What is Shopify sales tax? Does Shopify Collect sales tax?

Understanding how to handle taxes on Shopify is essential for global e-commerce businesses. Proper tax management ensures compliance with tax laws and helps avoid hefty fines. Although Shopify offers tools for managing taxes, setting them up correctly can be complex.

Today, we'll simplify things by answering key questions: What is Shopify sales tax? Does Shopify handle sales tax? Do they file tax returns for sellers? And how can merchants access tax information on Shopify? Explore our comprehensive guide to Shopify taxes.

What is Shopify sales tax?

Sales tax on Shopify is a consumption tax imposed by governments on the sale of goods and services. It is typically collected by the seller at the point of sale and then remitted to the government.

The rate and rules for sales tax vary depending on the jurisdiction, which can be local, state, or national. If you’re operating in the US, Canada, the UK, and various other regions, you’ll need to ensure you’re adhering to the sales tax requirements of your country and state.

Sales tax is usually calculated as a percentage of the sale price of the item or service being sold. Businesses are responsible for collecting and remitting sales tax to the appropriate tax authorities based on where the sale takes place and the applicable tax laws.

The revenue generated from sales tax is used to fund public services and infrastructure projects in the jurisdiction where the tax is collected.

Does Shopify collect sales tax?

Shopify itself doesn't automatically collect sales tax  for you. However, it does offer tools to help you manage sales tax collection

There are two main things to know about Shopify and sales tax:

• Calculating and Collecting: Shopify can help you calculate the correct sales tax rate to charge based on your customer's location and your products. It also has a paid service called Shopify Tax that can automate this process for you within the United States.
• Filing and Remitting:  Shopify won't file or remit your sales taxes to the government for you. You'll be responsible for filing and paying those taxes yourself.  They do provide reports to help you with this process, but it's always wise to consult with a tax professional to ensure you're compliant.

To begin collecting sales tax on your Shopify store, ensure you obtain a sales tax permit and integrate a reliable accounting app with your store. This integration enables you to keep all sales and tax-related information up to date.

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How to collect sales tax on Shopify

Step 1: Identify your nexus points

To effectively manage tax obligations, you must identify states where you trigger nexus, meeting their specific requirements. 

Source: TaxFoundation

There are two main types of nexus to consider:

• Physical Nexus: This involves having a tangible presence in a state, such as an office, employee, warehouse, affiliate, or product storage unit.
• Economic Nexus: This applies to entities without a physical presence but meet certain sales or transaction thresholds set by each state. 

Numerous online resources provide state-specific economic nexus guides. It's crucial to determine your physical and economic nexus locations and monitor relevant data for compliance.

Step 2: Understand tax sourcing regulations

When conducting sales across different states, it's important to clarify tax obligations. Tax sourcing rules play a key role in determining where taxes are owed. There are three primary types of tax sourcing:

• Destination sourcing: Taxes are owed to the state where the product or service is delivered. Fortunately, most sales tax falls under destination sourcing.
• Origin sourcing: Taxes are owed to the state from which you, as the Shopify merchant, operate. This typically applies to products shipped within the same state they originated from.
• Mixed sourcing: Transactions can be subject to either origin or destination sourcing.

To ensure tax compliance, it's essential to identify which states your business is working in.

Step 3: Complete registration with local tax authorities

To comply with local tax laws, register with the appropriate state tax authorities in your nexus states. This is typically done by contacting the Department of Revenue or applying online. Most states issue permits at no cost. After registration, you'll receive a sales permit and guidance on tax payment frequencies and filing deadlines. Compliance is crucial as failure to register and collect sales tax can result in penalties.

Step 4: Collect sales tax from your customers

After determining your nexus states and completing registration with local tax authorities, the next step is to configure the Shopify tax calculator.

Log in to your Shopify account

Sign in to the Shopify admin home page with your credentials to access the dashboard. This is where you make change to the backend of your store such as changing Shopify theme and setting up taxes.

Configure tax registration area

Navigate to the Settings option in the left sidebar of your Shopify dashboard. Select Taxes and Duties from the menu. In Regional settings, click the United States option or the countries you want.

In the Regions you’re collecting in section, select the specific state or county where you are registered to collect taxes. Enter your sales tax ID if applicable. Otherwise, leave it blank and update later.

Click "Collect sales tax" to confirm your selection.

Repeat the process to add additional registered states by clicking Collect sales tax.

