Does Shopify Collect Sales Tax?

BuiltWith reports that Shopify powers over 4.9 million businesses globally. If you manage a Shopify store, you know that understanding sales tax is key. That’s because it’s more than just a line item on a receipt; it’s a crucial part of operating your online store. 

Getting sales tax right is a big deal for online businesses. It’s important to know where to collect, how much to collect, and to whom it should be paid. This builds customer trust and sets your online shop up for growth.  

We’ll explore whether Shopify collects sales tax and how you can stay compliant with your sales tax obligations.

Nexus and Your Shopify Storefront

The term "sales tax nexus" might sound like something out of a science fiction novel, but it's actually a straightforward concept. Think of it as the legal term for having a significant presence in a state. This presence can be anything from having a physical store, employing workers, or even storing inventory in a warehouse. In the world of e-commerce, even making a sale to someone in a different state can create a nexus, meaning you're responsible for collecting and remitting state sales tax.

Why Is Sales Tax Nexus Important for Shopify Sellers?

Understanding sales tax nexus is critical for e-commerce platforms like Shopify, which empower merchants to sell goods and services across state lines. The rules surrounding nexus can vary significantly from one state to another, making it a tricky landscape to navigate. It's a bit like having a group of friends spread out across different cities. Just as each friend might have different expectations for staying in touch, each state has its own rules about when and how businesses should collect sales tax.

Shopify Sales Tax Calculation

Shopify has built-in features that automatically calculate the sales tax due on each sale based on the buyer's location, the type of product sold, and the shipping destination. This is akin to having a smart calculator that not only knows the exact rate of sales tax in each jurisdiction but also applies it in real time during the checkout process. This automation removes the guesswork and manual calculations, ensuring that the state and local tax collected matches the state and local requirements.

However, Shopify's ability to accurately handle these calculations hinges on the information it's given. This is where the integration of sales tax software with Shopify can provide value to business owners, eliminating manual processes, reducing workload, and ensuring accuracy.

Configuring Shopify for Sales Tax Collection

Shopify merchants can easily set up sales tax collection in their Shopify storefront to stay compliant with US state and other local tax jurisdictions. The most crucial step before doing so is determining whether you actually need to charge taxes. Again, this will mainly depend on state tax rules, but you will likely have to collect sales tax if you have a physical presence or reach economic nexus in a state.

If you have achieved nexus (either physical or economic) in a state, you’ll need to register with the state’s taxing authorities, such as the Department of Revenue, before you collect tax and begin filing taxes.

Setting Up Shopify Sales Tax Collection

Adding sales tax on Shopify is a key step in ensuring your store is ready to handle transactions compliantly. Here’s a step-by-step guide to get you started:

1. Log into your Shopify Admin: First, sign into your Shopify admin panel. This is your control center for everything related to your online store.
2. Go to Settings: Once logged in, navigate to the 'Settings' menu, usually found at the bottom left of your dashboard.
3. Access Taxes Section: In the Settings menu, click 'Taxes'. This section is where you'll manage all tax-related settings for your store.
4. Set Up Tax Regions: Shopify allows you to configure tax settings based on your customers' location. You’ll need to set up tax rates for each region where you have a tax nexus. A tax nexus is essentially where your business has a significant presence.
5. Add Tax Rates: For each region, you can manually add the tax rate or let Shopify calculate it automatically based on the default rates provided by tax authorities. To add a rate, click on the region's name and then 'Set up' or 'Edit' next to the tax rates.
6. Include Tax Overrides if Necessary: If particular products have different tax rates (like essential goods, which might be taxed differently), you can set these specific rates by creating tax overrides.
7. Save Your Settings: After configuring the tax rates for each region, save your settings to apply them.

Product and Shipping Tax Settings

Managing product-specific and shipping taxes efficiently can significantly simplify your tax-handling processes on Shopify. Here's how to set up these essential aspects:

Product Tax Overrides

Sometimes, certain products require different tax treatments due to regulations. Here’s how to set tax overrides for specific products:

1. Navigate to Your Products: Go to the ‘Products’ section in your Shopify admin.
2. Select a Product: Choose the product you want to apply a tax override to and click on it to edit.
3. Modify Tax Settings: Scroll down to the pricing section to find tax-related settings. Here, you can specify whether a product is taxable and if it should be exempt from certain taxes.
4. Set Custom Tax Rates: If a product needs a specific tax rate different from the standard, you can add this by setting up manual tax rates in the ‘Taxes’ settings and linking them to this product.
5. Save Changes: Save your changes before exiting the product editing page.

