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Does Shopify collect sales tax? (Full guide)

Does Shopify collect sales tax? (Full guide)

In the past, most Shopify sellers could comfortably get away with not paying taxes to their respective governing bodies. 

This has changed in recent years. Government tax agencies have caught up with regulations for e-commerce platforms and sellers, and the same happened with Shopify. Unfortunately, it’s made the taxation process a little murky for laymen. 

Today, we’ll cover everything you need to know about tax and Shopify: Does Shopify collect sales tax? Do they file tax returns for merchants? How does a merchant find the tax on Shopify? We’ll answer this and more in this complete guide on Shopify taxation. 

What is sales tax?

does shopify collect and remit sales tax

Sales tax is collected predominantly in the United States and Canada and refers to the tax collected by the seller at the final stage of the supply chain. 

Unlike VAT (Value Added Tax), which collects tax at every stage of the supply chain, the tax revenue jurisdictions do not receive tax until the final sale to the consumer is finalized. Hence the name, sales tax.

Sales tax is triggered by nexus. Before 2018, nexus referred to the physical place your business was operating from. Wherever you were physically in the country, you were then required to pay tax according to that region’s tax laws. 

After 2018, the laws were changed to encompass the online realm of e-commerce as well. Now, merchants who sell in a state beyond a certain nexus threshold will need to pay tax to the state, even if they are not physically in the state. 

In short, if you are making a certain amount of money from sales in a state, you will need to pay sales tax according to the state’s regulations. 

How does Shopify handle sales tax?

Shopify does not automatically collect tax for you. Unlike platforms like Amazon and eBay, it is not a marketplace facilitator and is not required to collect taxes for you. 

That doesn’t mean Shopify will leave you struggling with sales tax on your own. In response to the 2018 tax regulation changes and merchants struggling with the new swing of things, Shopify introduced Shopify Tax and other platform tax calculators.  

These calculators handle default tax calculations and are regularly updated. Still, merchants are encouraged to do regular checkups to ensure the collected amounts match up with tax regulations and store circumstances. 

should i charge tax on shopify

Many other factors determine sales tax, which you – the merchant – will need to take care of yourself. We’ll cover every part of the process in the tutorial below. 

If you are a bigger store or make more sales than you can comfortably keep track of, enlisting the help of an accountant might be pertinent. This way you can stay on the right side of the law.  

Does Shopify file tax returns?

Shopify will not file your taxes or remit them for you. You will need to do that yourself. As mentioned above, Shopify will only help you calculate and charge tax to orders. 

You will need to register with a local authority and handle the filing process yourself. 

How to collect sales tax on Shopify

We know the tax process can be daunting. But we’ll help you through the hardest part by demystifying the process and explaining the key points you need to prepare and apply for.  

Step 1: Determine where you trigger nexus 

As discussed above, 2018 introduced new laws on online stores and where they are considered an economic presence. Before, a physical presence in a state made you a taxable business but now, having an online presence in a state will also make you a taxable business. 

For you to effectively collect and pay taxes, you will first need to determine in which states you trigger nexus. To have nexus in a state, you need to meet the state’s nexus requirements. 

does shopify pay sales tax

There are two types of nexus you need to be aware of: 

Physical nexus

Physical nexus refers to having a physical presence in a state. This means your store or an offshoot of your store is physically present in the state or county. 

This can include but is not limited to: 

  • An office in the state 
  • An employee in the state
  • A center or warehouse in the state
  • An affiliate in the state
  • A product storage unit in the state

Economic nexus

Economic nexus refers to entities that do not physically reside in the state but make enough sales in the state to be considered an economic presence. What constitutes an economic nexus differs from state to state. 
States will determine if you have economic nexus in two ways:

  • Sales threshold: If you surpass the state’s sales threshold in a given period, you are considered an economic nexus in the state. 
  • Transactions threshold: If you have met the state’s units sold threshold in a given period, you are considered an economic nexus in the state. 

For example, Arkansas has a nexus threshold of $100,000 in sales and 200 transactions. If you reached or exceeded this amount in Arkansas, you are considered an economic nexus and are required to pay taxes to the state of Arkansas. 

Many free online resources offer free state economic nexus guides. Determine where you are considered a physical and economic nexus and keep track of the data for the next steps. 

does shopify remit sales tax

Step 2: Determine tax sourcing rules

When you are selling to a different state, it can be confusing who you owe taxes to. Is it your state, or the shipping state, or do you owe taxes to both? Tax sourcing rules help figure this out. 

