The Ultimate Shopify Sales Tax Guide [Full Resource]
Estimated reading time: 13 minutes 30 seconds.
In the mid-1990s at the dawn of ecommerce, online sales weren’t worth enough to garner the attention of tax authorities.
Sales tax was something paid by businesses with a fixed, physical address, and back then, most had that. This isn’t the case today.
Since Shopify’s inception in 2004, US ecommerce sales revenue has skyrocketed from $75 billion to $787.9 billion in 2020. In the last decade alone, the industry has multiplied itself almost five times over.
So how about that old bricks-and-mortar rule for sales tax? Well, governments were missing out big time on a revenue stream that seemed like it was on steroids. Not only that, but physical stores and businesses were suddenly at a significant disadvantage.
Commerce had a digital makeover and it was the IRS’ turn to catch up - so they did, in 2018.
Gone are the days that ecommerce sellers can turn a blind eye to their sales tax obligations. The laws have changed, and so must you.
Sales tax for Shopify sellers today must be a top priority - as is the case for an eBay seller, Amazon, Walmart, Etsy or any other. The biggest difference for Shopify is that it’s not a marketplace facilitator. So unlike some of the other platforms, it won’t do it for you.
But don’t worry, we’ll cover everything you need to know here as well as your next steps so that you can set off on your sales tax journey with a light at the end of the tunnel.
In this guide to Shopify and sales tax:
- An introduction to sales tax
- What is it?
- Why do ecommerce sellers need to pay it?
- Does Shopify help to collect it?
- Shopify sales tax in the US
- Finding your nexus states
- Sales tax by state
- What your nexus states need you to do
- How to collect and manage your Shopify taxes
- Shopify taxes FAQs
- Establishing a Shopify sales tax strategy
- Smashing Shopify sales tax with A2X
It might be worth either bookmarking this page or grabbing a pen and paper. Let’s go.
*Please note: The below information was correct at the time of writing. However, sales tax is still relatively new for ecommerce and changing, so please refer to the official state pages for the most up-to-date advice - or better yet, a specialist ecommerce accountant. Need to find one? Choose from our directory of trusted partners here.*
An Introduction to Sales Tax
Once upon a time, in the United States of America’s early days, tax wasn’t really a thing. At least, not direct tax (like income tax) - in fact, it was taxes that led America to rebel against the British in 1773.
Blame it on the Sixteenth Amendment. This enabled governments to begin collecting income tax which today, is the government’s largest revenue stream. Back in the 1940s though, it was retail sales tax that the government relied on, following its inception to recover from the Great Depression.
Since the 1970s, the list of things eligible for sales tax (the sales tax base), has been steadily decreasing whilst the rates charged have increased to fill the gap.
As the internet entered people’s homes and businesses began selling online, the nature of trade and consumption shifted. Commerce wasn’t confined to the streets anymore, and the states wanted to do something about it.
Why ecommerce sellers need to pay sales tax
In 1992, North Dakota filed a lawsuit against an office equipment company called Quill.
Quill’s sales revenue was significant at around $2 million per year, but none of its employees lived in North Dakota, and any belongings it stored there were deemed by the court as “insignificant” or “non-existent”.
North Dakota argued that because it had amended its definition of “retailer” back in 1987 to include companies like Quill, it should be able to impose a use tax on the company. The courts refused to allow the state to set its own definition, and ruled that only businesses with physical presence in a state could be considered to have economic nexus and therefore collect and remit sales tax.
This ruling came before even eBay and Amazon, the original ecommerce platforms, were operating. In 2018, a new decision was made, one that overturned this standard and changed the rules for online sellers for good.
That year, South Dakota took Wayfair Inc. to court. It was argued that the state was losing around $48-58 million every year because of the standard set by the Quill ruling 26 years earlier.
South Dakota set out a proposal to require that online sellers collect and remit sales tax as if they lived in the state, if they met certain criteria:
- They sold more than $100,000 worth of goods in one year into the state, or
- They engaged in 200+ transactions with customers living in the state.
With that compromise in place to protect smaller sellers, the courts agreed, and in the historic “Wayfair decision” the goal posts were officially moved.
Today, sellers can have economic nexus and be required to collect and remit sales tax without living in a state. There are criteria like the above which apply, but these vary by state, and the rates payable are also different.
So that’s what we’ll explore in this guide: Who to pay, how much, and the process.
Does Shopify collect sales tax for you?
Shopify will not collect sales tax for you. It is not a marketplace facilitator, and as such, is not obliged to manage collection and remittance of sales tax for you.
Examples of marketplace facilitators include Amazon, eBay and Walmart. Sellers use the same shop-front to compete for buyers and these sites facilitate those trades.
Some states now require by law that these sites collect and remit sales tax on behalf of their sellers, removing that obligation from individuals.
This came partly due to the introduction of Amazon’s enormous own-branded product range which was being sold untaxed, and partly to help police the sales tax collection. It’s far easier for states to hold a few sites accountable than millions of sellers.
