If you're an e-commerce merchant, you're likely aware of how complex managing sales tax compliance can be.
The more your business grows, the more understanding and adhering to tax regulations becomes crucial to avoid penalties and keep your operations running smoothly.
The good news is, you don't have to navigate this alone. We've created this guide to walk you through every step of managing US sales tax.
Whether you're new to Shopify or looking to optimize your current tax setup, this guide will equip you with the knowledge and tools you need to stay compliant.
TL;DR about Shopify Sales tax in US
Understand sales tax basics - it's a consumption tax that varies by state that you must collect from the customer and remit to the government.
Determine your nexus - the economic or physical presence in a state dictates whether you need to collect sales tax there.
Register for sales tax permits in states where you have nexus.
Set up sales tax collection in Shopify.
Consider using filing services to file tax returns.
Regularly monitor your sales tax obligations and thresholds to stay compliant.
Save copies of tax filings and payments to avoid penalties.
1. Understand Sales Taxes
What is Sales Tax?
Sales tax is a consumption tax paid to the government on the sales of goods and services.
As a merchant, you have to collect sales tax and remit to the government regularly, while the end customer pays it at the point of sale.
Sales tax varies by country and by state in the US for example.
How to calculate Sales Tax?
You can calculate Sales tax by multiplying the price paid when selling an item against the tax rate (e.g., $75 x 5% = $3.75).
Once you add the tax to the original price of the product, the final price including tax would be $78.75. The exact tax rate varies by state, local jurisdiction, product category, and other factors.
Should I charge sales tax?
You're only required to charge taxes if your service or product meets certain criteria for establishing a significant business presence in the state.
You can easily check if you have nexus trough Shopify's sales tax.
What is a nexus?
Nexus is the connection between a business and a state or jurisdiction that requires your business to collect and remit taxes to the government.
In simple terms, if your business has a physical or economic nexus in a state, you must charge sales tax to customers in that state.
What is a physical nexus?
The determination of physical nexus depends on the state and can be:
An office
An employee residing in or traveling to the state
A warehouse
A distribution center
A third-party affiliate
Stored inventory
Temporary physical business in a state, such as at a trade show or craft fair
What is an economic nexus?
Economic nexus stands for the threshold of sales within the sales.
All states have different considerations and it is essential to leverage professional tax advice to ensure you're collecting the right tax.
What are the tax sourcing rules?
It's important to understand tax sourcing rules for each state, especially when it comes to online business.
Most of the time, the state where your customer receives the goods governs the tax rate. However, there are two types of sourcing taxes:
Origin-based sourcing taxes the sale according to your location.
This applies when you ship goods entirely within one state. For instance, items you ship from a California warehouse to a California customer would be taxed at the rate applicable to the warehouse’s location.
Destination-based sourcing taxes the sale according to your customer location.
For example, goods sent from outside California into California would be taxed based on your customer's location.
After understanding where you have nexus, you must know if your products are taxable.
Are the products I am selling taxable?
Although most physical personal property (products) is typically subject to sales tax, certain items may be exempt or taxed at a different rate.
Depending on the state, tax-exempt items can include categories such as:
Services like legal or home renovation services
Digital products, including music, video games, or software
Food and groceries
Prescription and over-the-counter medications
The distinction between services and digital products can be tricky, as many services, such as advertising or software-as-a-service (SaaS), are now delivered digitally.
If you consider your products nontaxable, check with the local tax authorities or use the help of a tax professional.
2. Register for a Sales Tax Permit
If you meet the requirements for the types of nexus in a state, then you are obligated to register for a sales tax license in that state and begin collecting and remitting sales tax.
If you meet the requirements for the types of nexus in a state, then you are obligated to register for a sales tax license in that state and begin collecting and remitting sales tax.
Once you’ve identified where you need to register for sales tax, visit the relevant state's website and follow their registration process.
You'll likely need sensitive information such as your social security number, along with additional identification details like Federal Employer Identification Numbers (FEINs).
Be prepared to provide details about your corporate structure—whether you're operating as a sole proprietorship for a side business or as a C corporation or partnership.
It's also important to have a U.S. bank account set up to remit sales tax payments to the state for each filing period.
After you complete your registration, your state will notify you when you need to file taxes.
3. Set Up Sales Tax in Shopify
Configure US Sales Tax Rules and Rates on Shopify
The next step after registration is to enable Shopify Tax collection.
To enable Shopify Tax, go to Settings → Taxes and Duties → Choose → Tax Service → Manage and activate Shopify Tax.
