Sales Tax 101 Shopify

The Shopify Seller’s Sales Tax Guide

by Mark Faggiano

Sales Tax 101 for Shopify Sellers

Congrats! Your Shopify store is up and running. We hope your products are flying off your virtual shelves.

But once you do start making sales, that’s when the business side of your business kicks in. And one of the most confusing and sometimes perplexing aspects of an eCommerce business is sales tax. Why do you charge sales tax? Who do you charge it to? And when do you send that money you collected from buyers back to the state.

TaxJar is here to help. We’ve put together this step-by-step guide to sales tax guide for Shopify sellers.

Step 1: Determine Where You Have Nexus

If you sell a product, chances are you have to deal with sales tax. Forty-five U.S. states and the District of Columbia all require merchants to charge sales tax to buyers. As a merchant, you are only required to charge sales tax in states where you have “sales tax nexus” (which is just a fancy way of saying “significant presence.”)

Every state has a slightly different definition of nexus, but most states consider merchants to have sales tax nexus in their borders if they a physical presence such as an office, employee, or warehouse. Some states even consider that selling at a craft fair or tradeshow constitutes nexus. States use sales tax collected to pay for things like schools, roads and public safety, so it’s often in their interest to broaden their definition of nexus.

For example, if you run your business and only ship products out of your home office in Illinois, then you likely only have sales tax nexus in Illinois. But if you have your home office in California, but have hired your sister in Florida to help you, and you store some inventory in a warehouse in Arizona, you may find that you have nexus in all three of those states.

Your first step before you even begin to collect sales tax is to determine where you have sales tax nexus. List any states where you may have a physical presence and check with their Department of Revenue (or equivalent taxing authority) to determine this. Here’s a map of sales tax info by state to get you started.

Step 2: Register for a sales tax permit

Once you’ve determined where you have sales tax nexus, your next step is to contact your state’s department of revenue and register for a sales tax permit.

Some states charge money for a sales tax permit, while others do not. Others require you to renew your sales tax permit periodically, while others don’t. Just remember that most states consider it unlawful to collect sales tax from buyers without first registering for a permit, so don’t skip this step!

When you register for your sales tax permit, your state will tell you when they want you to file sales tax. This is usually monthly, quarterly or annually. If you have sales tax nexus in multiple states, don’t be surprised if one state wants you to file monthly while another wants you to file quarterly, etc. We’ll say it again: in regard to sales tax, every state is different.

Step 3: Collect sales tax from buyers

Your next step is to ensure that you’ve set up your Shopify shopping cart to collect sales tax from buyers in all states where you have sales tax nexus.

Fortunately, Shopify automatically collects sales tax for you, from wherever you tell it to – even if you have sales nexus in more than one state. To turn on sales tax collection in Shopify, simply go to Settings > Taxes. The Shopify Tax Manual quickly and thoroughly walks you through setting up sales tax.

Here are a few key recommendations when it comes to setting up sales tax in Shopify:

  • Include your sales tax separately from the price of the item. Customers are accustomed to sales tax being added after the fact, and adding sales tax to the price of the item in your store may make your prices appear higher than a competitor’s
  • Shopify allows you to charge taxes on shipping rates. Check here to make sure that your state (or states) requires you to charge sales tax on shipping.
  • Be sure to set your tax overrides. For example, some categories, such as food and clothing, are tax exempt in certain states. Don’t collect sales tax when you don’t have to!

Now you’re all set to collect sales tax in Shopify.

Note: If you’ve determined that you have sales tax nexus in more than one state, and you sell on more than one channel, such as on Shopify and on eBay or Amazon, you’ll need to collect sales tax from buyers in all state where you have nexus and on ALL channels that you sell on.

Step 4: Report how much sales tax you’ve collected

So you have a sales tax filing due date coming up, and you need to figure out just how much in sales tax you’ve collected. This is the part where sales tax starts to get really tricky.

You must figure out how much sales tax you collected from buyers in each state. If you only sell on Shopify, pulling a report of sales tax you’ve collected won’t be terribly difficult. But if you sell on more than one channel, then you have to pull sales tax reports from each channel and then combine them for your totals.

What’s worse is that most states don’t just want the total you collected from buyers in that state. They also want you to break down how much you collected by city, county or other taxing district.

That’s why we created TaxJar. TaxJar will pull in all the sales tax you collected from the channels you sell on, and then break down that information in the way each state wants to see it. Without TaxJar, you’ll have to combine reports, go back and try to figure out which district a buyer lived in, and then spend hours with state tax code lookup tables. With TaxJar your returns are ready in minutes.

Which leads us to…

Step 5: File Sales Tax

Once you’ve figured out how much sales tax you collected from buyers, it’s time to file your sales tax returns with each state.

You have some choices here. You can file by mail (archaic and time consuming), file online (easier, and some states even require it) or let TaxJar AutoFile your returns for you. With AutoFile, TaxJar files and remits your sales tax turns for you. After you’re set up, there’s no need for you to do anything else. We’ll also take advantage of any state sales tax discounts that may be eligible for, and remit them right back to you. We’ll never let you leave free money on the table!

Also keep in mind that some states want you to file a sales tax return even if you didn’t collect any sales tax. If you don’t file one of these “zero returns” you can be liable for a penalty. So don’t forget!

Step 6: Relax!

Congrats! If you followed these steps, you’ve put a lid on sales tax. Now you can get back to doing what you do best – running your eCommerce store.

We realize that you may have more questions about Shopify sales tax, so we put together this Sales Tax 101 for Shopify Sellers guide.

Shopify sales tax questions? Start the conversation in the comments.

  • Mark, the tax guide you guys put together is excellent.

    However, does the use of Shopify create nexus based on where the Shopify servers are located? Let’s say I ONLY have Nexus in Minnesota where I have my distribution center all employees. And, I’m using Shopify for my eCommerce platform. Can any Department of Revenue say I have Nexus in their state because a Shopify server may be located in that state? Are there any court cases that have addressed this issue?

    • Hi Mark, I saw that we replied to you elsewhere but also wanted to say here that no, in our understanding that isn’t the case. The servers are Shopify’s business activity, not your business’s. I hope this helps clarify!

      • Many thanks! Yes, I left this message first, then noticed where I could e-mail a question (and, you guys are lightening fast!).

        Yes, this is helpful. Intuitively, it makes sense anyway. It’s just when I speak with certain CPA firms, they will occasionally raise that question.

        Side comment – really appreciate your content.

        • Thanks so much for the compliments! 🙂 Also, in case you need any backup when talking to your accountant, here’s a list of sales tax experts we’ve vetted: http://www.taxjar.com/sales-tax-accountant-directory/ In my experience they love novel problems!

          • Outstanding … world of thanks. I’ll be checking out their sites.

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