If you are an Amazon seller in a state with marketplace facilitator laws, sales tax is added onto any eligible shopping carts automatically, collected by Amazon and remitted for you. You never see that money and don’t have to worry about it.
Shopify however, is not a marketplace facilitator.
As you rule the roost of your store and have the extra freedoms associated with that, you also have the added pleasure of full tax collection responsibility. Shopify is not legally required to help you, so this guide is exactly what you need to understand your obligations and how to meet them.
Shopify Sales Tax by US State
So, where do you start?
As we mentioned above, every state has its own rules and regulations about sales tax thresholds and rates, so your first step is to figure out which states are relevant to you.
Figuring out your nexus states
Ecommerce sellers trade “physical nexus” for “economic nexus”. Today, nexus thresholds take into account the types of activities relevant to ecommerce.
To figure out your nexus states, list out any states where you have the following:
- Customers (any at this stage, thresholds come next)
- Warehouses or stored inventory (including FBA if you use it for your Shopify orders)
- A physical storefront or business address (if applicable)
- Dropshipping partners
Once you have your list of states, you’re ready to check each for its thresholds. If you meet these, then you have nexus there and need to collect and remit sales tax.
Great news! Some states don’t charge your buyers any sales tax - or if they do, it’s low and related to specific jurisdictions. These are referred to as the N.O.M.A.D states because of their initials and include: New Hampshire, Oregon, Montana, Alaska and Delaware.
Let’s take a look at each of the states in more detail and how they compare.
Sales tax requirements by state
In this table, you will see all the threshold and rate information you need to know for each state.
We have included which states have marketplace facilitator laws just in case you do sell elsewhere as well as Shopify, and an “average sales tax rate” too.
Another layer of juicy detail to note is that states don’t just have one rate. Oh no, that would be too easy!
States have jurisdictions within them that have their own tax rates which you calculate along with the rate of the state. To make things easier, you can go by the average and pay the negligible difference at the end of the financial year. This is what we have listed in the table.
Please always check the official websites for the most up-to-date information. Links to them can all be found below.
|State||Marketplace Facilitator Laws?||Tax Basis for Home Sellers||Tax Basis for Remote Sellers||Nexus Threshold in $/per Annum*||Link to Official Site||Average Combined Tax||No. of Jurisdictions||Shipping & Handling Tax||Register for Tax Permit|
|District of Columbia (DC)||✅||Destination||Destination||$100,000+||DC||6.00%||1||✅||Here|
|Kansas (KS)||Destination||Destination||(All sellers)||KS||8.05%||594||✅||Here|
|New Hampshire (NH)||Destination||Destination||$50,000+||NH||0.00%||0||Here|
|New Jersey (NJ)||✅||Destination||Destination||$100,000+||NJ||6.63%||2||✅||Here|
|New Mexico (NM)||✅||Origin||Origin||$100,000+||NM||Calculate||145||✅||Here|
|New York (NY)||✅||Destination||Destination||$500,000+||NY||8.19%||78||✅||Here|
|North Carolina (NC)||✅||Destination||Destination||$100,000+||NC||6.90%||106||✅||Here|
|North Dakota (ND)||✅||Destination||Destination||$100,000+||ND||5.51%||154||✅||Here|
|Oregon (OR)||Destination||Destination||(All sellers)||OR||0.00%||0||Here|
|Rhode Island (RI)||✅||Destination||Destination||$100,000+||RI||7.00%||1||✅||Here|
|South Carolina (SC)||✅||Destination||Destination||$100,000+||SC||7.36%||46||✅||Here|
|South Dakota (SD)||✅||Destination||Destination||$100,000+||SD||5.60%||258||✅||Here|
|West Virginia (WV)||✅||Destination||Destination||$100,000+||WV||6.10%||62||✅||Here|
*Revenue threshold is not the only criteria for nexus in some states. For example, some have a threshold of $100,000/year OR 200 transactions - whichever comes first. See the authority websites for more details.
What your nexus states need you to do
Cool, so you should know now which states with which you likely qualify for nexus. What’s next?
In order to collect and remit sales tax legally, you need to register for a permit. The links in our table above will take you to the official state pages to do this, so for each nexus state, register for your permit.
Now there is one more ingredient to spice up your sales tax soup that we haven’t mentioned yet. And that’s to do with whose sales tax rate you pay.
You see, if you have nexus with Alabama for example, it’s not Alabama’s sales tax rate that you pay because it is a destination-based state.
Let us explain.
Each state classes itself as either origin or destination-based. If you have nexus with a state, you need to check whether it is origin or destination-based.
- If it is origin-based: You need to pay that state the sales tax rate of the location relevant to YOU as the seller.
Example: You live in Arkansas and you have an order come through from a buyer in Arizona. You have nexus with Arizona so you need to charge that buyer sales tax.
Arizona is an origin-based state which means that the sales tax rate to be applied is based on YOUR location, the origin of the product.
So you need to apply Arkinsas’ sales tax rate to that transaction and remit it to Arizona.
