In this guide, we'll walk you through everything you need to know about correctly setting up sales tax on Shopify. We'll cover determining if you need a sales tax ID, how to acquire one, and the step-by-step process of configuring your tax settings in Shopify.
Before we get into the details, let's discuss the sales tax nexus and how it affects your ecom
Nexus used to be primarily based on physical presence. Having an office, warehouse, or even a sales representative in a state would trigger nexus. However, economic nexus has changed the game.
Economic nexus means if you sell enough to customers in a state, even without a physical presence, you're responsible for collecting and remitting sales tax. Thresholds vary by state but usually involve sales volume or transaction count.
For example, California's economic nexus threshold is $500,000 in sales to California customers annually. New York's threshold is $500,000 in sales and 100 transactions. Texas' threshold is $500,000 in sales OR 200 transactions.
To track these rules, identify the states where you have the most sales and check their nexus laws. After determining where you have nexus, register for a sales tax permit in those states. Each state's process varies, so check their Department of Revenue website for instructions.
Consulting companies like Numeral can integrate with your Shopify to track your sales and notify you as soon as you hit nexus in any state. The company also employs highly qualified accountants who will set up your sales tax ID in the state and start filing.
Let’s quickly look at the steps to set up sales tax on your Shopify website.
The first step in setting up sales tax on Shopify is determining if you need a sales tax ID.
A sales tax ID, AKA a seller's or sales tax permit, is a unique number assigned to your business by your state's tax authority. It allows you to collect sales tax from your customers and remit it to the state.
Whether you need a sales tax ID depends on two main factors: nexus and product taxability.
If you have nexus in a state, you must collect and remit sales tax there. Along with Nexus, you must check if the product is taxable in the state. If it is, you are required to get your sales tax ID or sales tax permit in the said state.
Once you've determined that you need a sales tax ID, the next step is to obtain one from each state where you have nexus. The process varies by state but generally involves the following:
When applying for a sales tax ID, you must provide details about your business. While the specific requirements vary by state, here's a general list of the information you may need:
Having this information ready will make the application process smoother and faster. If you need help filing sales tax and want to do it yourself, we have many guides for individual states that will guide you through the filing process step-by-step.
Now that you have your sales tax IDs, it's time to configure your tax settings in Shopify. Here's a step-by-step guide:
1. Log in to your Shopify admin and go to Settings > Taxes and duties.
2. In the Manage sales tax regions, click United States.
3. You’ll then see a page where you can choose to manage tax collection, see tax rates and exemptions, or create tax reports.
4. Click on the Manage Tax Collection link. You’ll see all the states you sell to, where you meet nexus thresholds, and if you have any states where you need to take action or monitor.
You can click Show Details to see the nexus thresholds and how close you are to meeting them.
Go to Tax Rates and Exemptions. Click on Product Category and categorize your products.
For instance, you can categorize your products as apparel, software, digital goods, etc, to apply the correct tax rates.
To report, click on Reporting to download tax reports.
These reports show where to file sales tax and the amounts required.
Any state with nexus will show under the box that says Regions you’re collecting in. Click Collect Sales Tax to start entering your sales tax ID.
Select the states from the dropdown where you must collect sales tax and enter your Sales Tax ID or FEIN (aka Federal Employer Identification Number).
When adding a new product, check the box that says Charge tax on this product.
If you sell to tax-exempt customers, go to Customers and uncheck the tax collection box for those customers.
Go to Locations under settings. Add the locations where you ship products to ensure accurate tax collection based on origin or destination sourcing rules.
And that's it!
Your Shopify store is now set up to collect sales tax in the states where you have nexus. However, remember that you must also fill out individual sales tax permit forms and keep track of the nexus in each state.
If you find this process overwhelming or prefer an expert to handle it, consider using Numeral. Our white-glove service takes care of all your sales tax needs, from registration to filing, so you can focus on growing your business.
Setting up your sales tax settings is just the first step. To stay compliant and avoid headaches down the road, here are some best practices to keep in mind:
You definitely have questions and we have the answers. Here are a few questions our customers ask when they're trying to set up
Shopify Tax is a built-in feature that helps automate your sales tax calculations. It uses your location and customer information to apply the appropriate tax rates to each order. Shopify Tax is included in all Shopify plans at no additional cost.
No, Shopify does not automatically collect sales tax. You must set up your tax settings and enter your sales tax IDs for each state where you want to collect tax. Once you've done that, Shopify will calculate and apply the correct tax rates to orders from those states.
Shopify calculates sales tax using a combination of your store location, customer location, and product taxability. It also considers each jurisdiction's specific tax rates and rules, including state, county, and city taxes. Some Shopify accounting software also helps with this.
Yes, Shopify can handle tax-exempt sales. If you have customers exempt from sales tax, such as resellers or non-profit organizations, you can mark their customer profile as tax-exempt in Shopify. This will prevent the tax from being applied to their orders.
If you add a new product, categorize it correctly in Shopify for tax purposes. If the product is exempt from sales tax or subject to a reduced rate, you may need to set up a tax override.
If you expand your business to a new state and establish a nexus there, you must register for a sales tax ID and add it to your Shopify tax settings. This ensures you collect and remit tax correctly for orders from that state.
The frequency and method of remitting sales tax varies by state. Some states require monthly filings, while others are quarterly or annual. You'll need to check the specific requirements for each state where you're registered.
To file your sales tax returns, log in to the state's tax portal and enter the total sales and tax collected for the filing period. You'll then pay the tax due via ACH transfer or credit card.
If you find the filing process time-consuming or confusing, consider using Numeral. Our automated filing service ensures that your returns are filed accurately and on time, with no action needed.
The taxability of shipping varies by state. Some states consider shipping charges part of the item's taxable price, while others treat it as a separate, non-taxable service.
In Shopify, you can choose whether to charge shipping tax in each state where you collect tax. By default, Shopify will apply the state's rules for shipping taxability, but you can override this setting if needed.
This guide covers a lot, from nexus to product taxability to filing frequency. It's a lot to digest, but taking it one step at a time is critical.
Start by determining where you have nexus and registering for permits. Then, configure your Shopify settings to collect the right amount of tax from each customer. Stay on top of filing deadlines and consider automating the process.
If you're overwhelmed or want peace of mind, you can partner with Numeral. Our white-glove service covers everything from registration to filing, so you can stay compliant without lifting a finger.
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