Shopify Sellers Sales Tax Responsibilities
Shopify sellers sales tax responsibilities have dramatically increased since the June 2018, U.S. Supreme Court, Wayfair vs South Dakota Decision.
Unlike an Amazon seller where Amazon is now collecting and remitting in 33 states, Shopify sellers now have a much bigger sales tax exposure.
Shopify sellers now need to measure both their sales and transactions, in most states, to determine when they passed a threshold for economic nexus.
The good news is that several states have dropped the transaction thresholds so Shopify sellers sales tax responsibilities may be less in a few states.
A state such as Colorado only has a monetary threshold when it comes to economic nexus levels. The level is $100K in sales by June 1, 2019. That means if your has taxable sales of $100K in Colorado in the previous year, that is your registration date to collect and remit sales tax, moving forward.
If you are taxable sales are only at $70K in total sales in Colorado by June 1st, 2019, your store would not create economic nexus until you reached $100K in sales. Colorado has other forms of nexus, which we will cover in a moment.
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 overall 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, and 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. This is a major difference for Shopify sellers vs Amazon sellers.
Marketplace nexus is where the marketplace facilitator (Amazon) is required to collect and remit the sales tax for third-party sellers. Now there are over 33 marketplace facilitator states that will be soon collecting and remitting sales tax for you.
Since Shopify is not considered a marketplace facilitator (you create your own store), Shopify is not required to collect and remit sales tax on your behalf in these 33 states. You are operating your own website/store and must follow the economic nexus standards in each state.
These 33 marketplace facilitator states would rather 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.
Shopify Sellers Sales Tax Responsibilities are Now More Complex for Shopify Sellers and Easier for New Amazon Sellers.
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 to.
Therefore sales tax compliance which prior to the June 2018 U.S. Supreme Court Case, was relatively simple for a Shopify seller. Shopify sellers sales tax responsibilities meant you didn’t need to collect or remit sales tax unless it was your home state or if you used one third-party shipper in another state to ship your products to your customers.
The sales tax burden has flipped flopped. Amazon sellers for several years selling via FBA created nexus in every state where their inventory moved.
Unfortunately, most sellers are still behind on uncollected sales tax. These sellers are hoping that each state does not do random audits to Amazon sellers prior to Amazon taking over sales tax collections, now in 33 states.
The biggest chance of audit comes from California, Massachusetts, and Washington. Since California represents about 15-18% of overall sales
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.
First, you need to know that Colorado, like several other states, started out with both as a sales threshold of $100K AND 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 also 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 date of 6-1-19.
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. 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.
It is imperative for Shopify sellers to 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.
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.
Sales Tax System has complete sales tax services to help you with everything from determining when you first had nexus, to registrations and recommendations for companies to help you to remit sales tax. If you need support reach out to Sales Tax System at [email protected].