- If it is destination-based: You need to pay that state the sales tax rate of the location relevant to your BUYER.
Example: You live in California and you have an order come through from a buyer in Colorado. You have nexus with Colorado so you need to apply sales tax to that order.
Colorado is a destination-based state, which means the sales tax rate to be applied to that order is based on the BUYER’S location, the destination of the product.
So you need to apply Colorado’s sales tax rate to that transaction and remit it to Colorado - your location is irrelevant.
The rate you pay may also be affected by whether you are based in the same state as your buyers. If you sell to buyers in other states to where you are, you’re a “remote” seller, so just make extra sure you have the right rules for each sale.
It should be evident from the above that destination-based states make things more complicated. There are a lot more buyers than there are you!
You can probably see the value of an accountant or tax app right about now. So why don’t we explore those?
How to Collect and Manage Your Shopify Taxes
The best news about the big bad world of taxes is that even the pros will agree - they’re not easy to manage. How is that great news?
Because it means that someone saw that as an opportunity to solve a big problem, and create the tools and solutions to prevent sellers having to figure it out themselves. Hooray!
When it comes to the process of remitting taxes, you have three things to do: Collect it, check that it’s correct, and file it.
Collecting the sales tax
You can change Shopify’s settings to collect sales tax on eligible orders. Head to Settings > Taxes to change your shipping locations and tax rates accordingly.
For comparisons of what you’re collecting versus what you should be, automated filing, centralized tax data and up-to-date rates, consider integrating a tax app with your store.
Checking and tracking it
If you don’t have a tax app, you will need to manually keep track of all the sales tax you collect and need to remit for each nexus state at the end of the tax year.
A2X can help you do this.
For each of your Shopify bank deposits, there are income and expense lines that are not recorded for you. A2X calculates and organizes these details into neat journal summaries for each deposit that can be opened up to show exactly how much you collected in sales tax, paid in fees, received in reimbursements and spent on costs of goods sold.
Without A2X, you would need to figure this out manually, adding another time-consuming task to your already long list when manually filing your taxes.
Equally, if you use a tax app, A2X can still help you stay on top of the rest of your Shopify business and ensure that you have a realistic idea of the health of your financials at all times.
Tax apps can help you automate the filing of your tax returns. If you don’t use those, you can file your taxes on the websites of each of your nexus states.
We highly recommend hiring the help of a specialist ecommerce accountant in general, but at least at tax time. They can ensure you are meeting your obligations, only paying what you owe and help you with tax strategy going forward. Find one from our trusted directory here.
Shopify Sales Tax FAQs
Why do Shopify sellers need to pay sales tax?
In 2018, the landmark South Dakota vs. Wayfair Inc. case ruled that businesses no longer needed a physical address in a state to be eligible to pay taxes. If your Shopify sales for a particular state meet its threshold for economic nexus, or you store inventory there, have staff or affiliates based there, you may need to collect and remit sales tax to that state.
Does Shopify charge sales tax?
Shopify doesn’t charge or manage sales tax for you. However, you can integrate a tax app with your store and change Shopify’s settings so that each eligible transaction applies the correct rate of sales tax on top at checkout automatically.
How do I avoid sales tax on Shopify?
If your Shopify business has nexus with a state, you are required by law to collect and remit sales tax to that state. If you are audited, non-compliance could lead to fines and back-dated charges. You may sell items which are not taxable, and you can exclude these from sales tax collection by changing Shopify’s settings. See its help page here for how to do this.
How do I set up sales tax on Shopify?
Head to Settings > Taxes and select the relevant tax region. If you are selling in the US across multiple states, integrating a tax app with Shopify will help ensure you are collecting the correct amounts for each state. See our guide here for more on how to collect Shopify sales tax.
Do I need a sales tax license to sell on Shopify?
You need to register for a sales tax permit before you collect and remit sales tax on Shopify. Find out where your nexus states are (this guide can help) and then register with those. You can then change your store settings to apply sales tax to your transactions. See this guide on collecting sales tax for more help.
Does Shopify supply me with tax reports?
Shopify provides you with a taxes finance report and a sales finance report. These summarize your financial data to help you with filing taxes and tax reporting.* See Shopify’s help page on these for more information.*
Do I need to collect sales tax if I use dropshipping with Shopify?
Yes, a dropship partner is considered nexus criteria. Any business you do via dropshipping is just as eligible for sales tax.
Does Shopify charge VAT?
If you do business with the UK or Europe, you will need to check each country’s VAT and sales tax rules too. They will have their own thresholds and tax apps will help you figure out the correct amounts to charge and remit. Learn more about VAT for Shopify and Amazon sellers here.
Also on the blog:
- How to Collect Shopify Sales Tax
- An In-Depth Tax Series for Amazon & Shopify (UK & Europe)
- An In-Depth Tax Series for Amazon & Shopify (Australia & New Zealand)
- How to Drive Traffic to Your Shopify Store
- 15 Actionable Tips to Grow Your Shopify Store in 2021
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