There are three types of tax sourcing: 

  • Destination sourcing: Taxes are owed to the destination state, where the product or service was delivered. Luckily, most sales tax is destination sourcing. 
  • Origin sourcing: Taxes are owed to where you, the Shopify merchant, work from. This also usually applies to products that were in the state already and then shipped to the recipient in the same state. 
  • Mixed sourcing: This is when transactions can be either origin or destination sourcing.

To be tax compliant, you will need to determine which states require which sourcing taxes. 

Step 3: Register with local tax authorities

After you have established which states you have a physical or economic nexus in, you need to register with the local tax authorities. It’s illegal to collect sales tax without a permit in most states.  

The process is relatively easy. All you need to do is contact the relevant states and kickstart the permit application process. You can do this by calling the local Department of Revenue or searching online for the state’s permit application. 

Most states issue the permit for free; if they do charge a fee, it’s not going to be more than $100 and that’s on the high end. 

Once you have applied and are registered with the state, you will be issued a sales permit. They will coach you on when to pay taxes – monthly, quarterly, or annually – and give you the tax year due dates. 

It’s important to make sure you get this permit. The tax collected from sales is used for local upkeep and states are generally strict about businesses that have nexus in their state. 

Step 4: Collect sales tax from customers

do i need to charge sales tax on shopify

After determining where you have nexus and registering in the required states, it’s time to set up the Shopify tax checkout calculators. 

Like Shopify’s electronic gift cards, it’s easy to set up and does all the work for you at checkout. Shopify also regularly updates the tax duties calculators for fast and accurate results. 

Step 1: Log in to Shopify

Log in to Shopify with your unique login details to access your Shopify Merchant Dashboard. Here you can make backend changes like setting up sales tax and changing Shopify themes

Step 2: Set up your tax-registered regions

  • From the Shopify Merchant Dashboard, go to the left-hand sidebar and click on the Settings option. 
  • On the new menu, choose the Taxes & duties option. 
  • In the next section, go to the Manage sales tax collection and click on the United States option.
  • In the section labeled Region you are collecting in, click on the Collect sales tax option. 
  • Next, select the state or county you are registered in, and where you want to collect taxes from. 
  • In the Sales Tax ID bar, add the sales tax ID you received from the state. If you don’t have one yet, you can leave the section blank and update it once you receive the ID. 
  • If the state charges different taxes on shipping, click on the Advanced options button. 
  • Next, under Shipping tax, check or uncheck where you want to charge shipping tax. 
  • Click on the Collect sales tax button. 
  • Repeat the process by clicking Collect sale tax and adding more of your registered states. 

Step 5: Determine which products are taxable

Next, you will need to determine which of your products are taxable. The line on what is considered a product or service is blurred and will, once again, be different according to state. Some products or services might be taxed differently or be completely tax-exempt. 

do i have to charge tax on shopify

The most common non-taxable products include: 

  • Food products
  • Home renovation services
  • Legal services
  • Prescription drugs
  • Non-Prescription drugs
  • Some digital services (graphic design, software, etc.)
  • Digital products (games, music, etc.)

When you know which products are taxable, you’ll be able to change your Shopify tax setting accordingly. 

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If you suspect a product you sell is tax-exempt, check the state regulations and change it with the following method:

Step 1: Log in to Shopify

Log in to Shopify with your unique login details. 

Step 2: Make the product tax exempt

  • On the Shopify Merchant dashboard, navigate to the menu on the left of the page and choose the Products option. Here you can create Shopify discount codes and enable Shopify gift wrapping
  • Under the Products menu, go to the product you would like to make tax-exempt. Click on the product. 
  • On the product Pricing section, scroll until you find the option labeled Charge taxes on this product. Uncheck the box next to this label.
  • Next, click Save

The product will now be exempt from any sales tax. 

Step 3: (Optional) Create a collection for a tax override

do i need to charge tax on shopify

You can also create a collection tax override if you have products or services that are taxed at a different rate. This is especially useful if you have a product that is taxed differently in one state but doesn’t fall under the Shopify product tax categories. 

 First, you will need to create a collection on Shopify. 

