The Ultimate Guide to Managing Shopify Sales Tax

Managing a Shopify storefront can be complicated, especially when US sales tax is involved. Each state sets its own rules and regulations regarding sales tax and taxable products, making it difficult to understand nexus and where you need to register.

We’ve put together this guide to help Shopify merchants understand US sales tax basics and how to set up sales tax correctly for their storefronts. We’ll also cover how to avoid common sales tax pitfalls and why a sales tax solution can help.

Understanding US Sales Tax

In the US, consumers and businesses pay many different types of taxes. However, as a Shopify store owner, the most common one you will deal with is sales tax.

Sales tax is a tax charged at the point of purchase by a company and given to state and local governments to fund different projects. This type of tax exists throughout the US at both the state and local levels. There is no national US sales tax.

Sales Tax Nexus

Two primary types of US tax nexus could impact your business — physical and economic nexus. Here’s a look at the difference between the two:

• Physical nexus: This generally applies to businesses that have any kind of physical presence in a state, which can include employees, a physical business location, a warehouse, or other place where you store goods. 
• Economic nexus: While this varies by state, this is usually triggered when a business reaches a certain number of transactions, revenue generated, or a combination of both.

Sales Tax Registration

After determining your nexus, you must register to collect sales tax in a state. This is crucial as you cannot begin to charge sales tax in your Shopify storefront until you have a sales tax ID or valid registration.

Remember that sales tax varies by state, so you must register in every state that you have nexus.

Does Shopify Collect and Remit Sales Tax?

Since Shopify is not a marketplace, it is not required to collect and remit sales tax on your behalf automatically. However, its default settings can automatically collect the appropriate sales tax based on your location and where your customers are based. It takes into account various regional tax laws and rates.

You can enable or adjust these automatic tax settings in your Shopify admin. Go to 'Settings,' then 'Taxes.' Here, you can turn on tax collection features and customize settings according to your business needs, such as including or excluding taxes in product prices or overriding default tax rates for specific products or regions.

Shopify vs. Marketplace Facilitators

Sales tax can be confusing for e-commerce sellers who sell across multiple channels. In the US, marketplace facilitators like Amazon and Etsy must collect and remit sales tax for sellers. Sellers still need to track their sales to determine if they meet thresholds for state filing.

As mentioned above, Shopify is not a marketplace facilitator. Sellers are responsible for handling sales tax obligations, registering, collecting, and remitting sales tax to the state.

A third-party sales tax solution can minimize your tax liability by ensuring you’re collecting the right amount of sales tax every time from your Shopify storefront. In addition, they can also file sales tax returns and remit money to the states on your behalf.

Does Shopify Calculate Sales Tax?

Yes, Shopify can automatically calculate the sales tax for each transaction. Here’s how it works:

• Tax Calculation Based on Jurisdictions: Shopify uses the customer's shipping address and your store’s location to determine the appropriate tax rates and rules.
• Customizing Tax Calculations: If you have specific tax needs, such as applying different tax rates for specific products or exempting certain customers from tax, you can customize these settings in Shopify. This ensures the sales tax calculation meets your business requirements and complies with local tax laws.

By understanding and utilizing these features, you can ensure that your Shopify store handles sales tax efficiently and accurately from the initial setup.

How to Set up Sales Tax on Shopify

Setting up sales tax on Shopify is straightforward, but it is essential to get it right from the start. Once you have your sales tax ID, here’s a step-by-step guide to configuring your tax settings:

1. Accessing Tax Settings: Log into your Shopify admin panel. Navigate to 'Settings' and then select 'Taxes'.
2. Setting Up Tax Rates: Shopify automatically generates tax rates based on your store's physical and common customer locations. You can review and adjust these rates as needed.
3. Differentiating Tax Rates Between Regions: If you sell to customers in different states, you might need to set up different tax rates for each region. Shopify allows you to customize these rates to comply with local tax laws. Here's a straightforward approach to setting up regional tax rates:

• Create a New Tax Zone: Navigate to the 'Taxes' area in your Shopify dashboard. Look for an option like 'Add tax area' or 'Set up new region.' Select the geographical area you want to configure.
• Input the Tax Information: You must enter the standard tax rate for each zone. If there are special rates for particular items or sub-regions, you'll also want to add those.
• Confirm and Implement: Review your entries carefully to ensure accuracy before finalizing, then apply the changes.

In the United States, states have different rates, and individual cities or counties might impose their own additional taxes. Being aware of these variations helps you stay compliant and avoid surprises.

