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Shopify Sales Tax

Shopify Sales Tax: The Ultimate Guide In 2023

Shopify sales tax is a hot topic to discuss, and we want to give you the complete picture of sales tax on Shopify before we dive into the specifics.

We will talk about what types of sales tax exist and then go deeper into how they work, how to charge it, where you pay it and even help with all your business’s financials.

The reason it’s such a tricky subject is because of where you live, what state your business is in and if your product(s) are taxable or not.

That’s why we created this ultimate guide: to help you navigate through sales tax on Shopify.

What is Shopify Sales Tax and What Does this Mean for your Business

If you’re a merchant, you may have to charge taxes on your sales and then report and pay those amounts to your government.

Shopify can usually handle the most frequent sales tax calculations automatically, despite the complexity of tax rules and mandates.

You may also employ tax overrides to account for unique tax rules and circumstances.

Shopify uses a variety of different default sales tax rates. If you utilize the system’s built-in rates, double-check that they’re current and correct for your particular circumstance. You have the option to modify them as needed.

But keep in mind Shopify does not collect or remit your sales taxes for you.

You must register your business with local or federal tax authorities to manage sales taxes.

You should always double-check with a local tax department or a tax accountant to ensure that you charge your clients the proper sales taxes and submit and remit the amounts accurately.

If you frequently deliver products to customers in a particular state, you may have tax liability due to the economic connection.

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Which states does my Shopify store charge sales tax in

Every state has its rules about whether you must collect Shopify sales tax in that state.

To begin, figure out if you need to charge sales tax in the state where your business is based.

However, you must first check to see whether your state requires sellers to collect sales tax.

As your online business expands, you must begin collecting and remitting sales tax in additional states.

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Calculate your nexus states.

You must register, collect, and remit Shopify sales tax in any state with a “physical presence” (staff, warehouses, etc.).

After that, when your revenue in a given state reaches $100K or $200K in transactions, you should search for that state’s economic nexus legislation (here are the economic nexus laws by state).

Shopify sellers give up the “physical connection” to “gain an economic connection.” Nexus criteria have changed to account for the kinds of activities involved with eCommerce.

To discover your nexus states, make a list of any jurisdictions where you have one or more of the following:

  • Customers (and any others at this stage)
  • Your inventory (including F.B.A. if you use it for your Shopify purchases)
  • Affiliates
  • If you have a physical storefront or company address, fill it in.

You’re ready to review each state’s requirements once you’ve compiled a list.

You must collect and pay sales tax if you have Nexus in those states and fulfil these requirements.

The great news is that some jurisdictions do not charge your purchasers any sales tax; if they do, it is only minimal and targeted to specific locations.

Because of their initials, these states are known as the N.O.M.A.D. states, which include New Hampshire, Oregon, Montana, Alaska, and Delaware.

Regardless of whether you’re based in the United States, Physical Nexus exists if you sell items to customers in other states.

Several variables influence the Shopify sales tax that you should charge:

  • The destination from which your goods are sent
  • The address to which your product is delivered
  • Where you’ll be able to pay your taxes.
  • Taxability of goods
  • Buyer exemptions

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Sales tax laws by state

We’ve included which states have marketplace facilitator laws just in case you want to sell outside of California, as well as Shopify.

Another juicy nugget to consider is that states do not all have the same rate. That would be too simple!

States have tax rates, which you must calculate with the state’s overall rate.

You may average the numbers and pay minimal money at the end of the year to make things easier.

The table corresponds to everything we’ve said here:

Sales tax laws by state
Sales tax laws by state 1
Sales tax laws by state 2
Sales tax laws by state 3
Sales tax laws by state 4
Sales tax laws by state 5
Sales tax laws by state 6
Sales tax laws by state 7
Sales tax laws by state 8
Sales tax laws by state 9

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What you must do according to your nexus states

You must first acquire a license to lawfully collect and remit Shopify sales tax.

There’s one more ingredient to add to your sales tax meal that we haven’t yet discussed. And that is the sales tax rate you pay, which belongs to someone else.

If you’re in a destination-based state, such as Alabama, the rate you pay is not the same as that produced by residents of that state.

Several states consider themselves either origin or final-destination centred. You must verify whether a condition is origin or destination based if you have Nexus with it.

If it’s based on where you’re from: You must pay the sales tax rate in your state corresponding as a vendor.

For example, You’re located in Arkansas, and a buyer from Arizona has placed an order with you. Because you have a connection to Arizona, you must charge that customer sales tax. 

The sales tax rate in Arizona is based on where you live and the product’s origin.

So, to calculate your sales tax burden, you must deduct Arkinsas’ sales tax rate from the transaction value and send it to Arizona.

If it’s destination-focused: You must remit the state’s sales tax rate for the location relating to your buyer.