  • From the Shopify Merchant Dashboard, go to the left-hand menu and go to Products
  • Under the Products tab, click on the Collections option. 
  • Next, click on the Create collection option. 
  • Choose the Manual collection option under collection type. Tax override collections always need to be manual. 
  • Add the products you want to override to the collection. 
  • Click Save collection

Step 4: (Optional) Override the collection

  • On the Shopify Merchant Dashboard, go to the left menu and click on Settings
  • Go to Taxes & duties. 
  • Under the Manage sales tax collection section, click on the United States
  • Under the Tax rates & exemptions section, choose the Add product override option. 
  • Select the collection you created and want to be exempt from taxes. 
  • Next, choose the regions where the tax override applies and what the new tax rate for the collection is. 
  • Click on the Save button. 

Step 6: Determine how much sales tax you owe

do i need to charge taxes on shopify

After you have determined where you have nexus, how to collect taxes, and how to exempt certain product taxes, you will finally have to pay sales tax. It’s important to pay on time. Some states even reward businesses that pay ahead with tax discounts. 
Unfortunately, this is where the tax process becomes harder, and many throw in the towel. 

If you have a Shopify Professional or Unlimited plan, you can use Shopify Reports. They provide merchants with a custom tax report that shows a breakdown of the collected sales tax. 

Unfortunately, it gets a little more difficult if you don’t have these Shopify plans. And, as before, the difficulties vary from state to state. 
Some states will only want to know about the total collected sales tax and won’t be worried about much else. Other states will complicate the process. They will want to know exactly where the sales were made with a breakdown that includes the state, county, and city of sale. 

To accurately file taxes and stay tax compliant, you need to keep track of your sales and the states these sales were made in. You can do this with the Shopify Tax app (the basic plan is free) or use normal data collection methods like spreadsheets.

To simplify this process, we suggest tracking sales as they happen or enlisting the help of an accountant or a Shopify app or extension. 

Step 7: File your tax returns

does shopify automatically collect sales tax

Do you remember all the authorities you registered with in step 2? Now is the time to pay all those authorities the sales tax you have collected. 

Luckily, the tax filing process is a lot easier with the internet. Most states don’t allow in-person or tax return postage anymore and require it all done online. 

To file online, all you need to do is search the state and “tax returns.” It will take you to an online IRS portal where you can easily file your tax return. Do this with every one of the states you registered and collected sales tax for. 

Even if you did not meet the tax threshold for a state, you still need to file a tax return. These “zero returns” are a way for tax authorities to check on your business and to ensure you are still running. 

Step 8: Check for any tax updates

The Shopify sales tax calculator will determine the state and county sales tax according to the consumer’s shipping address. Even if you add free shipping to your Shopify store or remove the checkout shipping calculator, the sales tax calculations will still work.

While the Shopify tax calculators are regularly updated, you should keep track of state and county tax changes. Set notifications on your web browser about state tax changes. Join tax regulation mailing lists to stay up-to-date on sales tax. 

You need to collect the right amount of sales tax. But you can’t solely rely on default calculators. Shopify’s calculators, while brilliant, need time to update and won’t always account for regional changes.  

Use the local regulations, the above tax settings, and the Shopify tax calculators to ensure you are charging the correct sales tax. 

Does Shopify collect sales tax? (FAQs)

does shopify calculate sales tax

Does Shopify report sales to the IRS? 

Yes, Shopify reports sales to the IRS. While the platform doesn’t file or remit taxes on your behalf, it is required to report on the majority of the transactions made on the platform. 

Shopify reports the transactions annually on a 1099-K tax form. Usually, Shopify merchants that have made more than $600 are given a similar form. This form helps establish how much income the merchant made that year. 

Who can use Shopify tax? 

All Shopify merchants can use Shopify Tax. You can use Shopify Tax to help manage US tax no matter what Shopify plan you use. The feature is also available for people that sell to the United States. 

Why is Shopify not calculating taxes? 

If Shopify is not collecting taxes, the store was not set up to collect taxes. If your store is not collecting sales tax, step 4 of the above tutorial should resolve the issue. 

Conclusion

Sales tax is notoriously hard. Luckily, you aren’t struggling alone. With this guide and the help of Shopify’s smart tax calculators, you’ll be able to collect, file, and pay taxes on time and accurately. 
To make your Shopify store run even smoother and celebrate conquering the taxation process, submit a task with a Shopify developer. We’ll create custom features that elevate your store, improve user experience, and grow your business. 

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