Sales tax can be complicated to calculate, as it varies from country to country and even from state to state. In the United States, for example, sales tax is collected by the seller at the time of purchase and remitted to the appropriate state tax authority.
If you’re a new e-commerce business owner scratching your head over sales tax, you’re not alone. But don’t worry–you’re at the right place. In this article, we’ll discuss everything you need to know about Shopify and sales tax.
What Is Sales Tax?
Sales tax is a consumption tax that is levied on the sale of goods and services. In the United States, the federal government does not collect sales tax, but individual states have the authority to do so.
When a business makes a sale in a state that imposes sales tax, the business is responsible for collecting the tax from the customer and remitting it to the state.
Does Shopify Collect Sales Tax?
No, Shopify does not collect sales tax for its sellers. It is the responsibility of the seller to collect and remit sales tax to the appropriate state tax authority, and from a legal point of view, it’s an important requirement to sell on Shopify.
However, Shopify does provide tools to help sellers calculate and collect sales tax–so, let’s discuss how you can start collecting sales tax on your Shopify store. But before you do that, make sure you apply for a sales tax permit and that you integrate the best accounting app for Shopify with your store. That way, you’ll be able to keep all of the sales and tax-related information updated.
How to Collect Sales Tax on Shopify
If you’re selling physical goods in the United States, you need to collect sales tax from your customers and remit it to the appropriate state tax authority if the goods you sell are subject to sales tax in your state. Check with the relevant authorities in your jurisdiction to find out if you need to collect sales tax.
Fortunately, Shopify makes it easy to collect sales tax on your store. All you need to do is enable sales tax in your Shopify settings and add the relevant tax rates for the states where you have nexus.
If you’re not sure what nexus is or how to determine the tax rates for your state, don’t worry–we’ll explain all that in a minute. First, let’s take a look at how to enable sales tax on your Shopify store.
Enabling Sales Tax in Shopify
From your Shopify administrator page, go to Settings > Taxes. You’ll be directed to a list of countries, where you should select yours (United States). Click on ‘Set Up’ next to ‘United States’ and then enter all the states in which you have a physical or economic presence. For example, if you have an office in New York and a warehouse in California, you’ll need to enter both locations.
Similarly, if you have over $100k in sales or 200 transactions in a state, you must enter that, too, depending on the state’s economic nexus law. Economic nexus simply means that if you’re selling a lot of products in a state, the tax authority of the state might want you to collect and remit sales tax to it.
It’s also important to add your warehouse locations because they help Shopify apply the right tax rates. For example, same-state orders might get taxed at a different rate than cross-state orders.
Calculating Sales Tax in Shopify
Fortunately, you don’t have to manually calculate the sales tax for each state in Shopify. As soon as you enter a state, you’ll see its sales tax displayed along with its name.
Adding Taxable Products
Not all products are taxable. For example, some states exempt gift cards from tax, and you’ll have to determine the taxable products for each state that you’re operating in.
Once you’ve done that, go to Products > All Products. You’ll have to edit each variant for the products you’ll collect sales tax on. Click on ‘Edit Variants,’ and for each variant, check the ‘Charge Tax on This Variant’ box.
Adding Tax-Exempt Customers
Finally, not all customers are required to pay sales tax. Examples include resellers, government organizations, and non-profit companies. To ensure these customers don’t get charged, go to ‘Customers’ from your Shopify dashboard.
Select the customer you want to exempt from sales tax, and click on ‘Manage’ next to their tax settings. Next, deselect the box ‘Collect Tax’ and click on save.
That’s it! Now, you can collect sales tax on your Shopify store. Check out our recent post on Shopify tax reporting to learn how to be able to remit this tax to your state tax authority.