Does Shopify Collect Sales Tax?
In this article, you will learn:
Merchants running a Shopify store often have this question “Does Shopify Collect Sales Tax?” Well, the answer is no. Shopify does not collect and file or remit the sales tax on your behalf to the respective state or local government where you have an economic nexus. It simply provides you with tools and features to help you set up and manage your own Shopify sales tax collection.
As a Shopify merchant, you are responsible for determining whether you need to collect sales tax and for configuring your Shopify store tax settings accordingly. The platform provides you with a built-in tax calculator that allows you to set up tax rates based on your business location and the locations where you have physical or economic nexus.
In addition to this, Shopify integrates with various third-party tax apps and services that can help you automate the process of calculating and collecting sales tax. These apps often provide more advanced features, such as handling tax exemptions, managing tax holidays, and generating tax reports.
Therefore, as an online merchant, you need to be aware of the local and regional tax regulations, as they vary widely. Furthermore, you must consult with a tax professional or use tax automation tools to ensure compliance with the applicable sales tax laws.
Since now you are clear that Shopify as a platform does not collect sales tax on your behalf, we are going to walk you through the process of how you can manage sales tax in your Shopify store. We will also guide you on how to determine whether you need to collect Shopify sales tax and how Shopify as a platform can help you in charging sales tax from your customers.
But before we go ahead with all this, let’s first understand what is sales tax, what are the goods or services that are taxable, and who is required to collect sales tax.
What Is Sales Tax?
Sales tax is a consumption-based tax that is imposed on retail sales made to the end consumers. Though the seller is the one responsible for collecting and remitting sales tax to the state, it is the consumer who bears the economic burden of the sales tax.
Typically, sales tax is imposed on the sale of tangible personal property and certain enumerated services depending on the state. It is not imposed on the sale of intangibles and real property. Also, sales made along the supply chain, for instance, resales, to parties other than the end consumer are generally not taxable.
Whatever amount of sales tax sellers collect, they are required to remit the same to the state on a monthly, quarterly, or annual basis. In case sellers do not collect sales tax, the purchaser or the consumer owes use tax which is complementary to the sales tax.
In the United States, 45 states and the District of Columbia, plus local governments, impose a type of sales tax. Only 5 States do not impose a sales tax. These include New Hampshire, Oregon, Montana, Alaska, and Delaware.
Typically, merchants in the US need to collect and remit sales tax in a state where they have delivered tangible goods or performed services. Accordingly, it is extremely important for the merchants to “source” the sale to the correct jurisdiction because tax rates vary drastically among states and localities.
What Is Taxable?
Typically, states impose sales tax on all tangible personal property unless it is exempted by law. At times, states also levy tax on specifically enumerated services. For instance, states like South Dakota, New Mexico, and Hawaii have a very broad levy of tax on services.
Now, when it comes to defining personal tangible property, many states in the US do it similarly. However, there is no uniform way to tax goods or services in a state. Furthermore, there exist no uniform definitions in the state. For instance, many states tax “prepared food” but exempt the “sale of food”. This means that something considered as food in one state may not be considered in another state due to the applicable definition of food.
Likewise, each state has unique “product-based” exemptions. Therefore, merchants use tax software to “map” the products into categories. The tax software helps the merchants to determine whether a particular product is taxable or exempt depending on the jurisdiction where the product is to be shipped.
Besides the “product-based” exemptions, there are many “use-based” exemptions as well. For example, in many jurisdictions, manufacturers are allowed to buy equipment used in the manufacturing process exempt from sales tax. That’s so because such states want to encourage manufacturing in their state. Also, the “use-based” exemptions require the seller to maintain exemption certificates from their purchaser.
This showcases that what is taxable varies from state to state in the US. Each state has its regulations to levy sales tax. It completely depends upon how a specific state defines the personal tangible property and what type of exemptions it enumerates in its sales tax code.
Who Is Taxable?
Like there is no uniform manner in which different states in the US define personal tangible property, there is no uniformity in the way states in the US define sales tax exemptions or exclusions. Typically, states have exemptions or exclusions based on the type of buyer making the purchase.
For instance, all states allow resellers to claim an exemption for purchases made for resale. Then, most states allow an exemption for non-profit organizations such as churches and charities. Also, all states do not impose sales tax on direct purchases made by the US federal government.
