Shopify Sales Tax

Shopify Sales Tax Responsibilities

Shopify sales tax responsibilities have dramatically increased since June 2018, U.S. Supreme Court, Wayfair vs. South Dakota Decision. Shopify, unlike Amazon, Walmart, eBay, Etsy, is NOT considered a marketplace facilitator.  There are 42 states with marketplace nexus, where the marketplace facilitator is responsible for collecting and remitting the sales tax for third-party sellers. The marketplace facilitator is responsible for collecting and remitting sales tax.

 

Shopify sellers are different. They need to focus on the 45 economic nexus states including D.C., of which 27 have transactions of only 200. Once Shopify sellers trigger economic nexus in a state, they are responsible for collecting and remitting sales tax on those sales in that state.

Shopify Sales Tax, Updated April 2020. Shopify has updated its tax setting that now you only need to add the sales tax registration number of the state you have nexus, and their sales tax calculation engine will do the rest!

Here is one way to estimate when you may pass Colorado’s threshold of $100K in sales. Colorado’s population is about 1.72% of the overall population, which means your whole business would be close to $6M in annual sales to come close to the $100K threshold.
Other states have a transaction threshold still in place. This means if you are selling a $20 product. In states like Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, New Jersey, Utah, and Virginia, to name a few, they have 200 transactions as the level required to create nexus in those states.

This means you may only have $20 x 200 transactions or $4,000 in sales (assuming you sell one unit per transaction) vs. $100K in total sales. In this situation, a seller in a state like New Jersey that is 3.07% of the population, at $20 per transaction, may reach $4K in sales with as little at $135,000 in total sales.

Selling on Shopify vs Amazon

Sales Tax Compliance is Less Complex on Amazon Because they are a Marketplace Facilitator and Collect and Remit in 41 of the 42 Marketplace Nexus States. 

This is a significant difference between Shopify sellers vs. Amazon sellers in regards to sales tax compliance. These 42 marketplace facilitator states would instead audit one large company, like Amazon, Walmart, Etsy, eBay, that allows other third-party sellers to use their platform vs. going after the third-party sellers (which some states are still doing especially in the state of California).
There is more than one time of nexus that has developed since the 2018 June U.S Supreme Court Case, Wayfair vs. South Dakota. The economic nexus changes now require your business to track all your taxable sales in all 45 taxable states and D.C. to determine when you cross these new thresholds (unless the state is a marketplace nexus state).
Selling in the EU, for example, is different because you only have one country at a time to determine if you passed the thresholds.
In the U.S., because sales tax is at the state level, it is like selling in 45 countries and D.C. at one time, with no choices as to which “country” or state you sell.
Back to the Colorado situation. Assuming you had no physical nexus with an LLC, employee, or inventory in the state, you must consider the two other types of nexus besides the economic nexus standards of $100K in sales.
Shopify launched their Shopify Fulfillment Network in June of 2019. Shopify’s Fulfillment Network is similar to Amazon’s FBA service, which is outsourced fulfillment. But third-party fulfillment creates sales tax obligations due to storing of inventory.  Shopify currently has fulfillment center locations in California, Georgia, Nevada, New Jersey, Ohio, Pennsylvania, and Texas.

Shopify Sellers Should Track when They Cross the Economic Nexus Thresholds to Minimize their Liability.

Shopify sellers need to know that Colorado, like several other states, started with both as a sales threshold of $100K AND a transaction threshold of 200. This was in place as of 12-1-18. The goods news is that Colorado will enforce the $100K in sales only moving forward. You must know that Colorado also has a notice and reporting threshold of $100K, but that nexus date was in effect since 7-1-17.

That means if you had sales of $100K in Colorado the prior year of 7-1-17, that was your nexus start date, not the new time of 6-1-19. Colorado’s effective date for marketplace nexus is 10-1-19, which is essential if you had prior nexus. If not, the marketplace facilitator will collect and remit for you. A notice and reporting state gives you the option to collect and remit sales tax OR to send a notice to every buyer in the state and the state of all your transactions.

Shopify Sellers Need to Track the Economic Nexus Threshold of 200 Transactions in 27 States 

Everyone has concluded it is much easier to collect and remit when you pass the threshold for a notice and reporting state. The challenge is if you don’t know these different notice and reporting requirements in 16 states now, you may be subject to heavy fines, up to $20K in some states. Although most states are being cooperative with sellers and lenient with these fines (notice and reporting) we don’t recommend you press your luck as these fines are real.

Shopify sellers must be aware of these thresholds and track both your taxable sales and transaction in each state and month to determine when you first triggered nexus in a state. In most cases, once you trigger nexus in a state, it is up to you to determine when you want to get registered with a sales tax permit. Once you have a sales tax permit, you may turn on your sales tax settings in Shopify and start collecting sales tax in the states where you have nexus. There are several remitting companies (the last step in this process) that will automate the process to remit or give back the sales tax to the state.

Selling on Shopify’s Fulfillment Network? Your inventory stored in this network creates physical nexus in those states. This creates sales tax nexus and a sales tax liability for your Shopify business.

Steps for Shopify Sellers to Get into Compliance with Sales Tax 

  1. Is your product subject to sale tax? Most products are subject to sale tax. Products such as supplements (depending upon ingredients), clothing, and groceries may not be subject to sales tax and vary from state to state.
  2. Determine which states you have crossed the economic nexus thresholds. Use the chart provided on this page for support. If you would rather have our support to determine which states, you have crossed the thresholds reach out to our team at this link for a sales tax nexus analysis.
  3. Get registered for sales tax permits (most states refer to a remote seller’s permit) in the states you have economic nexus. Sales Tax System has bundled packages to help you get registered efficiently.
  1. Set up Taxes for Your Shopify Store. This will allow you to collect sales tax on sales to products in the states where you have nexus. This involves creating shipping zones under settings – shipping. Next, set your tax rates, which can be set automatically. Set up any tax exemptions.
  2. Remit Sales Tax to the State. There are remitting software companies that will automatically remit (or give back) the sales tax you collected to the state and file sales tax returns. Sellers outside the U.S. will want to have a U.S. bank account only available with a U.S. entity for an ACH pull to automatic this process. If you are selling through a foreign entity with no U.S. bank account, you will need to work with a remitting tax firm that allows you to wire sales tax due, and they file on your behalf. Contact Sales Tax System for our recommended remitting resources.