Sales tax and Shopify: 3 things you need to know

Shiloh Johnson
By Shiloh Johnson
backgroundshape

eCommerce platforms like Shopify make launching and running an online business more accessible than ever, but selling to customers across the country means navigating complex sales tax regulations.

You’re ready to take your passion and turn it into revenue. Maybe you use a 3D printer to create models of famous architecture, have perfected snack recipes to delight tastebuds across the country, or are ready to share your skill for crocheting everything from plush dinosaurs to sweaters with cosmic designs. From artwork and home goods to clothing and accessories, you will need a reliable way to get your merchandise out to your customers. Your custom jewelry isn’t doing much good sitting on your shelf, after all. 

Opening a shop once meant scouting tangible locations and months of setting up a storefront for customers. However, in recent years, it’s become incredibly easy to launch a specialty shop, handmade goods boutique, or other niche stores online — especially with eCommerce platforms like Shopify. 

Shopify was created to help entrepreneurs and small business owners build and run their own eCommerce websites quickly and hassle-free. However, while the platform has many features to make selling online easy to manage, it doesn’t include tax or accounting within its range of online services. For example, sellers can use the platform to charge sales tax on purchases, but Shopify doesn’t offer the option to automatically file or remit these taxes to the IRS.

Managing the tax obligations of your business can be daunting, and missing payments to the IRS or filing a late return is a red flag that may trigger an audit. Since Shopify doesn’t have a built-in feature to manage sales tax compliance, small business owners must find other solutions to manage their tax deadlines, payments, and filings. Learning the fundamentals of sales tax and how your business might be affected is a great place to begin.

#1 - To sales tax or not to sales tax?

Sales tax is the tax you’ll pay to a jurisdiction for the right to sell taxable goods to the residents of that jurisdiction. Regulations can be complicated and confusing, as laws vary greatly depending on your business's location. 

Sales tax is audited more heavily than income tax, with sole proprietorships being the most frequently audited. Because sales tax can significantly impact your business, you’ll want to keep accurate records and follow applicable laws and regulations. These laws can change frequently, and what was once nontaxable could become taxable over time.

Unless you live in one of the five states that doesn’t have a state-wide sales tax – Alaska, Delaware, Montana, New Hampshire, or Oregon – start by determining if your business is based in an origin-based state or a destination-based state. 

  • Origin-based states require sales tax to be charged based on the business’s location, including any applicable state, county, city, or district taxes. Only eleven states fall into this category.

Arizona

Mississippi

Pennsylvania

Utah

California

Missouri

Tennessee

Virginia

Illinois

Ohio

Texas

  • Destination-based states have a more complicated system where businesses have to charge sales tax at the rate of the customer’s location. If your business is located in one of these states, you’ll have to charge sales tax at the rate of where the item is being shipped, including all state, county, city, or district taxes.

Alabama

Indiana

Minnesota

Rhode Island

Arkansas

Iowa

Nebraska

South Carolina

Colorado

Kansas

Nevada

South Dakota

Connecticut

Kentucky

New Jersey

Vermont

District of Columbia

Louisiana

New Mexico

Washington

Florida

Maine

New York

West Virginia

Georgia

Maryland

North Carolina

Wisconsin

Hawaii

Massachusetts

North Dakota

Wyoming

Idaho

Michigan

Oklahoma

#2 - Sales tax matters, even if your sales are online

In the era of eCommerce, sales taxes have only grown more complex. While you’re probably required to charge all applicable sales tax to customers in the same state as your business, you’ll also have to abide by the sales tax regulations of any state where you have a nexus. Any connection between your business and a certain jurisdiction can become a sales tax nexus, requiring you to collect and pay sales tax to that state, county, or city.

There are a few different ways your business may have established a nexus in a different state:

Physical presence nexus

Having a brick-and-mortar location within a tax jurisdiction creates a physical nexus, but other functions can also create a physical presence nexus. Owning or leasing, even just one office or mailing address, or having a single employee or independent contractor within a state can create a nexus. If you store inventory or maintain a warehouse out-of-state or sales reps attend a trade show on behalf of your business, you maybe be liable for sales tax in that jurisdiction.

Economic nexus 

After a precedent set by the 2018 Supreme Court case South Dakota v. Wayfair, states can now require any business to collect sales tax, even if that business has no physical location or sales representative. Once sales reach a set level of transactions or a minimum threshold, an economic nexus will be established, and the business will be required to remit sales tax.

Marketplace nexus 

If your business operates as a marketplace, like a virtual co-op shop, where third parties sell their good to customers through your platform, you may have a marketplace nexus. This means that the state where your business is located or where you meet a certain threshold of sales may require you to collect sales tax on behalf of the sellers on your platform.

Click-through nexus

You may create an agreement with a person or company in a different state that refers customers to your out-of-state business. If that person or company collects a commission for that referral or other consideration, you may have created a click-through nexus in that state.

#3 - Tools you can use to manage your sales tax

Navigating what sales taxes you’ll need to pay and to which jurisdictions you’ll remit those taxes is one thing, but managing all those deadlines and payments is another. 

Shopify offers default tax rates, which are updated regularly, but you’ll need to confirm that they are accurate for your circumstances, and you may have to override the settings to correct them. 

You’ll also want to consider all the requirements for the states where you do business. Automatically turning on sales taxes for states where it is not required can make filing more complicated later. You must remit sales tax if you collect it, even if you don’t owe it. 

It’s also important to remember that even if you collect sales tax from purchases your customers make through Shopify, the company will not remit or file these taxes for you. Luckily, there are software options that can help.

  • Sovos If you’re looking for sales and use tax solutions, Sovos offers a comprehensive platform that helps your business maintain compliance. Its features include validating use tax or vendor invoices, managing exemption certificates in real-time, and even automating your sales tax filings.  
  • ComplYant Your tax liability can vary based on your business, and ComplYant offers a platform to maintain your compliance across multiple forms of business tax. An intuitive dashboard allows you to manage multiple businesses and never lose track of filing and payment deadlines for income tax, sales tax, property tax, business licensing, payroll tax, annual reports, and more. 
  • Tax Jar  If you’re running an eCommerce business and need a solid platform to manage your sales tax, Tax Jar can help you maintain your compliance in each state you’re enrolled (where you’ve established a nexus), provide sales tax data in real-time reports, and even automatically remit and file.

If I don’t sell much, do I really need to worry about this? 

If your business is new, plan as if you won’t be small forever. Things can move fast on the internet, and your business may grow like wildfire. It’s best to be prepared and avoid the headache of sorting out all the regulations you’ll need to follow as your sales grow.

Shiloh Johnson
By Shiloh Johnson
Shiloh Johnson is a long-time CPA and founder of ComplYant, a technology platform offering business owners and entrepreneurs a simple way to manage tax rules and requirements.

Related posts

Young professional reviews cash flow statements
Guide

The ins and outs of cash flow: How to keep track of the money moving through your business

Tracking money in and out of your business may seem simple, but it can become complicated. A company’s cash flow helps to evaluate its overall financial health. Knowing how cash flow affects your business can be just as important as finding the right management strategy.
Small business owner applies for a business license on a laptop
Guide

Business licenses: They are everywhere you are

Business licenses are an age-old compliance rule that local governments enforce on businesses in a specific area. Quite literally, business licenses are everywhere you are.
An employee examines their paycheck
Guide

How business entity structure can affect payroll obligations

When it comes to payroll taxes, not all businesses are the same. Check out this breakdown of business entities to learn more about the different ways this tax obligation can be applied.