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Your Go-To Shopify Sales Tax Beginners Guide [Full Resource]
Nov 1, 2022

Your Go-To Shopify Sales Tax Beginners Guide [Full Resource]

Home » Blog » Your Go-To Shopify Sales Tax Beginners Guide [Full Resource]

Estimated reading time: 17 minutes.

Since Shopify’s inception in 2004, US ecommerce sales revenue has skyrocketed from $75 billion to $959 billion in 2021. In the last decade alone, the industry has multiplied itself almost five times over.

With the advent of ecommerce, the IRS had to adjust and catch up, which they did in 2018. Gone are the days where ecommerce sellers could turn a blind eye to their sales tax obligations.

Sales tax for Shopify sellers today must be a top priority, and as Shopify is not a marketplace facilitator, unlike platforms such as Amazon or Etsy, it won’t automatically do it for you.

In this guide, part of our Shopify accounting hub series, we break down Shopify sales tax for you step by step. We’ll cover everything you need to know here as well as your next steps so that you can set off on your Shopify sales tax journey well prepared.

Please note: While this information was correct at the time of writing sales tax is ever-evolving. Please refer to the official state pages for up-to-date advice, or consult a specialist ecommerce accountant.​​

Learn how to manage your Shopify accounting the right way

If you want to scale up your Shopify business, you need reliable accounting. Discover the best tools, key tax information and how to ensure that your Shopify accounting is set up for success.

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An introduction to sales tax

Once upon a time, in the early days of the United States of America, 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, which was implemented 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 while 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

A cartoon map of America with figures of people standing across connected to coins by dotted lines leading to a store front. It represents a merchant selling to various customers across various US states.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 the court deemed any belongings it stored 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 a physical presence in a state could be considered to have economic nexus and therefore collect and remit sales tax.

This ruling came before even the original ecommerce platforms eBay and Amazon were operating. In 2018, the courts made a new decision that overturned this standard and changed the rules for online sellers for good.

That year, South Dakota took Wayfair Inc. to court. It 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 specific 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 goalposts for tax laws were officially moved.

Today, sellers can have economic nexus and be required to collect and remit sales taxes 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.

In this guide we’ll explore: Who to pay, how much, and the process.

Does Shopify collect sales tax for you?

Shopify will not automatically collect sales taxes for you. It is not a marketplace facilitator and 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 automatically added to any eligible shopping carts, 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 online 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.

How to collect and manage your Shopify taxes

A screenshot of Shopify’s sales tax insights page. You can see this merchant has been alerted that they may need to start collecting sales tax in Texas, Connecticut, New Jersey, Colorado, and New Mexico.

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 an opportunity to solve a big problem and create the tools and solutions to prevent sellers from 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.

1. 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.

In 2022, Shopify introduced Shopify Tax to help merchants selling in the US, and to a lesser extent, in Canada, with their sales tax responsibilities. Merchants in the US and Canada can now use Sales Tax Insights to track where they may be required to collect and pay sales tax, register with the appropriate tax agencies in particular states, and collect taxes on orders in areas they’re registered in.

In addition, Shopify Tax lets merchants in the US categorize each product they sell so they can collect the correct tax rate and calculate the tax rate based on the buyer’s address. If and when tax rates change, Shopify tax will adjust accordingly.

It is free to use Sales Tax Insights, but if merchants activate tax collection and use Shopify Tax to collect sales tax, there may be a cost, depending on the size of your business. Here’s the breakdown of Shopify sales tax fees:

  • Merchants on Starter, Basic, Shopify, and Advanced plans:
    • First $100,000 of US sales each calendar year: Free to use
    • After $100,000 of US sales each calendar year: 0.35% is charged when an online order is made in a state where you have reached nexus and enabled tax collection.
  • Merchants on Shopify Plus plans:
    • After $100,000 of US sales each calendar year: 0.25% is charged when an online order is made in a state where you have reached nexus and enabled tax collection.
  • The fee is capped at $0.99 per transaction and $5,000 per year.
  • There is no charge for sales tax collection on Point of Sale (POS).

