Don’t want to get smacked with sales tax penalties?
Every Shopify merchant dreams of running a successful online store and selling to tons of happy customers. But guess what?
Sales tax is getting more complicated every year. If you don’t know how to properly collect sales tax in Shopify, your business could be at risk of audits and penalties.
Here’s the truth: Without proper sales tax compliance, you’re playing with fire.
You will learn everything you need to know about Shopify sales tax so that you can stay compliant and focus on growing your business.
What you’ll discover:
- Why Shopify Sales Tax Matters More Than Ever
- How Shopify Tax Actually Works
- Setting Up Sales Tax Collection the Right Way
- Common Sales Tax Mistakes to Avoid
Why Shopify Sales Tax Matters More Than Ever
Shopify sales tax compliance is more important than it’s ever been. Here’s why you should care.
States Are Getting More Aggressive
So you think you can fly under the radar? Think again.
States are cracking down big time on collecting sales tax from online sellers. The big shift happened in 2018 when the Supreme Court case South Dakota vs Wayfair decided that states could require online retailers to collect tax based on economic activity, not physical presence.
And here’s the kicker… More than 2 million merchants are using Shopify right now. This means states are actively targeting ecommerce for tax collection.
States are reducing or eliminating their economic nexus thresholds to grab more sales tax revenue. Some states have ditched the 200-transaction requirement and require tax collection at much lower sales volumes.
Economic Nexus Thresholds Keep Changing
One of the most annoying parts are the constant shifts in rules. But with the right Shopify sales tax guide, you’ll be able to navigate them with ease.
Economic nexus means that you have to collect sales tax in a state if you reach certain sales or transaction thresholds even if you don’t have a physical presence there.
Did you know that 47.7% more shoppers are placing orders with Shopify merchants since 2020?
As more people shop online and sales grow, you’re much more likely to cross economic nexus in more states.
Thresholds vary from state to state. Some have a threshold of $100,000 in sales before they require collection, but some states have much lower thresholds.
Automation Makes Compliance Easier
The good news:
You don’t have to do any of this manually. Shopify Tax will automatically calculate the sales tax for over 11,000+ jurisdictions across the United States.
How Shopify Tax Actually Works
Shopify Tax is built directly into your store which means you can start collecting sales tax without any third-party apps.
Here’s how Shopify Tax works:
Shopify Tax determines the customer’s shipping address and automatically calculates the tax rate and amount owed for that location. It pulls from up to four different tax rates:
- federal
- state
- county
- local tax
The system also applies the correct rate based on product categories. Clothing and electronics might be taxed differently for example.
Automatic Rate Updates
Tax rates change constantly. Shopify Tax automatically updates these rates so you don’t have to track every state, county, and local jurisdiction where you sell.
Product Category Intelligence
Shopify Tax suggests product categories for your items and then automatically applies the proper tax treatment. Digital products are taxed differently than physical goods, clothing might be exempt in certain states, and food and medical items are often taxed at a special rate.
Setting Up Sales Tax Collection the Right Way
Ready to properly set up Shopify sales tax collection? Follow this process that actually works.
Step 1: Determine Where You Need to Collect Tax
The first step is to determine where you need to collect sales tax. This will be anywhere you have physical nexus (inventory, employees, or a business location in the state) and economic nexus (sales or transactions that exceed the state thresholds).
Shopify Tax has a nexus tracking feature that shows where you might need to register.
Step 2: Register for Sales Tax Permits
Once you know where you need to collect tax, register for sales tax permits in those states. Most states allow online registration and many don’t even charge a fee for permits.
This step is non-negotiable. Collecting sales tax without a permit is illegal in most states.
Step 3: Configure Shopify Tax
Turn on Shopify Tax in your store settings. The system will immediately start calculating sales tax for the states where you’ve indicated you need to collect.
You can adjust settings to account for tax exemptions, specific product overrides, and different rates.
Step 4: Set Up Filing and Remittance
Collecting sales tax is only half of the battle. You also need to file returns and remit the collected tax to each state.
Shopify Tax has automated filing for many states which prepares your returns and submits them on your behalf.
Common Sales Tax Mistakes to Avoid
Automated tools help a lot but here are some common mistakes to watch out for as a Shopify merchant.
Not Registering Soon Enough
The number one mistake is waiting too long to register for sales tax permits. It’s easy to accidentally hit economic nexus thresholds without even realizing it.
Pay attention to your sales and register for permits as soon as you meet nexus requirements.
Ignoring Product Exemptions
Not all products are taxable in all states. Clothing under a certain amount is often exempt, digital products have different tax rules, and food and medical items are usually exempt.
Double check your product categories.
Forgetting About Filing Deadlines
You must file returns on time even if you didn’t collect any tax in a given period.
Missing filing deadlines can lead to penalties that can quickly become significant.
Not Keeping Proper Records
Keeping good records is an important part of sales tax compliance. You should keep records of sales transactions, tax amounts by jurisdiction, exemption certificates, and filing confirmations.
These records are important if you get audited.
Leveraging Shopify’s Advanced Tax Features
Shopify Tax has several advanced features that can help with compliance.
Tax Liability Insights
Tax liability insights show you exactly where you need to register based on your current sales. It tracks your progress towards economic nexus and sends you alerts as you near thresholds.
Automated Filing Service
Shopify can automatically file your returns in eligible states. The service will prepare your returns, submit them on time, handle payments to tax authorities, and give you confirmation of filing status.
Enhanced Reporting
Shopify Tax provides enhanced reporting which gives you a detailed breakdown of your tax liability by jurisdiction.
International Considerations
Selling internationally? Shopify Tax will calculate VAT for sales in the European Union and United Kingdom.
The Final Word
Sales tax compliance shouldn’t be the nightmare that keeps you up at night. With the right setup and tools, you can automate most of the process and focus on growing your Shopify business.
The key is to just get started. Set up Shopify Tax, register to collect where you need to, and use automated filing services where possible.
Don’t try to do it all manually or ignore it hoping it’ll go away. States are cracking down big time on enforcement and the penalties for non-compliance can be huge.
Take action today and get your Shopify sales tax in order. Your future self will thank you when you’re scaling your business and not worrying about tax authorities.
