Shopify Sales Tax
Shopify sales tax responsibilities have dramatically increased since June 2018, U.S. Supreme Court’s Wayfair vs. South Dakota Decision. Unlike Amazon, Walmart, eBay, and Etsy, Shopify is NOT considered a marketplace facilitator.
There are 47 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.
Keep in mind, when selling on Amazon FBA, your FBA stock creates physical nexus in many states and a requirement to register to collect and remit sales tax for your Shopify sales in those states, even if you have not crossed the economic nexus thresholds below.
Shopify sellers are different. They need to focus on the 46 economic nexus states, including Alaska, and D.C., of which 24 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.
[2023 Sales Tax Nexus Chart] Includes Economic, Marketplace, & FBA States
Selling on Shopify vs. Amazon
Sales Tax Compliance is Less Complex on Amazon Because they are a Marketplace Facilitator and Collect and Remit in 46 of the 47 Marketplace Nexus States.
This is a significant difference between Shopify sellers vs. Amazon sellers in regards to sales tax compliance. These 47 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’s Sales Tax Liability Dashboard
Shopify’s tax liability dashboard will help you determine if you should register for sales tax.
How to Find Shopify’s Liability Dashboard:
After signing in to your Shopify admin page, click on settings (on the bottom left) and click taxes. Next to the U.S., click manage.
You will see a section at the top of the screen that says manage sales tax liability. To the right of that, click show all liabilities.
You are on the sales tax liability dashboard and can click show details to see Shopify’s calculations in relation to the thresholds.
Key Points about Shopify’s Data:
- Shopify does not count those sales towards your economic nexus thresholds if you sell on other marketplaces. Some states count marketplace sales towards your thresholds even if the marketplace collects and remits sales tax.
- Do you sell products exempt from sales tax, such as supplements (in some states) or clothing? If so, exempt sales should not be counted toward your economic thresholds.
- If you have a physical presence in a state with a warehouse that ships your products, that creates nexus even if you have not crossed economic thresholds yet.
- Most states will calculate sales from the previous or current calendar year. Some states are only from the previous calendar year or prior 12 months. Sales are not cumulative from year to year.
Shopify’s New Tax Tool
Shopify’s tax liability dashboard will help you determine if you should register for sales tax.
Shopify Launches New Tool to Help Merchants Manage Sales Tax:
Getting notified that you may have sales tax nexus is one thing. Managing sales tax calculations to file accurate and timely sales tax returns is very different and complex.
As of October 12, 2022, Shopify merchants doing business in the U.S. can use a new sales tax insights feature to stay on top of their state-level requirements.
Initially, the tool is free to everyone through the end of the year. The tool is free for the store’s first $100,000 sales yearly.
Point-of-sales do NOT count toward the threshold, only online sales.
Once you exceed that threshold in a year, a .35% fee would apply up to a maximum of $0.99. A customer would have to make an online purchase of $283 for the $0.99 fee to apply.
If your U.S. online sales were to grow and exceed $100,000 annually, the tax calculation fee would only apply to online sales in states where you collect sales tax. POS tax calculation would still be free.
If you are already working with a sales tax provider to collect your data and file your returns, you may opt-out of this feature.
Economic Nexus Threshold of 200 Transactions in 24 States
Shopify software will determine where you have sales tax nexus (crossed thresholds) based on your net sales.
Most states calculate where you have crossed the economic nexus thresholds based on your gross, retail, or taxable sales. This is not the same as what Shopify is reporting, but similar.
Some states have nexus thresholds as high as $500K in sales, such as California and Texas, yet other states are only 200 transactions. Keep in mind each state has different rules when you calculate sales.
Although some states have dropped the 200 transaction requirements, you can not count on that in the future to get you off the hook of owing sales tax.
See our chart above that considers the different methods to calculate if your business crossed the economic nexus thresholds. Some states only look at the previous year, and some look at the previous or current calendar year.
The states on the map above that say the previous calendar year do not all treat the method to calculate the same.
For example, Michigan and Pennsylvania both say that they would need to wait until January next year to register once the threshold has been met. The start date would be 01-2023, even if the thresholds were met early in that previous year.
However, they can voluntarily register for sales tax at an earlier date if they foresee that they can reach the thresholds within this year.
Florida says that if the thresholds are met, sellers should register immediately. Florida also says that the previous calendar year method was generally for sellers already selling in Florida before the law took effect.
Warning: Do NOT turn on the tax settings for states where you have crossed the thresholds BEFORE registering with a sales tax permit.
It is illegal to collect tax without a permit, and it could be tax fraud. At this point, you must get registered.
Once you have a sales tax permit, you may turn on your sales tax settings in Shopify and collect sales tax in the states where you have nexus. Several of our remitting partners (the last step in this process) will automate the process to remit or give back the state’s sales tax.
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
- 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.
- Determine which states you have crossed the economic nexus thresholds. Use Shopify’s sales tax liability dashboard and our 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.
- 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.
- 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.
- Remit Sales Tax to the State. Remitting software companies 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 only a U.S. bank account with a U.S. entity for an ACH pull to automate 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. Schedule a discovery call with our team for support.