Optimize Tax Calculations

To optimize tax calculations, navigate to the Tax Calculations options after entering data in the Tax Regions section. You have four choices:

• Include sales tax in the product price and shipping rate: Taxes are applied to all products and included in shipping costs.
• Include or exclude tax based on your customer’s country: Shopify determines tax rates based on customer location.
• Charge tax on shipping rates: Include shipping rates in tax calculations for US, Canada, and EU transactions.
• Charge VAT on digital goods: Add VAT to digital products for European customers.

You can select multiple options. For example, if you sell digital products in the EU and physical products worldwide, choose the second and fourth options. If you are unsure about tax and VAT liabilities, consulting an accountant is advisable.

Step 5: Clarify which products are subject to taxation

Certain products and services will be tax-exempt, depending on the law of each state. Knowing which products are taxable will help adjust the tax settings on Shopify.

To make products tax-exempt on Shopify, follow these steps:

• Select the specific product you want to make tax-exempt.
• Scroll down to the Pricing section and find the option labeled "Include sales tax in the product price and shipping rate". Uncheck the box next to it.
• Save your changes.

To create a tax override collection on Shopify, follow these steps:

• Create a manual collection on Shopify by accessing the Products section from the left-hand menu, then selecting Collections and clicking on Create Collection.
• Choose the Manual collection option under collection type. Tax override collections always need to be manual. 
• Add products that require tax overrides to this collection.
• Save the collection.

To override taxes for the collection on Shopify, follow these steps:

• Navigate to the Settings option in the left sidebar of your Shopify dashboard.
• Select Taxes and Duties from the menu.
• In the Regions you’re collecting in section, select the specific state or county where you are registered to collect taxes. Example: click on the United States.
• In the Product overrides section, choose  "Add Override".
• Select the collection you created.

• Specify the regions where the tax override applies and set the new tax rate for the collection.
• Save your changes.

To override taxes for the shipping on Shopify, follow these steps:

• Similar steps as Collect overrides above
• Instead of selecting "Product overrides" we will select "Shipping overrides"
• The remaining steps are similar.

Following these steps will help ensure compliance with tax regulations and accurate tax calculations for your Shopify products.

Step 6: Calculate your total sales tax liability

Once you've established a nexus and understood tax collection, the final step is to calculate and pay your total sales tax liability.

Shopify Advanced plan or Shopify Plus plan offer custom tax reports via Shopify Reports, simplifying tracking and payment. Without these plans, the process can be complicated and difficult since it varies by state. 

To manage tax filings accurately, you can track sales diligently by state and utilize tools like the Shopify Tax app or spreadsheets. Real-time sales monitoring and assistance from professionals or Shopify apps can streamline the process.

Step 7: Submit your tax returns

After taking all the steps above, it's time to pay the collected sales tax. Thankfully, the internet has simplified the tax filing process, with most states requiring online filing. 

Just search for the state and "tax return" to access the online IRS portal. File a tax return for each state where you collected sales tax, even if you don't meet the tax threshold. 

These "zero returns" are necessary for tax authorities to monitor your business operations.

Step 8: Stay informed about any tax-related developments

To stay updated on tax-related developments, monitor state and county tax changes independently, even though Shopify's tax calculators are regularly updated.

Set up notifications for tax changes and join mailing lists for tax regulations to ensure compliance. Combine local regulations, tax settings, and Shopify's calculators for accurate sales tax collection.

Useful Apps for Charging Tax on Shopify

Shopify offers built-in tax features, but for more advanced automation and functionalities, consider these useful apps:

1. Zonos Duty and Tax

Automates duties, taxes, and fee calculations for seamless international sales.

Pricing:

• Standard $2,500/ year
• Premium $4,000/ year

2. Tax Rex – Sales Tax Automation

Simplifies US sales tax compliance with accurate reporting and economic nexus alerts.

Pricing:

• Startup $5/month
• Growth $10/month
• Advanced $20/month

3. DHL Duty and Tax Calculator

Calculates duties, taxes, and import fees, providing an all-inclusive shipping cost to customers. 

Pricing:

• Start-Up Plan $90/month
• SMB Plan $315/month
•  Enterprise Plan $765/month.

The best app for you depends on your specific needs. Consider factors like your store's location, sales volume, product types, and target markets. If you're unsure which app is right for you, research its features, pricing plans, and customer reviews to make an informed decision.

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