno
4. TaxCloud
5. AccurateTax
6. Selz
7. Taxify
7. File your sales tax return(s)
If you’re selling products online through Shopify, you’ll need to file sales tax returns in any state where you have nexus (a physical presence).
This includes your home state, as well as any states where you have inventory, employees, or affiliates.
Sales tax returns are typically filed on a quarterly basis, but some states require monthly or annual filings. You’ll need to check with your state’s tax agency to find out what frequency is required.
To make sure you’re collecting the right amount of sales tax from your customers, you’ll need to know the tax rates in each state where you have nexus. These rates can vary widely, so it’s important to stay up-to-date on the latest changes.
You can use Shopify’s built-in sales tax calculator to automatically calculate the right amount of sales tax to collect from your customers. The calculator is updated with the latest rates and rules for each state, so you can be confident that you’re always collecting the right amount of tax.
If you’re selling products that are subject to special taxes, like alcohol or tobacco, you’ll need to collect those taxes from your customers in addition to sales tax. You can learn more about special taxes on Shopify’s help site.
Conclusion
The most important thing for ecommerce Shopify sellers to remember is that they need to collect sales tax from their customers in any state where they have nexus. Nexus is generally created when a seller has a physical presence in a state, but it can also be created by having an online presence in a state.
To make sure you’re collecting the right amount of sales tax, you’ll need to stay up-to-date on the latest tax rates in each state where you have nexus. You can use Shopify’s built-in sales tax calculator to help you with this.
Work with knowledgeable, seasoned experts who are familiar with particular tax strategies and tactics while seeking professional assistance in tax strategies methods.
Accounting and tax experts at Free Cash Flow Agency are here to assist you with your queries, accounting needs, and tax preparation.
