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As a Shopify business owner selling goods in the US, you may wonder how to apply sales tax on shipping charges, given every state has its own shipping tax rules.
Sales tax on shipping is different from the sales tax that you as a merchant need to collect on the sale of products. It is the tax that you charge on the cost of shipping the goods to the buyers.
Since the rules governing the taxation of shipping charges vary from state to state, some states might exempt shipping charges from sales tax while others may consider these charges as taxable. Provided the shipping charges are stated separately on the invoice.
Thus, it’s important for you as a Shopify retailer to understand the sales tax laws in the state or jurisdiction where you are selling goods to accurately apply and collect the appropriate sales tax on shipping charges.
This is because you do not want to charge your customer sales tax on shipping charges in a state where shipping is not considered taxable.
So, to simplify and help you understand sales tax on shipping, in this article, we are going to walk you through what is Shopify tax on shipping, does Shopify pay for shipping, and how is shipping charged on Shopify.
What is Shopify Tax On Shipping?
Shopify allows merchants to specify whether they want to charge taxes on shipping charges or not. Note that as a Shopify merchant, you can choose to either include shipping charges in the taxable amount or exclude them. This choice may vary depending upon the state or the jurisdiction where you are selling the goods to your customers and the sales tax laws that apply in that state.
Now, before we go ahead with how is shipping charged on Shopify, it’s important to first understand how sales tax is charged on shipping in the US.
Sales Tax On Shipping in the US
As per the Streamlined Sales and Use Tax Agreement (SSUTA), shipping charges are a type of delivery charge that sellers of personal property or services charge for the preparation and delivery to a location designated by the purchaser of personal property or services. These charges may include but are restricted to, transportation, shipping, postage, handling, crating, and packing.
SSUTA is an effort by several states in the United States to simplify and standardize sales tax laws across state lines. The primary objective of the participating states under SSUTA is to streamline sales tax regulations so that it’s easier for businesses to collect and remit taxes across different states.
Thus, the objective of the SSUTA agreement is to bring uniformity in definitions, tax rates, and tax administration procedures of the member states.
So, shipping charges are a type of delivery charge associated with transporting goods from a Shopify seller or retailer to a buyer or customer. These charges may cover various costs related to the shipping and handling of products, including packaging, postage, transportation, and any additional services involved in getting the goods to their intended destination.
Now, in the US, sales tax on shipping charges is a tax that online sellers like Shopify merchants may have to charge on the cost of shipping goods to the buyers, depending upon the state in which the goods are sold. As mentioned earlier, the sales tax on shipping is separate from the sales tax that merchants may have to charge and collect on the actual sale of products.
For instance, in certain states, a buyer of goods may not only have to pay the sales tax on the price of the items they purchase but also the sales tax on any shipping charges associated with the delivery of those items. What this means is that if a buyer pays $200 for the items purchased and $20 for the shipping charges, he or she may have to pay sales tax on the combined amount of $220 plus any applicable local taxes.
However, one thing that Shopify merchants must know is that each state in the US has its own laws governing the taxation of shipping charges.
Some states consider shipping charges as part of the taxable sale, whereas others treat shipping separately. That is, these other states may exempt shipping from sales tax, provided the shipping charges are stated separately on the invoice and meet certain conditions.
Thus, it’s essential for Shopify merchants to understand the sales tax laws in the state or jurisdiction in which they operate. This will help them to collect appropriate sales tax on shipping charges.
Common Rules For The Application of Sales Tax On Shipping
There are some common rules that the states in the US adhere to while applying sales tax on shipping costs. Though, the treatment of sales tax on shipping in the USA may vary depending on the state in which the online retailers are located. In general, here’s how the sales tax on shipping in the US works:
I. Taxable vs. Non-Taxable Shipping Cost
In many states in the US, shipping charges are treated as part of the overall sale and are subject to sales tax if the items being shipped are also taxable. This means that, as a Shopiy seller, if you sell taxable goods and charge your customers for shipping, the shipping charges can be subject to the same sales tax rate as the items themselves.