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How to Collect Sales Tax in Shopify Step-By-Step

Setting up your Shopify store to correctly collect sales tax may be more complicated than you think.

However, here are the essential procedures we recommend you take:

1) Tell Shopify where you want to have sales tax collected

First, you must tell Shopify in which jurisdictions it should collect sales tax from clients.

As previously said, you should always begin with the state in which your business is based after obtaining a sales tax permit.

Look for a link labelled “Settings” on the homepage and follow it to “Taxes.”

Shopify sales Taxes 1 Dashboard

Go to the United States and select “Set up” or “Edit” from the drop-down menu.

Shopify sales Taxes 2 Dashboard

Then, Input in any states where you need to collect sales tax owing to a physical or economic presence.

You may be required to enter your sales tax permit rather than your zip code if you use Shopify on a higher version:

Shopify Dashboard

2) Set up your sales tax shipping choices

Now that you know the basics, it’s time to ensure you charge tax on shipping costs.

Go back to “Settings” and “Taxes.” A “Tax calculations” area is at the bottom of the screen.

Select the box that reads, “Charge tax on shipping rates,” from the drop-down menu:

Shopify sales Taxes 4 Dashboard

3) Select which products should require sales tax

Shopify needs to know which items in your store you want to collect sales tax for in the states you’ve entered.

Because every state has its own set of rules, not all products are subject to sales tax.

For example, you won’t be charged a sales tax on gift cards. Some states have stricter regulations (not great). New York has specific clothing and shoes that are taxed and must have a price tag.

For taxable items, go to “Products” and “All products.” You’ll need to modify each variant of the products you want to charge tax on:

Shopify Dashboard 2

Select the box “Charge tax on this variant” when you go to change each variant:

Shopify sales Taxes 5 Dashboard

4) Add your warehouse locations

You’re now ready to add your warehouse locations that are processing orders:

Shopify  Dashboard 3

This procedure allows Shopify to determine the correct rates.

Sales tax may differ if a product is moved from a warehouse to a customer in the same state as the warehouse than if it were taken to another state.

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5) Add tax-exempt buyer information

Eventually, you may only be required to collect sales tax for a subset of your clients (The most frequent exempt client is a reseller who purchases goods through your Shopify store and then resells them).

For example, non-profits are tax-exempt organizations. These are likely repeat purchases; you don’t need to charge sales tax.

To deal with these customers, you’ll need a tax-exemption certificate from them before not charging sales tax.

To identify these clients as tax-free in your Shopify store, go to “Customers” and select “Tax Settings”:

Shopify Dashboard 4

Delete the “Collect tax” checkbox and enter a reason:

Shopify sales Taxes 7 Dashboard

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What Should You Do if you are Overwhelmed? (Which is not your fault)

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F.A.Q.

Is Shopify required to charge sales tax?

Shopify is not required to collect and remit sales tax on behalf of its merchants.

As a result, Shopify isn’t covered by marketplace facilitator rules that force companies like as Amazon or Ebay to collect and remit sales tax for their sellers. As a consequence, the Shopify seller is responsible for paying state taxes.

Is it true that I can charge sales tax to customers from other states?

If you’re in the state with nexus and wish to charge sales tax, you must do so based on the buyer’s final destination.

If you’re a non-resident seller, only the state rate is relevant.

Is Shopify required to report sales tax to the IRS?

To be precise, Shopify doesn’t collect or remit your sales taxes for you. When it’s time to file and pay your taxes, the tables and reports provided by Shopify should help make things easier.

How do I add sales tax to my Shopify store?

– From the Shopify admin, go to “Taxes” in “Settings”.

– Click Set up next to your region in the Tax regions section.

– Click Collect Sales Tax in the Taxes section.

– Enter your tax number in Tax number.

– Click “Collect tax”.

Click collect sales tax to add more sales tax jurisdictions and account numbers.

How can I avoid having to pay taxes on Shopify?

– From your Shopify admin, go to “Customers”.

– Exclude a specific customer from all taxes by finding them and clicking their name.

– Tax Settings -> Click Manage in the Tax settings section.

– Uncheck “Collect tax”.

– Save your settings.

Is Shopify currently reporting sales to individual states?

Shopify determines your sales tax responsibility based on transactions that take place through the Shopify platform.

Do you have to disclose Shopify earnings?

The IRS requires Shopify to file a 1099-K form for each merchant that handles more than $20,000 in transactions during the year and has more than 200 transactions or fewer if they’re in Massachusetts or Vermont states.

Is it necessary to have a sales tax permit in order to sell online?

Whether your online business sells items that are taxable, most states demand a seller’s permit, Whether you have a physical location or just operate online, you’ll need one.

You’ll have to pay sales tax, which is what a seller’s permit allows you on Shopify.

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