You have three options for tax services: Shopify Tax, Basic Tax, or Manual Tax.
Shopify Tax, used by 90% of merchants, provides a powerful service that automatically collects sales tax at checkout with precise rates tailored to specific products and locations.
Choosing Basic or Manual Tax is related with additional steps and settings, you can further read about on Shopify's website.
Once you've set this up, Shopify will start collecting sales tax for shipments to your selected regions.
Bonus: Test if my setup is working
To ensure everything is working, test it by adding products to your cart and using a shipping address within a state where you have nexus.
The tax should be calculated accordingly.
If you change the shipping address to a state where you don’t have nexus, no tax should be applied.
Shopify Tax Pricing
Shopify Tax is available to all Shopify merchants at no cost until you reach $100,000 in revenue.
After surpassing $100,000 in U.S. sales within a calendar year, a fee of 0.35% (or 0.25% if you're using Shopify Plus) per taxable order will apply, capped at $0.99 per order and $5,000 annually.
4. Enable US Sales Tax collection in Shopify
In your Shopify admin, navigate to Settings and select Taxes and Duties.
Select USA and navigate to "Regions you're collecting in" and click on "+ Region".
Select your region and enter your tax number in the designated field.
If you’ve applied for a number but have not yet received it, you can leave this field blank and update it later once you have the number. Finally, click Collect Tax to confirm.
If needed, you can add additional regions and account numbers by selecting Collect sales tax again.
5. Configure Tax Rates in Shopify
To set up your tax rates, you'll need to categorize products in Shopify. The system will notify you if any categories lack items that are a subject to tax collection.
Properly categorizing your products based on regional sales tax laws can minimize the need for overrides.
Shopify generally handles both shipping and sales tax collection, applying tax to shipping costs when necessary and offering the option to create overrides if needed.
To do this, navigate to Products → Add Product → Select your category. If you want to categorize an existing product, just click on the product row and add a category.
** In pricing, click on "charge tax on this product"
6. Prepare sales tax reports in Shopify
When it’s time to file taxes, you need to determine how much sales tax you’ve collected from customers in each state where you have sales tax nexus.
Shopify Tax provides detailed insights into your net and taxable sales, broken down by state, country, and local jurisdictions.
It also displays the exact reporting codes and allows you to customize reports based on your needs.
If you want to expand your e-commerce business in other countries, read more about Shopify Markets.
7. File and Remit Sales Tax
Automated filing with Shopify
Shopify's automatic tax collection is a big plus, especially when you compare it to platforms like WordPress, where you'd have to be a coding pro to get it right.
While Shopify Tax ensures you collect the correct amount of tax for each order, it doesn’t automatically file sales tax returns with the respective states. Filing can be time-consuming and prone to errors.
To simplify or automate this process, you might consider using online sales tax filing services like Galvix, Avalara, or Vertex, which connect to your Shopify store.
These tools will retrieve all your orders, reconcile the sales tax collected with the correct local tax rates, and prepare and file the tax returns on your behalf.
Manual filing
To file your taxes manually online, visit your state's website. If you don’t already have an account, you’ll need to create one.
From there, navigate to the proper section and complete the required return for the most recent filing period. Most state websites will have a return ready for you to fill out for the applicable period.
When it’s time to file, an important step is remitting your sales tax to the state.
To avoid additional fees, it’s best to use a U.S. bank account for this process. While you can pay with a credit or debit card, be aware that there is often a fee of around 3% added to the total.
Be sure to save a copy of your filing and payment records for future reference.
8. Monitor new obligations in the Shopify dashboard
Shopify has a great tool that allows you to track your progress toward reaching economic nexus thresholds.
To access it, navigate to Settings -> Taxes and Duties -> Managing Tax Liability.
Shopify automatically will send you notifications when you reach 80% and 100% of any relevant threshold.
Conclusion: Mastering Shopify Sales Tax
Mastering sales tax compliance on Shopify may seem daunting at first, but with the right tools and understanding, you can efficiently manage the process.
While Shopify’s tax features and automated filing services can simplify the process, we still recommend seeking professional tax advice to ensure full compliance and avoid any potential complications.
Read more about: Shopify vs. Magento and Shopify vs. Webflow
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With a decade of of e-commerce experience, Preslav, CEO of Craftberry, produces informative content. His writing focuses on practical insights and strategies in the e - commerce, aimed at helping professionals and businesses in the industry.
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