Managing Shopify Sales Tax Collection

Efficiently managing sales tax collection is vital to maintaining compliance and providing a smooth checkout experience for your customers. Here's how you can manage this process on Shopify:

How to Add Taxes on Shopify

1. Adding Tax Rates Manually:
   • Navigate to Settings > Taxes in your Shopify admin.
   • In the Tax rates section, click "Add tax rate."
   • Select the country and state/province (if applicable).
   • Enter the tax rate percentage.
   • Specify if the tax is compound (calculated on top of other taxes).
   • Name your tax (e.g., "California State Tax").
   • Click "Add tax rate" to save.
2. Using Automated Tax Services:
   • Shopify offers automated tax services like Shopify Tax or third-party apps.
   • To enable Shopify Tax, go to Settings > Taxes.
   • In the Tax Calculations section, click "Set up Shopify Tax."
   • Follow the prompts to set up your tax profile and enable automatic calculations.
   • This service automatically updates rates based on location and product type.
3. Customizing Tax Settings:
   • You can set up tax overrides for specific products or collections.
   • Navigate to the product or collection page and look for the "Pricing" section.
   • Check "Charge taxes on this product" or uncheck to make it tax-exempt.
4. Setting Up Tax Exemptions:
   • You can create customer accounts with tax-exemption settings for wholesale or tax-exempt customers.
   • Go to Customers > Add customer.
   • In the Tax settings section, you can mark the customer as tax-exempt.

For a more detailed walkthrough on adding sales tax to your Shopify store, including step-by-step instructions and advanced tips, check out our detailed guide on How to Add Sales Tax on Shopify.  

How to Charge Sales Tax on Shopify

1. Ensuring Accurate Tax Charges at Checkout: The taxes charged during checkout must be accurate to avoid any issues with compliance and customer satisfaction. Shopify’s automated systems help ensure that the correct tax is calculated each time.
2. Setting Up Tax Overrides for Specific Products or Regions: Sometimes, you may need to apply different tax rates for specific products or override the general tax settings for certain regions. Shopify allows you to customize these settings to comply with unique tax requirements.

How to Collect Sales Tax on Shopify

1. Integrating Tax Collection into Payment Processes: Shopify integrates tax collection into its payment processing features, ensuring that the correct tax amounts are collected at the time of purchase.
2. Record-Keeping Tips for Collected Taxes: It is essential to maintain accurate records of the taxes you collect. Use Shopify’s reporting tools to track and record sales tax on all transactions. This will be invaluable for financial reporting and when it’s time to file and remit taxes.

How to Integrate Shopify with Sales Tax Software

Connecting your e-commerce store with the best sales tax software for Shopify can make running your online business much more manageable. Let's look at why this is a smart choice:

1. It's more accurate and follows the rules. Sales tax can be tricky because rates change often and differ from place to place. Tax software keeps track of all these changes for you. This means you're less likely to make mistakes that could lead to a sales tax audit, which can result in hefty penalties and fees.
2. It saves you time. Instead of spending hours figuring out taxes, you can use that time to improve your products or talk to customers. As your business grows, the software grows with you, so you don't have to work harder on taxes just because you're selling more.
3. It gives you up-to-date information. Most tax software shows you your tax info right away. This helps you understand how much money you owe in taxes at any time, which is great for planning.
4. It works everywhere you sell. If you start selling in different states or countries or across multiple channels, the software can handle all of that. You don't have to learn new tax rules every time you expand your business.
5. It keeps good records. If someone ever checks your taxes, the software keeps track of everything for you. This makes it easy to show that you've been doing things right.
6. It works with other business tools. Many tax programs can connect with other software you use for your business, like accounting programs. This makes it easier to see how your whole business is doing.
7. It updates automatically. Tax laws change frequently, and good tax software updates itself when these changes happen, so you don't have to worry.
8. It makes shopping easier for customers. When taxes are calculated correctly and shown clearly, customers know exactly what they'll pay. This makes them more likely to buy from you.

Why You Should Consider Shopify Sales Tax Software

Whether running an e-commerce store or a dropshipping business, using sales tax software with your Shopify store isn't just about following rules – it's about making your business run smoother. It helps you focus on growing your business instead of worrying about taxes. You can spend more time on the important stuff, like making great products and keeping your customers happy.

Shopify Sales Tax Software Case Study

Glamnetic, an omni-channel beauty brand, experienced rapid growth during the pandemic. As their strategy paid off, they moved into multiple department and retail stores, allowing them to expand into stores like Ulta, Sephora, Target, and Kohl’s. However, as they grew, sales tax became more complex.

While working with a sales tax provider, clarity and communication fell short, and the team had no idea if they were talking to actual people or robot. Submitting notices and handling sales tax filings required many complex steps that were too much for the team to handle on their own.

The Glamnetic team discovered Zamp and quickly discovered the benefits of having an automated sales tax solution for their Shopify storefront:

• A transparent process. The process with Zamp is straightforward and hands-off. The Glametic team went from spending over ten hours a month on sales tax to not having to worry about it at all.