Then, the sellers selling exempted items are generally required to obtain and maintain exemption certificates from buyers at the time of sale. These certificates include the required data elements like the name and address of the buyer, the buyer’s sales tax account number, and the reason for the claimed exemption. However, some states require their specific state exemption certificate. Then, many states accept the Multistate Tax Commission’s Uniform Resale Certificate but only for purchases for resale. Also, many states accept the Streamlined Sales Tax Exemption Certificate.
This showcases that there is no uniform way in which states define who is taxable and who is exempted from paying sales tax.
How Much Is Taxable?
Now, states in the US typically define “sales price” or “purchase price” as the tax base on which the sales tax and use tax are levied. The amount is based on the consideration that the buyer pays which includes cash, credit, barter, exchange, etc. However, the states may vary on what else is part of the tax base such as delivery charges, discounts, rebates, discounts, trade-ins, other taxes, and services necessary to complete the sale.
When it comes to taxing bundled transactions, that is, when taxable and nontaxable services are sold together for one non-itemized price, the states typically tax the entire sale.
Who Is Required To Collect Sales Tax?
Before 2018, merchants with customers in more than one state had to pay sales taxes only to be collected and remitted on sales to customers in states where the merchant had an office, a storefront, employees, or some other physical presence. This rule had its origin in two Supreme Court decisions: National Bellas Hess, Inc. v. Illinois Department of Revenue and Quill Corp. v. North Dakota. These cases were decided in the twentieth century.
However, in the new millennium, eCommerce grew exponentially. Merchants started selling products and services online instead of establishing physical storefronts or hiring salespeople in different states. Following the above-mentioned Supreme Court decisions, many e-commerce businesses could avoid tax liability in every state except the one in which they were physically located. This resulted in severe revenue shortfalls for states and municipalities.
To this, several states responded by either increasing their tax base to include services and/or digital products or imposing use tax collection obligations on out-of-state sellers with no physical presence in the state.
South Dakota was one of these states to implement these rules. It required an out-of-state seller, whether it was physically present in the state or not, to collect and remit use tax if the seller either delivered more than $100,000 of goods or services into the state or conducted 200 or more transactions for the delivery of goods or services into the state.
Wayfair, Inc. and other large Internet retailers with no physical presence in South Dakota refused to collect the tax. This provoked a constitutional challenge that compelled the Supreme Court to overrule Bellas Hess and Quill. South Dakota courts declared the Bellas Hess and Quill law unconstitutional and the U.S. Supreme Court granted an order to reconsider the physical presence requirement. The decision, South Dakota v. Wayfair, Inc., established that a state may impose tax obligations on a business if it has an “economic nexus” with the state even if it has no physical presence there.
Do I Need To Charge Sales Tax On Shopify?
As a Shopify merchant, you first need to determine whether you are liable to charge sales tax or not. Now, whether you need to charge Shopify sales tax
depends on a variety of factors, including your business’s location, your customers’ locations, and the relevant tax regulations. The following are the factors that will help you determine whether you need to charge Shopify sales tax.
As a Shopify merchant, the first thing that you need to consider while determining your Shopify sales tax liability is whether you have a physical or economic nexus with the state where your online store delivers goods or services.
Sales tax obligations often depend on whether you have a “nexus” in a particular location. The term nexus refers to a significant connection or presence that your business has in a particular jurisdiction, such as a state. The concept of nexus is crucial in determining whether your business is required to collect and remit sales tax in a specific location.
Historically, nexus was primarily based on a physical presence in a state. This physical presence could include having a brick-and-mortar store, warehouse, office, or employees in the state. Note that the physical presence rule was based on the Supreme Court’s decision in Quill Corp. v. North Dakota passed in 1992. The decision established the precedent that a business must have a physical presence in a state for that state to require it to collect and remit sales tax.
However, the landscape changed with the Supreme Court’s decision in South Dakota v. Wayfair, Inc. in 2018. The Court overturned the Quill decision passed in 1992 and ruled that states could impose sales tax obligations on a business if it had an economic nexus in the state, even if it lacked a physical presence. Economic nexus is typically based on a business reaching a certain level of sales revenue or transaction volume in a state.
By the 2018 South Dakota v. Wayfair, Inc. decision, states enacted economic nexus laws. As a result, rules regarding when a business had nexus in a state varied from state to state.
Therefore, if your Shopify store engages in interstate commerce, you must be aware of the specific nexus thresholds and requirements in each jurisdiction where you do business. That’s because you are responsible for determining whether you have nexus in a particular state and for complying with the sales tax laws of that state.
