As a business owner, you probably know that you’re responsible for collecting sales tax on the products you sell. There are a lot of questions about taxes when it comes to selling online, and rightfully so. But what if you use Shopify to run your online store? Do they collect sales tax on your behalf, or do you have to handle it yourself?
This can be a confusing topic, so in this article, we’ll be discussing whether or not Shopify collects sales tax for sellers. This information should be helpful, though there are many scenarios that we haven’t covered. It’s best to work with an accountant to be sure everything is set up right. Failure to collect sales tax can result in penalties and interest.
Does Shopify collect sales tax for sellers?
As a business owner using Shopify, it’s crucial to understand how sales tax works on the platform. Unlike Amazon, Etsy, or eBay, Shopify is not a “marketplace facilitator” and therefore isn’t required to collect and remit sales tax on behalf of its sellers. This means that it’s the responsibility of the Shopify seller to remit sales tax to the appropriate state.
The responsibility to collect sales tax then is on the Shopify seller. This sales tax is collected from customers by the seller and then passed on to the state. If a seller fails to collect sales tax, they are still liable to pay the sales tax.
In what states do Shopify sellers collect sales tax?
It’s important to note that each state has different laws regarding sales tax for remote sellers and will, at a minimum, need to register for a sales tax permit in the state where their business is located.
Related: How to register for a sales tax permit
Additionally, if you have a physical presence (officially referred to as economic nexus) in any state (employees, warehouses, etc.), you will also need to register in those states. In addition, as your sales in any state approach their sales threshold, you will need to register for a sales tax permit in each of those states as well. The threshold will vary in each state. Some states don’t charge sales tax and others require remote sellers to collect sales tax for any sale. In most states, the threshold is $100,000 in sales or 200 transactions annually. Usually, the collected sales tax is submitted to the state monthly.
It’s important to check each state’s department of revenue. Avalara has a great overview of sales tax nexus laws by state.
How to Charge Sales Tax On a Shopify Store?
In your Shopify store, you can easily turn on sales tax collection by following these simple steps:
1. Go to Settings (bottom of page) > Taxes and duties in your Shopify account.
2. Select the Countries/regions to collect sales tax. Here we will select the United States.
3. Select “Collect sales tax” under the “Sales tax collection” section.
4. Select each state where sales tax will be collected. Enter the state and state sales tax ID number.
5. Set your products to taxable in Shopify. Confirm that the option to “Charge tax on this product” is enabled under Pricing on the product details page. (IMAGE)
In most cases, Shopify will automatically take care of the appropriate sales tax calculations for each order based on the customer’s shipping address. However, there may be some cases where you need to override the default tax rates. For example, you may need to charge a different tax rate for shipping to certain locations, or you may need to collect tax on the full purchase price of an order, even if the shipping address is outside your jurisdiction. You can set up tax overrides for specific products in the Taxes and duties section in your Shopify admin, if necessary.
For more detailed information, the Shopify Tax Manual provides guidance on how to set up your store to collect sales tax.
Shopify Sales Tax FAQs
– Does Shopify automatically collect sales tax?
Sales tax can be a confusing and daunting topic for business owners, but thankfully Shopify has built-in functionality to make things a whole lot easier.
Whether you have sales tax nexus in one state or multiple states, Shopify can automatically collect the appropriate sales tax for you. To get started, simply go to Settings > Taxes in your Shopify admin.
For more details, the Shopify Tax Manual will walk you through the process of setting up sales tax.
Does Shopify report sales to IRS?
Yes – in most cases – As an online seller, it’s important to know that Shopify reports any business that earned at least $600 each calendar year via Shopify Payments to the IRS every year through a form called the 1099-K. If you own multiple online stores and make at least $600 per store, you’ll get a separate 1099-K form for each store.
Having a 1099-K can be helpful when you’re figuring out your gross income for the year and filing your taxes.
Why do Shopify sellers need to pay sales tax?
When you sell products online, you are required by law to collect and remit sales tax to the state in which your customer is located. This is true whether you use Shopify or any other e-commerce platform. The only exception is if you sell to a state that doesn’t have a sales tax or if you’re selling products that are exempt from sales tax (such as certain foods or prescription drugs).
Unlike some marketplaces, like Amazon or eBay, Shopify is not a marketplace facilitator, which means it’s up to the Shopify seller to collect and remit sales tax to the applicable states. Failure to do so can result in hefty penalties and interest charges.
Do I need to collect sales tax if I use dropshipping with Shopify?
Generally, the answer depends on the location of your customer and where you and your dropshipping vendor have nexus. If neither you nor your vendor has nexus in the customer’s state, then you aren’t obligated to charge tax, unless you exceed the state’s sales tax threshold. Instead, the customer may still be responsible for paying a use tax to the destination state.
If you don’t have nexus in the customer’s state, but your vendor does, then the vendor may ask you for a resale certificate.
If you aren’t sure, be sure to talk with an accountant.