Shipping Taxes

Some states charge sales tax on shipping. Here’s how to manage tax collection on shipping in Shopify:

1. Access Shipping Settings: From your Shopify admin panel, navigate to ‘Settings’ and then ‘Shipping and Delivery’.
2. Edit Tax Settings in Shipping Profiles: Your shipping settings contain different shipping profiles for various regions or types of products. Click on a profile to edit it.
3. Configure Taxes on Shipping Rates: Look for options related to taxes in the shipping profile. Here, you can decide whether tax should be applied to shipping fees for each region covered by the profile.
4. Check Local Tax Laws: Understand the tax laws on shipping in each region you sell to. Some areas require taxes on shipping fees, while others do not.
5. Save Your Settings: Always save any changes to ensure that the correct tax rates apply to checkout shipping charges.

Managing Shopify Sales Tax Exemptions

Shopify offers features that help you manage sales tax exemptions effectively for specific customers or groups. Here’s how to manage these exemptions:

Exempt Customers on Shopify

Here’s how you can deal with tax-exempt customers:

1. Identify Exempt Customers: First, determine which customers or groups qualify for tax exemptions. This could be due to their status as nonprofit organizations, resellers, or because of location-specific tax laws.
2. Create Customer Profiles: You can create customer profiles for these exempt groups or individuals in Shopify by going to the ‘Customers’ section in your admin panel.
3. Apply Tax Exempt Status: Edit the customer’s profile to mark them as tax-exempt. Then, when they make a purchase, Shopify will automatically apply the exemption to their orders.
4. Communicate with Customers: Notify your customers that they have been classified as exempt and explain any necessary steps they must take, such as providing valid documentation.

Processing and Tracking Resale Certificates

Here’s a step-by-step process of how you can process and track resale certificates for your Shopify storefront:

1. Collect Resale Certificates: Before exempting a reseller from sales tax, you need their valid resale certificate. Set up a process for collecting and verifying these documents.
2. Store Documents Securely: Store the resale certificates in a secure system. Shopify does not directly manage these documents, so you may need a third-party app, tax service, or a secure file storage service.
3. Record Keeping: Maintain detailed records of all resale certificates and tax-exempt transactions. This information is needed for audit purposes and compliance with tax regulations with state and local tax authorities.
4. Update Regularly: Review and update the resale certificates and tax exemption statuses regularly. Certificates may expire, or tax laws could change, affecting the exemption status.

How to Integrate Sales Tax Management Apps with Shopify

Integrating third-party tax apps can be a game-changer for Shopify store owners looking to enhance their sales tax management capabilities. These apps offer advanced features beyond Shopify's built-in tools, providing more precision and sales tax automation for e-commerce stores. 

Here’s how to make the most of these integrations:

Custom Sales Tax Reports 

Accurate reporting is critical for tax filing and auditing. Shopify and most third-party apps can generate detailed tax reports that simplify these processes:

Shopify Sales Tax Collection: Conclusion

Setting up your tax settings in Shopify is not just a one-time task; it's the foundation for ensuring ongoing compliance with sales tax laws. This involves specifying your physical presence (or nexus), the nature of your products (as some items are taxed differently), and any other relevant tax information. It's like informing that helpful neighbor not only about the yard sale but also about what you're selling, where your yard is located, and any special rules you need to follow.

Correctly setting up these details in Shopify ensures that sales tax is calculated accurately for each transaction. This is crucial because inaccuracies can lead to shortfalls or overcharges, either of which can significantly impact your business. Undercharging could result in tax liability for you, the merchant, while overcharging could lead to unhappy customers and potential legal issues.

Moreover, properly configuring your tax settings from the get-go can save you a significant amount of time and effort in the long run. It's much easier to invest a bit of time in setting things up correctly than to untangle a web of tax errors down the line. This is especially true as your business grows and the volume of transactions increases.

Why Zamp?

Zamp offers a fully managed sales tax solution for your Shopify store, enhanced by a team with deep expertise in all facets of sales tax. Collectively, our team has over 200 years of sales tax experience. Our solution integrates with Shopify to analyze transaction data and create summary reports by state.

Book a call below to see how our completely managed solution can help you stay sales tax compliant.