This may require you to register for a sales tax permit in that state, collect sales tax from customers in that state, and remit the collected taxes to the appropriate tax authorities. In case you fail to comply with sales tax obligations, you may have to bear penalties and legal consequences.
2. Product Taxability
Once you determine whether you have a physical or economic nexus with a state where you deliver goods or services, the next step is to check whether the products are taxable. The taxability of products and services can vary from state to state.
Each state has its own set of rules and regulations governing what goods are subject to sales tax and at what rate. However, there are some general principles to consider.
a. Taxable vs. Exempt Items
States typically tax the sale of tangible personal property, but exemptions may apply to certain types of products. Common exemptions include food, prescription drugs, and clothing, but the specifics vary by state.
b. Digital Products And Services
The tax treatment of digital products and services (such as software, e-books, and streaming services) can also vary. Some states tax them as tangible personal property, while others treat them differently.
c. Taxability Of Services
In addition to tangible goods, some states also tax certain services. However, the types of services subject to tax can vary widely. For example, some states tax repair services, while others do not.
d. Use Tax
If a state does not impose a sales tax on a particular item, it may have a corresponding use tax. Use tax is generally levied on the use, storage, or consumption of taxable goods or services in the state when they were not subject to sales tax at the time of purchase.
e. Special Considerations
Some states have unique rules. For instance, some may provide specific exemptions for certain industries, organizations, or types of transactions. It’s important to be aware of any special considerations that may apply to your business.
Thus, to determine the taxability of specific products in a particular state, you should consult the state’s Department of Revenue or equivalent tax authority. Many states provide detailed guidance, publications, and resources to help you understand your sales tax obligations.
You can even use tax automation software or services that integrate with your point-of-sale systems to calculate and collect the appropriate sales tax based on the location of the buyer and the tax rules of the relevant jurisdiction. Consulting with a tax professional can also be beneficial to ensure compliance with state-specific regulations.
3. Customer Location
Customer location is another factor that you must consider when determining your sales tax liability in a particular state. Determining the customer’s location is a crucial aspect of sales tax compliance, particularly for online sales where customers can be located in various states or jurisdictions. The customer’s location helps you to apply the correct sales tax rates and rules based on the specific jurisdiction’s regulations.
For instance, sales tax can be calculated based on the origin, where the seller is located, or the destination, where the buyer is located. If the state where you deliver taxable goods or services to a state where destination-based sales tax is levied, in such a case, you must charge a sales tax rate based on the buyer’s location.
Then, the customer’s location is also important when determining nexus rules as sales tax is typically collected based on the buyer’s location.
Thus, given the complexity and variability of sales tax regulations, especially in the context of e-commerce, you as a business must seek the assistance of tax professionals or use specialized software to ensure accurate and compliant sales tax collection based on the customer’s location.
Once you determine your nexus with a state, product taxability, and customer location, you can configure tax rates based on your business location and nexus in your Shopify Admin.
4. Digital Products
If your online store sells digital products, then you must consider them when determining your sales tax liability in a particular state. Digital products are the products that customers download and do not have any physical components to ship. These can include a wide range of items such as software, e-books, music downloads, streaming services, online courses, and more.
Now, rules regarding taxation of digital goods may vary from state to state.
For instance, some states consider digital products to be tangible personal property subject to sales tax, while others treat them differently. Furthermore, states may have specific provisions that address the taxability of digital goods.
Then, some states follow an origin-based system for sales tax, where the tax rate is based on the seller’s location. Others use a destination-based system, taxing based on the buyer’s location. Thus, the tax treatment of digital products may depend on the specific rules of the state in question.
Additionally, there are special tax rules related to subscription-based digital services, such as streaming platforms or software as a service (SaaS). Some states may tax these services differently from one-time purchases.
Then, in cases where a state doesn’t impose a sales tax on digital products, it may have a corresponding use tax. Use tax is generally levied on the use, storage, or consumption of taxable goods or services in the state when they were not subject to sales tax at the time of purchase.
Finally, in some states, certain digital products may be exempt from sales tax. For example, some states exempt sales of digital products if they are for educational purposes or if they are considered essential goods.
Thus, you as an online business must be aware of all of these rules to ensure accurate compliance with sales tax laws for digital products.
