How to Charge Sales Tax on Shopify

With the ability to sell to customers across multiple states and countries, online store owners must understand where they have the obligation to charge sales tax and how to implement it correctly.

In this article, we’ll explore how sales tax applies on Shopify, what sellers need to know, and how they can set it up in their stores to comply with tax obligations.

What is Sales Tax?

Sales tax is a state and local tax on the sale of goods and services. This tax is charged to the buyer at the point of sale and must be remitted to tax authorities by the seller. Sales tax rates and rules vary by jurisdiction, which can complicate management for online sellers with activities in multiple states.

What is Tax Nexus?

Tax nexus is the sufficient connection that a seller must have with a state to be required to collect sales tax. This connection can be physical (e.g., having an office, warehouse, or employees in the state) or economic (exceeding a sales or transaction threshold in the state).

Economic Nexus Thresholds

Many states have implemented economic nexus thresholds that require sellers to collect sales tax if they exceed certain levels of sales or transactions in that state. These thresholds vary from state to state.

Examples of Thresholds:

• California: $500,000 in annual sales.
• Texas: $500,000 in annual sales.
• New York: $500,000 in annual sales and 100 or more separate transactions.
• Florida: $100,000 in annual sales or 200 or more separate transactions.
• Wyoming: $100,000 in annual sales or 200 or more separate transactions.

How to Set Up Sales Tax on Shopify

Step 1: Identify the States Where You Have Nexus

The first thing you need to do is identify the states where you have nexus. This includes reviewing whether you have a physical presence or if your sales in a specific state exceed the economic nexus threshold. You can use Shopify's sales analysis tools to help determine this.

Step 2: Register to Collect Sales Tax

Once you have identified the states where you have nexus, and therefore the obligation to collect, report, and remit the tax, you must register to collect sales tax in those states. This involves obtaining a sales permit from the corresponding tax authority in each applicable state.

Step 3: Set Up Sales Tax Rates on Shopify

Shopify offers an integrated feature for setting up and managing sales tax. Follow these steps to set up sales tax rates in your Shopify store:

1. Access Tax Settings: In your Shopify admin panel, go to Settings > Taxes.
2. Add a Tax Region: Select the country and regions (states) where you need to charge sales tax.
3. Set Up Tax Rates: Shopify allows you to set up tax rates manually or use automatically provided rates from Shopify. Ensure that the rates are up to date and reflect the correct sales tax rates for each region.
4. Apply Taxes to Products: Make sure all products in your store are set up to apply sales tax where necessary.

Step 4: Monitor and Remit Sales Tax

Shopify provides detailed reports on sales and collected sales tax. Use these reports to monitor your sales and ensure that you are collecting sales tax correctly. You must remit the collected sales tax to state and local tax authorities within the established deadlines, which can be monthly, quarterly, or annually.

How We Can Help

At Prodezk, we provide comprehensive accounting services to help you manage all your sales tax obligations on Shopify. Our experts:

• Will help you register to collect sales tax in the necessary states.
• Will keep your records organized to ensure tax compliance.
• Will file your sales tax returns on time and accurately.
• Will guide you through each process to help you maximize your tax benefits.

If you have questions about sales tax in the United States, contact us and receive a free consultation with our accounting team.