The Sales Tax Guide for Shopify Sellers

states with sales tax

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The Sales Tax Guide for Shopify Sellers

Sales tax is one of those unfun, but necessary aspects of running a Shopify store. Unless you’re lucky enough to live in one of the five states without a sales tax (Alaska, Delaware, Montana, New Hampshire and Oregon), you likely need to deal with collecting, reporting and filing sales tax periodically. This guide will walk Shopify sellers through the basics of of sales tax, and teach you how to turn a hassle into just another check off your business admin to-do list.

The basics of sales tax

In the U.S., sales tax is governed at the state level, and forty-five U.S. states and Washington D.C. all have a sales tax. Revenue is collected by retailers (such as online sellers) from their buyers, and is then remitted back to the state and local areas where it is used to pay for budget items like schools and roads.

states with sales tax

As it currently stands, retailers are only required to collect sales tax from buyers in states where they have sales tax nexus.

So to become sales tax compliant, your first step is to…

Determine where you have sales tax nexus

Currently in the U.S., states can only require that retailers collect sales tax if the retailer has what is known as “sales tax nexus” in the state. Though every state’s sales tax rules and laws are different, this is a list of factors that commonly create sales tax nexus:

  • A location – your home, an office, warehouse, store, or other physical place of business
  • Personnel – an employee, contractor, salesperson, installer or other person doing work for your business
  • Inventory – Most states consider storing inventory in the state to cause nexus even if you have no other place of business or personnel
  • Affiliates – Someone who advertises your products in exchange for a cut of the profits creates nexus in many states
  • Selling products at a tradeshow, festival or other event – Some states consider you to have nexus even if you only sell there temporarily

You can read what each states’ laws say about sales tax nexus here. If you have nexus in a state, your next step is to…

Register for a sales tax permit

Sales tax registration is governed by each state’s taxing authority, which is usually called the [State] Department of Revenue. There are guides on how to register for a sales tax permit with each state here.

Once you’ve registered, your state will send you a seller’s permit, and will also assign you a sales tax filing frequency and due dates. The due dates vary by state, but the most common due date is the 20th day of the month following the end of the taxable period.

Filing frequencies are generally monthly, quarterly or annually, though some states have other frequencies. For the most part, how often you are asked to file sales tax depends on your sales volume. The higher your sales in a state, the more often the state will ask you to file and remit sales tax.

sales tax filing frequency

Once you have your sales tax permit in hand, your next step to sales tax compliance is to…

Set up sales tax collection

Luckily Shopify and most other online shopping carts and marketplaces have automatic sales tax collection. All you, as the retailer, need to do is give your cart information about where and how you’d like them to collect.

As an online seller, you may charge your customer for shipping. If you do, keep in mind that some states require that shipping charges also be taxed. Other states, however, consider shipping charges separate from the sale price of the item, and do not require that you charge sales tax on shipping. You can see a list of states that do and do not require sales tax on shipping charges here.

You can read our guide to setting up sales tax on Shopify here, and find guides to setting up sales tax on other online shopping carts and marketplaces here.

Report and file sales tax by the due date

Soon enough, your sales tax filing due date will roll around. Now’s the time to report how much sales tax you collected in the state and file your sales tax return.

This is where sales tax can get tricky. Most states don’t want to know just how much sales tax you collected from buyers in the entire state. They instead want you to break down how much sales tax you collected by city, county and special taxing district. This means tracking down every sale and determining in which taxing jurisdiction your customer received your product. Ouch!

Technology to the rescue! A sales tax automation software will pull in your sales data from Shopify and all of the other online shopping carts and marketplaces on which you sell, and break down your sales tax just the way the state wants to see it. If you’d rather never deal with sales tax again, you can also AutoFile your state sales tax returns.

There are a few more important things to remember when it comes to sales tax filing:

  • File on time – states levy penalties and interest on late filers, so be sure to get your sales tax return filed by the due date
  • File zero returns – File a sales tax return even if you didn’t collect any sales tax over the taxable period. States will still levy fines and penalties for failing to file even if you don’t owe a penny.
  • Don’t discount sales tax discounts – About half the states with a discount allow online sellers who pay on time to keep a very small (usually 1-2%) portion of the sales tax you collected. This discount may be a small amount, but it’s free money!

And that’s it! You’re sales tax compliant. Just keep filing your sales tax returns on time, and double checking your nexus every time you make a change to the way you do business! If you have questions or an unusual sales tax situation, we recommend contacting a vetted sales tax expert.

For more about sales tax, check out TaxJar’s Sales Tax Guide for Shopify Sellers, or start the conversation in the comments!