Collecting sales tax as a Shopify merchant – A how-to guide for sellers based in the US and Canada
Sales tax is a fact of life for all e-commerce sellers. If you’re not currently collecting it, you’re probably not meeting your tax obligations. Every product sold in the US and Canada – whether you’re a local or foreign seller – is 9 times out of 10 subject to sales tax. But the real question, and where things get a little tricky to keep track of – is how much?
In the US, each state has its own state or local tax rate – some have both. In Canada, you pay a federal level tax called GST, then depending on which province a sale has been made in, you’ll also pay varying levels of local tax.
It’s a lot to get your head around – even the experts who have been working with sales tax for 20 years joke they’ve still yet to master it. As a Shopify merchant based in the US or Canada, you have it a little easier than the rest of the world because Shopify will collect this tax for you.
By following the steps in this guide, you can get on top of your tax liabilities (if you have any) and confidently move your business forward – knowing your sales tax is well accounted for.
The basics of sales tax
Sales tax is enough to scare away even the toughest kid on the block, but it’s important to take an interest in it. Even if you work with an e-commerce accountant, understanding the process is a fundamental part of selling online.
While sales tax isn’t the only tax you need to worry about, it’s the tax that comes with the most complexities.
Nexus in the US
In the US, each state has its own state and/or local tax. In the past, e-commerce sellers only needed a physical presence in a state – like a store or employees – to create nexus. It was this physical nexus that indicated you were liable for sales tax in the US – meaning most Shopify sellers didn’t have to worry about it.
Fast-forward only a few years and states now have the right to collect sales tax on remote sales (that meet a state threshold) without a physical presence – otherwise known as economic nexus.
What does this mean? All Shopify sellers are now liable for sales tax.
GST and more in Canada
In Canada, you have 10 provinces and three territories, all of which pay the federal-level VAT tax called goods and services tax (GST) of 5%. You pay this at every step of the supply chain. So long as your revenue in Canadian dollars is less than $1.5 million, you’ll file this return annually.
Then you have local-level taxes for the 10 provinces only, which differ between provinces and come into effect once you’re registered for GST.
Canada’s version of nexus – ‘carrying on business’ – is not determined by physical presence, but rather a list of 13 defining factors. It’s good news for Shopify sellers, though a typical e-commerce store not selling on Shopify probably won’t have nexus in Canada, unless you decide to use a Canadian warehouse or distribution company.
What are you selling?
The type of products you sell on Shopify also affects whether you should be collecting sales tax. As a general rule, tangible personal property is taxable, services are not – but US and Canada – as well as each state or province – may have their own way of doing things. The best thing to do is check with a state’s tax authority.
Leading US/Canada sales tax expert Michael Fleming of Sales Tax and More explains that these changes are the reason why so many Shopify sellers are being chased for back-dated sales tax – and therefore why it’s important to stay on top of things.
“All of a sudden, a lot of e-commerce sellers have this linker connection (nexus) where they may have never had it before,” Michael says.
“When it comes to selling through Shopify, the states over the next two years will be getting very aggressive, beefing up what we call their discovery units. These units are looking for sellers they think should be paying sales tax but are not,” he says.
Collecting sales tax on Shopify
(US/Canada merchants only)
The first step is to register with each state or province you need to collect sales tax in because it’s illegal to collect sales tax without a permit. If you’ve asked an e-commerce sales tax professional to help you with this, make sure it’s someone who understands how to register your business, Michael says.
Once registered, you’ll be assigned a sales tax filing frequency and due dates. This may be monthly, quarterly or annually – depending on your sales volume. Remember, registering for sales tax in each state may mean you end up with numerous sales tax frequencies and due dates you’ll need to stay on top of.
Michael advises considering this before registering: “I think we need to look at the materiality when deciding whether it makes sense to register for tax. What the states say doesn’t always make good business sense.
“If you’re trying to be compliant, you may end up paying more to register and for the compliance than you would if it was back tax – including any penalties and interest.”
Where and how to start collecting
Now that you’re registered, you need to ensure you’re collecting sales tax from your customers. As mentioned earlier, it’s good news for Shopify merchants based in the US or Canada, because the platform does a lot of the work for you. However, Shopify uses many default sales tax rates, and as these are updated regularly, it pays to confirm they are correct for your circumstances. You can override them wherever necessary.
Getting set up
Follow these steps to check your sales tax rates are set up correctly in your Shopify Admin:
- Set up the countries you will be shipping to.
- From your Shopify admin, go to Settings > Taxes.
- Click the tax region, set
the tax rate, then click save.
- If you’re in the United States, then choose automatic tax settings or manually specify the rates for state, county, and municipal taxes, including shipping taxes.
- If you’re in Canada and need to charge tax, then enter your tax registrations.
- If you sell digital products, then set up the taxes that apply to these items.
Optional: you can override tax rates or exempt products from taxes where necessary, and you can choose to display your prices with taxes included.
Filing your return
While Shopify collects the sales tax for you, it does not file or remit your taxes for you. Shopify can provide reports that make it easier to file your return, but this is solely your responsibility. You can file:
- Online via each state’s tax authority website – where you can pay through the state’s payment gateway.
- Automatically via sales tax software – some are more accurate than others.
This is where A2X for Shopify comes in handy. Michael says A2X’s value is being able to tell you – quickly and accurately – what your Shopify sales are for each state.
“A2X makes it easy to get out of Amazon and Shopify the information you may need for a plethora of reasons, and quickly import it into QuickBooks or Xero. Using a tool like A2X gives you more confidence that you’re actually getting all the information you need.”
If in doubt, ask for help
Now that you know a little bit more about your sales tax obligations in the US and Canada, and how to check Shopify is collecting the right amount of tax on your behalf, you can work on getting on top of your tax liabilities quickly and accurately.
If you’re looking for more help, it’s always a good idea to check with the relevant tax authorities – or a specialist e-commerce accountant – that you’re charging your customers the correct rates, and to make sure you file and remit the taxes correctly.
If you sell on both Shopify and Amazon, you still need to report your marketplace sales when filing your return for your Shopify sales – just make sure you don’t pay double tax.