Likewise, if you sell non-taxable goods and charge your customers for shipping, the shipping charges may not be subject to any tax as the items sold are non-taxable.
Further, if you sell a combination of taxable and non-taxable items to customers, the portion of the shipping charges allocated to the taxable sale is taxable. Whereas, the portion attributed to the non-taxable sale is exempt.
II. Stating Shipping Costs Separately
In some states in the US, the shipping costs are considered non-taxable if the online retailers state these charges separately on the invoice. That is if the online retailers clearly separate the shipping charges from the cost of the items on the invoice or receipt, such shipping costs may be considered as non-taxable in some states.
However, this may vary from state to state as certain states have specific rules about how shipping charges should be stated to be considered non-taxable. Therefore, it’s important for online retailers to check the specific rules of the state in which they operate or sell goods to the customers.
III. Origin Vs Destination Based Tax System
Sales tax can be charged either on the origin-based system or the destination-based system.
In an origin-based system, the sales tax charged depends on the location of the online seller. Whereas, in a destination-based tax system, the sales tax is based on the location of the buyer.
Typically, most states in the US follow a destination-based tax system. This means that the sales tax is applicable depending on the location where the customer receives the goods, including any shipping address.
For instance, the shipping charges may not be subject to sales tax if the customer is in a state that charges sales tax and the shipping destination is in the same state.
Tax on Shipping Examples
Every state in the US has its own rules concerning the sales tax on shipping. Therefore, it is essential for online retailers to understand the sales tax rules of each state to determine whether the shipping charges are subject to sales tax or not.
For instance, shipping charges imposed by online sellers on taxable goods in states like New Mexico and Texas are taxable whether such charges are stated separately on the invoice or included within the sale price.
However, shipping charges imposed by a third-party carrier directly to the buyer are not included in the sale price of the items sold to the buyer.
Further, in states like Florida, Illinois, Colorado, and Missouri, the shipping charges are taxable irrespective of whether such charges are stated separately on the invoice or included in the sales price of the items sold.
On the contrary, in certain states, the shipping charges are treated differently if shipping as a service offered by the seller is optional, that is the buyer has the option to either ask the seller or a third-party shipping service to deliver the goods to the buyer. In such a case, these states treat shipping charges as nontaxable provided such charges are stated separately on the invoice.
Also, some states in the US treat “shipping” and “handling” charges separately. For instance, in Maryland and Virginia, the online sellers need to state the amounts for shipping and handling charges separately as the individual amounts standing against shipping and handling will be considered for taxation.
Accordingly, the transportation charges will be exempt from sales tax if such charges are stated separately on the invoice. And, the handling charges will be taxed if stated separately on the invoice.
However, if the online seller combines the exempt transportation charge with the taxable handling charge, he or she would be failing to meet the separately stated requirement.
Then, in states like Colorado and Louisiana, online retailers need to be careful as in such states the local tax laws differ from state tax laws. In these states, the local jurisdiction may tax shipping charges in a different way than the manner in which the state may tax such charges.
For instance, Pueblo West City in Colorado may charge tax on shipping even if such charges are stated separately on the invoice by the online seller. Whereas, the Centennial city in Colorado exempts “optional” shipping charges from tax if such charges are stated separately. This is just the way the Colorado state treats tax on shipping.
Let’s consider one more example to understand how sales tax on shipping is treated differently in various states in the US.
California exempts tax on the shipping charges if the online seller delivers taxable items to the buyer through a common carrier, provided such charges are stated separately on the invoice.
But if the items are delivered to the buyer through the seller’s own vehicle, then the delivery charges are taxable. However, the condition in this entire scenario is that the delivery charge should not exceed the actual cost of delivery to the buyer by the common carrier. If the seller fails to maintain records of the actual cost of the delivery, then the delivery charge is taxable.
Why is Shopify Charging Tax On Shipping?
Since now we have an understanding of how the tax on shipping works in the US, let’s try to understand why is Shopify charging tax on Shipping.