“I'm no longer spending multiple hours in a month trying to reconcile large amounts of data for Shopify and wholesale and retail. Having Zamp being able to manage the transactions has been really helpful. We have a lot more time to really dig into our own trends and day-to-day tasks.” - Mayra Jimenez, Assistant Controller at Kombo Ventures

• Direct access to support from experts. The Glamnetic team has access to sales tax experts whenever they have questions. They don’t have to wait around for answers because we always answer the phone.
• Easy onboarding and implementation. Zamp handles everything during onboarding from start to finish.

Want to see how Zamp is helping other companies with their Shopify storefront and staying compliant? Check out our case studies here.

How to Avoid Common Sales Tax Collection Pitfalls

Awareness of these common sales tax errors can help you avoid potential issues. Let's take a look and explore strategies to overcome them:

1. Sales Tax Rate Inaccuracies

Tax rates change frequently, and keeping up can be overwhelming. Here are some solutions to tackle inaccuracies:

• Utilize Shopify's built-in tax rate database or integrate with specialized tax software.
• Set a regular schedule (e.g., monthly) to review and verify your tax rates.
• Consider subscribing to tax authority newsletters for timely updates.

2. Nexus Complexities

Evolving economic nexus laws make it difficult to know where you're obligated to collect tax. Here’s what you can do:

• Use sales tracking tools to monitor your revenue by state.
• Set up alerts for when you're approaching economic nexus thresholds.
• Conduct quarterly nexus studies to reassess your obligations.
• Consider consulting with a tax professional for complex multi-state situations.

3. Sales Tax Filing and Remittance Delays

Missing deadlines can result in costly penalties and interest. Here are some solutions:

• Use a tax compliance calendar to track due dates across all jurisdictions.
• Set up automated reminders well in advance of deadlines.
• Consider outsourcing to a tax service provider for timely filings and payments.
• If cash flow is an issue, explore options for payment plans with tax authorities.

4. Insufficient Documentation

Inadequate records can complicate audits and lead to unfavorable outcomes. Here’s what you can do:

• Implement a cloud-based document management system for easy access and backup.
• Maintain detailed transaction logs, including itemized sales, tax collected, and exemption certificates.
• Regularly audit your own records to ensure completeness and accuracy.
• Develop a standardized process for collecting and storing exemption certificates.

5. Overlooking Exemptions and Tax Holidays

Failing to account for product-specific exemptions or temporary rate changes can lead to over or under-collection of tax. Here are a few solutions:

• Maintain a database of product categories and their tax status in different jurisdictions.
• Set up a calendar of known sales tax holidays and configure your system to adjust during these periods automatically.
• Regularly review and update product classifications to ensure they align with current tax laws.
• Implement a process for handling customer-provided exemption certificates.

6. Mishandling Marketplace Sales

Many sellers are unaware of their tax obligations when selling through online marketplaces. Here’s what you can do to avoid mishandling marketplace sales: 

• Research the specific requirements for each marketplace you use.
• Adjust your tax settings to avoid double taxation, where marketplace facilitator laws apply.
• Keep separate records for direct and marketplace sales for accurate reporting.

7. Ignoring Local Tax Jurisdictions

Some areas have additional local taxes on top of state rates, which can be overlooked. Here are some solutions:

• Use address validation tools to ensure accurate customer location data.
• Integrate with tax software that includes detailed jurisdiction mapping.
• Regularly update your system to account for new local tax jurisdictions.

8. Mismanaging Product Taxability

Different products may be taxed differently, even within the same jurisdiction. This can apply to items like clothing, groceries, digital goods, and more. Here’s what you can do to avoid mismanagement:

• Categorize your products based on tax treatment across different jurisdictions.
• Regularly review and update product classifications.
• Use tax software that allows for product-specific tax rules.

Shopify and Sales Tax: Conclusion

Effectively managing sales tax on Shopify ensures you meet legal requirements and keep your online store running smoothly. Handling sales tax correctly also builds trust with your customers because they know they're being charged the right amounts.

Staying updated with the latest tax laws and any new features from Shopify is also essential. Tax rules can change often, and Shopify frequently updates its platform to help you manage these changes more quickly. You can adjust your settings to ensure you're always compliant by keeping informed.

Use Shopify's tools and make it a habit to regularly check for updates in tax legislation and Shopify’s features. This way, managing sales tax can strengthen your business, enhancing your operations and customer service. This proactive approach protects your business and improves your service to your customers.

Why Choose Zamp?

Zamp is a complete service that checks all the boxes, including nexus tracking, registrations, tax return preparation, rooftop accurate calculations, API integrations, product taxability research, mapping, filing, and reporting.

Want to learn more? Book a call below!