Sales tax regulations for online marketplaces in the United States can be complex, and they have changed in recent years. The responsibility for collecting and remitting sales tax may fall on either the marketplace facilitator or the individual sellers, depending on the state.
Many states have enacted laws that designate marketplace facilitators (such as Amazon, Etsy, and eBay) as responsible for collecting and remitting sales tax on behalf of third-party sellers. In these cases, the marketplace itself is considered the seller for tax purposes.
In some states, individual sellers on a marketplace may still be responsible for collecting and remitting sales tax. The rules can vary, and sellers should be aware of the specific requirements in each state where they have sales.
Thus, sales tax laws can vary widely from state to state, and both marketplace facilitators and sellers need to understand the specific laws and requirements in each jurisdiction where they operate.
Dropshipping is a retail fulfillment method where a store doesn’t keep the products it sells in stock. Instead, when a store sells a product, it purchases the item from a third party and has it shipped directly to the customer. As a result, the merchant never sees or handles the product.
In case you are a Dropshipping seller, then you must know that dropshipping in the context of sales tax in the United States introduces specific considerations, especially regarding the responsibility for collecting and remitting sales tax.
For instance, in some cases, the dropshipping platform or marketplace might be considered the seller for sales tax purposes, taking on the responsibility of collecting and remitting sales tax. This depends on the specific laws of the state.
In other situations, you as an individual dropshipping seller may be responsible for sales tax compliance. If you as a seller have nexus in a state, either through a physical presence or meeting economic nexus thresholds, you may need to register for a sales tax permit and collect taxes on sales to customers in that state.
Thus, as a dropshipping business, you must stay informed about the specific regulations in each state where you conduct business.
Does Shopify Collect Sales Tax?
As mentioned earlier, Shopify itself doesn’t automatically collect sales tax on your behalf as a merchant. Instead, Shopify provides tools and features that allow you to set up and manage your own sales tax collection.
Thus, as a merchant, you are responsible for determining whether you need to collect Shopify sales tax and for configuring your store settings accordingly. The platform offers a built-in tax calculator that enables you to set up tax rates based on your business location and the locations where you have nexus.
Additionally, Shopify integrates with various third-party tax apps and services that can help you automate the process of calculating and collecting sales tax. These apps often provide more advanced features, such as handling tax exemptions, managing tax holidays, and generating tax reports.
How To Charge Sales Tax On Shopify?
As mentioned before, Shopify does not remit or file taxes on your behalf. Instead, it helps you to automate charging sales taxes. But first, as an online merchant, you must determine where in the United States you have a sales tax liability.
If you use Shopify Tax as your tax service, then view the “Manage Tax Liability” page to determine where your online store has a nexus. However, it is not a replacement for advice from a tax authority or a tax professional. It is your responsibility to determine where you need to charge and remit the sales tax.
Once your store is open and it starts making online sales, Shopify automatically monitors your sales and locations. This helps you determine whether you have nexus in specific states as your sales into a specific state are compared to that state’s sales thresholds. As a result of such a comparison, you can identify where you might have a tax liability in the United States.
Now, before you can monitor your tax liabilities in Shopify, you must take into account the following considerations.
Setting Up Sales Tax In Shopify
1. Your Shopify store displays the tax liability of only those transactions that occur within the store. These transactions include the ones that have occurred on the marketplaces integrated with your Shopify store as well as the orders that you import into your store. The sales that you make outside your Shopify store and do not import them are not included in these transactions.
2. Your Shopify store displays the tax liability for only those states that have economic nexus tax laws at the state level. States that don’t have economic nexus laws are not included.
3. Some states have local tax filing requirements that are separate from state filing requirements, such as Alaska or Colorado. Shopify does not track nexus for local taxes.
4. Your Shopify store displays the tax liability for states where sales occur during the threshold period for that state. It does not include sales outside the threshold period.
5. Shopify calculates tax liability using net sales, not gross sales. Net sales are sales less refunds, shipping, or tax.
6. Shopify does not reflect sales immediately in your tax liabilities and might take a few days to update. In case your online store surpasses a sales threshold indicating that you may need to charge and remit taxes in a particular state, then the month that your online store surpassed the threshold is displayed.
7. Your Shopify store displays the tax liability for physical nexus in current locations. If you had a location in a state but deleted it, then it is not included.
In addition to the above points, there’s one more thing that you need to consider. In case the address that you set in the Address section in your Shopify Admin under Settings and then the Store details section is different from the address that you set as a location, then the location address is used to determine nexus. The Store details address is not used if you have created a location.