Now there can be a lot of reasons why Shopify is charging tax on shipping. But primarily, Shopify’s tax calculation settings and whether or not tax is charged on shipping depends on how you as an online retailer have configured your store’s tax settings and the tax regulations of the state in which you are selling goods.
Let’s understand what are some common reasons for Shopify charging tax on your shipping.
I. State Tax Laws
As mentioned earlier, some states in the US consider shipping charges as a part of the overall sale and impose a tax on the sale price. Thus, if you have customers located in such states, your sales will be subject to sales tax as per the regulations of such a state.
II. Sales Tax Configuration
Another reason why Shopify is charging tax on shipping is that you have set up your tax settings in Shopify to include shipping charges in the taxable amount. If that is the case, then sales tax will be applied to both the products and the shipping costs.
III. Default Settings
As a Shopify merchant, you must also check the default tax settings in your store. It can be the case that the default settings of sales tax in your Shopify store might be set to include shipping charges by default. Therefore, you need to review and adjust these settings as needed.
IV. Destination-Based Tax
Another factor on which the tax on shipping charges may depend is the location of your customer. If you are selling items in a destination-based tax state or jurisdiction, where taxes are based on the customer’s location, the shipping address may impact whether tax is charged on shipping. Accordingly, if the shipping address of your customer is in a state that charges sales tax, then shipping charges as well will be subject to taxation.
V. Settings for Individual Products
Tax on shipping may also depend upon the type of products that you sell. If you sell a combination of taxable and non-taxable products, the tax settings for individual products may impact whether tax is charged on shipping. The shipping charges will be subject to tax if a taxable item is included in the order.
Now, to address the issue of Shopify charging tax on shipping, you must follow the steps below:
A. Check Tax Settings
Go to your Shopify admin and navigate to Settings. Under settings, select taxes. In the taxes section, review your tax configuration settings, including whether you’re applying tax to shipping.
B. Review State Rules
Check the tax laws in the state or jurisdictions where you are selling goods. Some states or jurisdictions have specific rules about whether tax should be applied to shipping charges or not.
C. Adjust Tax Settings
You need to make sure that your tax settings do not charge tax on shipping in case you do not want to impose tax on shipping costs. For this, you will have to change your settings to exclude shipping charges from taxable amounts.
D. Contact Shopify Support
After taking the above actions, if you are still unsure why Shopify is charging tax on shipping, reach out to Shopify’s customer support for assistance. They can help you troubleshoot and adjust your settings as needed.
How To Set Up Sales Tax On Shipping in Your Shopify Store?
Before you set up sales tax on shipping in Shopify, you need to consider the following things:
- Determine whether or not you need to charge sales tax on shipping as each state in the US has different sales tax laws. Go through the tax regulations of the state in which you deliver goods to your customers.
- Shopify also takes into account the concept of an “Economic Nexus,”. Economic nexus refers to the physical presence in a particular jurisdiction that may trigger the obligation to collect and remit sales tax once the online retailer crosses the benchmark sales in that particular state or jurisdiction. If you have economic nexus in a state, you may need to collect sales tax on all taxable transactions within that state, including shipping. Further, if you have an economic nexus in more than one state, you need to ensure that shipping is taxable in each state.
- Further, you also need to ensure that business is not inconsistent with the general, shipping rules of the state in which you deliver goods. For instance, if you use your own vehicle, a third-party delivery service, or ship goods using anything other than a common carrier like UPS, FedEx or the USPS, then check whether or not your state’s general sales tax rules apply to your business.
Once you take care of all these factors, you can then set up sales tax on shipping in Shopify by following the steps below:
- Go to your admin and log in to your Shopify account.
- After you log in, navigate to the “Settings” tab at the bottom left of your dashboard. Click “Settings” and then click “Taxes and Duties” from the menu on the left bar of your dashboard.
- Once you click “Taxes and Duties”, your Shopify store showcases the “Manage Tax Collection” section and “Decide How Tax is Charged” section. Under the “Decide How Tax is Charged” section, check the box that says “Charge tax on shipping rates”.
- Finally, click the “save” button on the top right corner to save all the changes that you have made.