Shopify Tax is not mandatory, so if you’re looking for other ways to seeFor 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.

TaxJar, Avalara and Taxify are great examples of tax apps to make your life a lot easier.

For more information on collecting Shopify sales tax, see our guide here.

2. Checking and tracking it

If you don’t have a tax app or use Shopify Tax, 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 taxes 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.

Start a free trial of A2X for Shopify here.

3. Filing it

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 an ecommerce accountant now using our trusted directory.

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 consider the types of activities relevant to ecommerce.

To figure out your nexus states, list 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)
  • Employees
  • Affiliates
  • 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, 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: New Hampshire, Oregon, Montana, Alaska, and Delaware.

Let’s take a look at each of the states in more detail and how they compare in how they charge tax.

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 sell elsewhere in addition to Shopify, and an “average sales tax rate,” too.

Another layer of juicy detail to note is that states don’t just have one rate—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.

StateMarketplace Facilitator Laws?Tax Basis for Home SellersTax Basis for Remote SellersNexus Threshold in $/per Annum*Link to Official SiteAverage Combined TaxNo. of JurisdictionsShipping & Handling TaxRegister for Tax Permit
Alabama (AL)DestinationDestination$250,000+AL8.36%805 Here
Alaska (AK)DestinationDestination$100,000+AK1.54%109Here
Arizona (AZ)OriginOrigin$100,000+AZCalculate131 Here
Arkansas (AR)DestinationDestination$100,000+AR8.57%400Here
California (CA)DestinationOrigin$500,000+CA8.26%401 Here
Colorado (CO)DestinationDestination$100,000+CO6.47%305Here
Connecticut (CT)DestinationDestination$100,000+CT6.35%2Here
Delaware (DE) DestinationDestination(Other)DE0.00%0 Here
District of Columbia (DC)DestinationDestination$100,000+DC6.00%1Here
Florida (FL) DestinationDestination$100,000+FL6.82%67Here
Georgia (GA)DestinationDestination$100,000+GA7.33%162Here
Hawaii (HI)DestinationDestination$100,000+HI4.24%4Here
Idaho (ID)DestinationDestination$100,000+ID6.04%12 Here
Illinois (IL)OriginDestination$100,000+ILCalculate635Here
Indiana (IN)DestinationDestination$100,000+IN7.00%1Here
Iowa (IA)DestinationDestination$100,000+IA6.89%1028 Here
Kansas (KS) DestinationDestination(All sellers)KS8.05%594Here
Kentucky (KY)DestinationDestination$100,000+KY6.00%1Here
Louisiana (LA)DestinationDestination$100,000+LA9.58%388 Here
Maine (ME)DestinationDestination$100,000+ME5.50%1 Here
Maryland (MD)DestinationDestination$100,000+MD6.00%1 Here
Massachusetts (MA)DestinationDestination$100,000+MA6.25%1 Here
Michigan (MI)DestinationDestination$100,000+MI6.00%1Here
Minnesota (MN)DestinationDestination$100,000+MN7.18%98Here
Mississippi (MS)OriginDestination$250,000+MSCalculate3Here
Missouri (MO) OriginDestination(None)MOCalculate1491Here
Montana (MT) DestinationDestination(None)MT0.00%10 Here
Nebraska (NE)DestinationDestination$100,000+NE5.86%252Here
Nevada (NV)DestinationDestination$100,000+NV7.78%19 Here
New Hampshire (NH) DestinationDestination$50,000+NH0.00%0 Here
New Jersey (NJ)DestinationDestination$100,000+NJ6.63%2Here
New Mexico (NM)OriginOrigin$100,000+NMCalculate145Here
New York (NY)DestinationDestination$500,000+NY8.19%78Here
North Carolina (NC)DestinationDestination$100,000+NC6.90%106Here
North Dakota (ND)DestinationDestination$100,000+ND5.51%154Here
Ohio (OH)OriginDestination$100,000+OHCalculate96Here
Oklahoma (OK)DestinationDestination$100,000+OK7.86%594 Here
Oregon (OR) DestinationDestination(All sellers)OR0.00%0 Here
Pennsylvania (PA)OriginDestination$100,000+PACalculate3Here
Rhode Island (RI)DestinationDestination$100,000+RI7.00%1Here
South Carolina (SC)DestinationDestination$100,000+SC7.36%46Here
South Dakota (SD)DestinationDestination$100,000+SD5.60%258Here
Tennessee (TN)OriginDestination$100,000+TNCalculate129Here
Texas (TX)OriginDestination$500,000+TXCalculate1659Here
Utah (UT)OriginDestination$100,000+UTCalculate321 Here
Vermont (VT)DestinationDestination$100,000+VT6.04%16Here
Virginia (VA)OriginDestination$100,000+VACalculate175 Here
Washington (WA)DestinationDestination$100,000+WA8.76%385Here
West Virginia (WV)DestinationDestination$100,000+WV6.10%62Here
Wisconsin (WI)DestinationDestination$100,000+WI5.46%76Here
Wyoming (WY)DestinationDestination$100,000+WY5.29%24 Here

