How-To Guide: Collecting Shopify Sales Tax
Estimated reading time: 7 minutes.
Sales tax is a fact of life for all ecommerce 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 not), will likely be liable for sales tax.
The real question is not whether you should be paying, but how much. And this is where things get tricky.
Excluding the N.O.M.A.D. states, every US state has a tax rate, and some additional jurisdictions with their own applicable rates too.
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.
In this guide, we will explore:
The basics of sales tax
- Economic nexus
- GST in Canada
- Types of products and sales tax liability
Collecting sales tax on Shopify (for US/Canada sellers only)
- Getting registered
- Where and how to start collecting
- Getting set up
- Filing your returns
Expert help for Shopify sellers
Nailing your taxes with A2X
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 ecommerce 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.
In the US, each state has its own state and/or local tax. In the past, ecommerce 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. More on the back story here.
GST 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) which is 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 ecommerce store not selling on Shopify probably won’t have nexus in Canada, unless you decide to use a Canadian warehouse or distribution company.
Types of Products
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 the 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. 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."
- Michael Fleming.
Collecting Sales Tax on Shopify
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.
Michael advises that if you are looking for help from an ecommerce sales tax professional, to make sure it’s someone who understands how to register your business.
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. 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.”
Expert Help & A2X for Shopify
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 ecommerce accountant, that you’re charging your customers the correct rates, and to make sure you file and remit the taxes correctly.
Without integrating A2X with your Shopify account and accounting software, you will need to figure out how much sales tax you have collected manually and whether you meet the thresholds. By adding A2X into the mix, your bookkeeping across the board becomes more streamlined, dynamic and accurate.
Also on the blog:
Learn how to manage your sales tax obligations like a pro
Sales tax is complex and the costs for getting it wrong can be significant. Discover the key terminology, compliance strategies as you grow, and how to set your business up for success.Download our free guide
Ecommerce accounting is challenging, A2X makes it easy.
Discover how A2X can automatically take all of your accounting pain away.
Before you leave...
Are you looking to take control of your Shopify accounting, to ensure that your business is running like a well-oiled machine?
Download our free guide