After considering the above points, you can now determine or review your tax liability within your Shopify store.
How To Review Tax Liability In Shopify?
To review your tax liability within Shopify, log in to your Shopify Admin. Once you log in, click “Settings” and then click “Taxes and Duties”. Under “Taxes and Duties”, select “United States”. The moment you select “United States”, Shopify will display a preview of your tax liabilities above the states in which you’re registered to collect tax.
In case the sales that your online store has made into specific states indicate a potential tax liability, then the tax liabilities section displays the state, the reason for the potential liability, and the date of the potential liability. You can click on “Show All Liabilities” and view the “Manage Tax Liability” page in case you want to review more information.
On the “Manage Tax Liability” page, you can view the states into which your online store has made sales. You can use the menu at the top of the page and choose the states you want to review.
Now, the “Manage Tax Liability” page will showcase the following three sections. You need to know what each of these sections means.
a. Action Required
The “Action Required” section indicates the states where Shopify has identified potential tax liability. States listed under the “Action Required” section are those where you might have physical nexus from a location, or economic nexus from sales into that state. In case, your Shopify Admin displays any states listed in the “Action Required” section, then you might need to start charging and remitting tax there.
b. Monitoring Required
The “Monitoring Required” section indicates the states where you do not have a location and your sales within Shopify, including marketplaces where required by state law, have reached at least 80% of that state’s threshold for economic nexus. In case, your Shopify Admin displays any states listed in the “Monitoring Required” section, then review the sales made into that state, taking into account sales that Shopify did not process.
c. No Action Required
The “No Action Required” section indicates the states where you do not have a location and your sales within Shopify, including marketplaces where required by state law, are under 80% of that state’s threshold for economic nexus.
Once you are aware of what all these sections mean, the next step is to address your tax liability. In case a state is listed as a potential tax liability on the “Manage Tax Liability” page of your Shopify Admin, then you must carefully review the sales tax laws for that state. You must consult a tax professional or contact that state’s tax authority if you are not sure whether your store has physical or economic nexus in a state.
Once you know whether your store has physical or economic nexus in a state, then you can set up tax collection in Shopify from the “Manage Tax Liability” page. But before you begin, you must make sure that you have registered with the state’s tax authority to charge and remit sales tax.
To set up tax collection from the “Manage Tax Liability” page of your Shopify Admin, follow the steps below:
1. Go to the “Manage Tax Liability” page, locate the state, and then click Start collecting taxes.
2. Then in the “Sales Tax ID” section, enter your sales tax ID. In case you have applied for a sales tax ID but do not have one yet, then leave this field blank. You can update it when you receive your sales tax ID.
3. Finally, click the “Collect Sales Tax” button to save the changes.
How To Collect Sales Tax On Shopify?
Once you have determined where you need to charge tax in the United States and have registered with the tax agencies and have your sales tax ID, you can set your Shopify store to automatically manage the tax rates used to calculate taxes on the sales made. You can even set up tax overrides in Shopify for products that have special tax rates.
The following are the steps that you need to follow to allow Shopify to start collecting taxes.
1. Log in to your Shopify Admin and go to “Settings”.
2. Then, under “Settings”, go to “Taxes and Duties”.
3. Under “Taxes and Duties”, go to the “Manage Sales Tax Collection” section. In this section, click “United States”.
4. Under the “Manage Sales Tax Collection” section, go to the “Regions You’re Collecting In” section. In this section, click “Collect Sales Tax”.
5. After clicking “Collect Sales Tax”, you will see a list of states or regions. Select a state or region in which you are registered.
6. Once you select the state or the region where you are registered for sales tax, go to the “Sales Tax ID” field. In this field, enter your sales tax ID. In case you have applied for a sales tax ID but do not have it as yet, then leave this field blank. You can update it later when you receive your sales tax ID.
7. The next step is optional. If your business is located in a state where tax laws regarding shipping vary, then you can choose whether you want to charge tax on shipping. To charge tax on shipping, click “Advanced Options”. Then, go to the Shipping Tax section. In this section, choose whether you want to apply shipping tax.
8. Finally, click on the “Collect Sales Tax” button to start collecting sales tax on your Shopify store.
9. The next step is optional. If you want to add more regions and account numbers, you must click on the “Collect Sales Tax” button.