Sources used: TaxJar, Shopify, Avalara, Amazon.

*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

So by now, you should know which states you likely qualify for nexus. What’s next?

To collect and remit sales tax legally, you need to register for a permit. Use the links in the table above to visit the official state pages and register for your permit in each nexus state.

Now, there is one more thing to bear in mind with sales tax 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 an order comes 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.

Therefore, you need to apply Arkansas’ 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 an order comes 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 make extra sure you have the right rules for each sale.

From these examples you can probably tell that destination-based states complicate things. After all, there are a lot more buyers than there are you.

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 and 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 automatically charge sales tax for you. However, you can manage it either with Shopify Tax, or integrate a tax app with your store and change Shopify’s settings so that each eligible transaction automatically applies the correct sales tax rate on top at checkout.

Does Shopify collect and remit sales tax?

Yes and no. If you choose to use Shopify Tax, then Shopify will collect sales tax for you, as long as you have correctly registered with the relevant state/s. However, this is an opt-in service for merchants selling in the US. It’s important to note that Shopify Tax will not remit sales tax on your behalf, this is the merchant’s responsibility.

Does Shopify calculate sales tax?

Yes, Shopify can do sales tax calculations if you use Shopify Tax. It does this using smart categorization and rooftop accuracy.

Based on your product descriptions, Shopify recommends a product category, which can be approved or modified. Then, Shopify assigns the correct tax rate based on local regulations so that the customer pays the proper amount at the checkout. Additionally, Shopify Tax looks at the sales tax requirements for a buyer’s delivery address, collecting the right amount at the checkout. This information can be reviewed by the merchant afterwards, to ensure the right tax was collected.

Does Shopify file sales tax returns?

No, Shopify does not file sales tax returns on your behalf, and this is your responsibility as a merchant. To ensure you file accurate and timely tax returns, use one of the integrations available to Shopify merchants, including A2X, and then verify this information with the guidance of an ecommerce accountant or bookkeeper to make sure you obey tax compliance.

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 that are not taxable, and you can exclude these from sales tax collection by changing Shopify’s settings.

See Shopify’s 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, their Sales Tax Insights will indicate any action or monitoring that is required with states where you have potential tax obligations. You can also use Shopify Tax or integrate a tax app with your Shopify store to 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 must register for a sales tax permit before collecting and remiting sales tax on Shopify. Find out where your nexus states are (see the table above for guidance) and then register with them. You can then change your online 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 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

Learn how to manage your Shopify accounting the right way

If you want to scale up your Shopify business, you need reliable accounting. Discover the best tools, key tax information and how to ensure that your Shopify accounting is set up for success.

Download our free guide

Ecommerce accounting is challenging, A2X makes it easy.

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