Shopify Sales Tax Guide: How to Set Up & Manage Taxes on Shopify

Handling Shopify sales tax can be confusing, with different rules across states and countries. If you’re selling in the U.S., Canada, Europe, or Australia, understanding sales tax, VAT, and GST is essential to stay compliant.

In this guide, Nextsky will help you navigate Shopify tax settings, tax nexus, registration, and reporting—so you can collect taxes correctly and avoid penalties. Let’s dive in!

1. Shopify Sales Tax Explained: When & How to Collect It

1.1 What is sales tax?

Sales tax is a type of consumption tax applied when selling goods or services. In most countries, it is calculated as a percentage of the transaction value, with the buyer paying the tax while the seller is responsible for collecting and remitting it to the tax authority.

Sales tax systems vary by country—while the U.S. applies tax at the state level, other regions use VAT or GST, which impact pricing and compliance differently.

1.2 Types of Consumption Taxes

Sales Tax (U.S.) (a.k.a. Consumption Tax)

Shopify merchants in the U.S. must comply with varying sales tax rules:

• Some states do not impose sales tax (Alaska, Delaware, Montana, New Hampshire, Oregon).
• Rates vary by state, and some cities add local taxes.
• Certain products and services may be tax-exempt or taxed at different rates.

Under the economic nexus rule, merchants must collect sales tax in states where their revenue or transactions exceed the threshold.

Value-Added Tax (VAT - Europe)

VAT is a multi-stage consumption tax where the final consumer bears the cost.

• Shopify merchants must register if revenue exceeds their country’s threshold.
• Under the One-Stop Shop (OSS) system, VAT is charged based on the buyer’s location for EU cross-border sales.

Goods and Services Tax (GST - Canada, Australia)

GST is a fixed-rate tax similar to VAT.

• Canada: Federal GST applies nationwide, with some provinces adding PST or HST.
• Australia: Businesses earning over AUD 75,000/year must register and charge 10% GST on all sales.

1.3 When Do Shopify Sellers Need to Collect Sales Tax?

Merchants must collect sales tax if:

• Sales exceed the economic nexus threshold in a U.S. state.
• Revenue surpasses the VAT/GST registration threshold in their country.
• They sell taxable goods/services in a jurisdiction requiring tax collection.

Some items (e.g., groceries, children's clothing, digital goods) may be tax-exempt or taxed at different rates.

1.4 Does Shopify Collect Sales Tax Automatically?

Shopify provides tax calculation tools, but it does not automatically remit sales tax on behalf of sellers (except in specific cases, such as VAT on digital products for EU customers).

Sellers are responsible for:

• Register for tax permits where required.
• Set up tax collection in Shopify to apply correct rates.
• File and remit taxes to authorities regularly.

2. Tax Nexus & Sales Tax Thresholds

2.1 What Is Tax Nexus & How Does It Affect Your Shopify Store?

Tax nexus determines where you must collect and remit sales tax. If you have nexus in a state, you must register, charge, and remit the correct tax.

Types of Tax Nexus:

Physical Nexus

A Shopify store has physical nexus if it has:

• A store, office, or warehouse
• Inventory in third-party fulfillment centers (e.g., Amazon FBA)
• Employees, contractors, or sales reps in the state

Example: Storing inventory in California via Shopify Fulfillment Network creates a tax obligation there.

Economic Nexus

Even without a physical presence, a store may have economic nexus if its sales volume exceeds state thresholds. Most U.S. states require tax collection if you exceed:

• $100,000 in sales OR
• 200 transactions in that state

Example: If a store generates $120,000 in Florida sales, it must register for Florida sales tax.

2.2 Sales Tax Thresholds by State & Country

Each U.S. state sets its own economic nexus rules:

• California: $500,000 in sales
• New York: $500,000 + 100 transactions
• Florida: $100,000 in sales (no transaction requirement)

International VAT/GST thresholds also vary:

• Canada: $30,000 CAD in sales
• European Union: VAT required for €10,000+ in cross-border sales

=>> See also: How Does Shopify Pay You? A Complete Guide to Shopify Payouts

3. Sales Tax ID: Do You Need One?

3.1 What is a Sales Tax ID Number?

A Sales Tax ID (also known as a sales tax permit or reseller certificate) is a unique identifier issued by a state’s tax authority. It allows businesses to collect sales tax from customers and remit it to the government. Without this permit, collecting sales tax is illegal in most jurisdictions.

3.2 How Do You Get a Sales Tax ID Number?

To obtain a Sales Tax ID, follow these steps:

1. Determine where you need to register – Typically, you need a permit in any state where you have economic nexus (i.e., a certain level of sales or transactions).
2. Apply through the state’s tax agency – Most applications can be completed online via the state’s Department of Revenue website.
3. Provide business details – You’ll need to submit your business name, EIN (Employer Identification Number), and estimated sales information.
4. Receive and activate your Sales Tax ID – Once approved, you can start collecting sales tax legally.

3.3 Sales Tax ID vs. Business Tax Registration

While both are tax-related, they serve different purposes:

• A Sales Tax ID allows you to collect and remit sales tax.
• A Business Tax Registration (or EIN) is a federal tax ID for general business tax filings and payroll purposes.

3.4 Do Shopify Sellers Need a Sales Tax Permit?

Yes, Shopify sellers need a sales tax permit if:

• They have physical presence (e.g., office, warehouse, employees) in a state that requires sales tax collection.
• They meet the economic nexus threshold in a state (based on revenue or transaction volume).

Failing to register for a sales tax permit when required can lead to penalties and back taxes. Always check state-specific regulations or consult a tax professional to ensure compliance.

4. How to add taxes on Shopify

Step 1: Determine Where You Need to Collect Taxes

Your tax obligations depend on tax nexus — physical (office, warehouse, employees) or economic (sales volume). Identify states/countries where you must collect tax.

Step 2: Register for a Sales Tax Permit (If Required)

If required, apply for a Sales Tax Permit in the relevant states or countries before collecting taxes.

Step 3: Set Up Taxes in Shopify

1. Go to Settings → Taxes and duties in your Shopify Admin.
2. Add tax regions (states, countries).
3. Choose automatic or manual tax collection settings.

Step 4: Check Product Tax Settings

1. Go to Products in Shopify Admin.
2. Select a product → Under Pricing, check Charge tax on this variant if applicable.

Step 5: Monitor and Report Taxes

• Download tax reports (Analytics → Reports → Sales tax report).
• File and pay taxes according to local regulations.

💡 Note:

• Shopify calculates but does not remit taxes—you must submit them yourself.
• International sales may require VAT/GST collection.

5. B2B vs. B2C Sales Tax Differences

B2C (Business-to-Consumer): You must collect and add sales tax to the total price at checkout. Shopify can automatically calculate taxes based on the customer’s location.

B2B (Business-to-Business): Businesses may be tax-exempt if they provide valid documentation (e.g., VAT ID, exemption certificate). In some regions, such as the EU, a reverse charge mechanism applies, meaning the buyer, not the seller, is responsible for reporting and paying the tax.

5.1 How to Handle Tax-Exempt Orders on Shopify

1. Collect valid documentation (VAT ID, tax exemption certificate).
2. Verify the VAT ID using VIES or a local tax authority.
3. Set up tax exemptions in Shopify:
   • Go to Customers → Select a customer → Edit → Check Tax-exempt → Save.
4. Include a note on invoices if a reverse charge applies.

💡 Tip: Tax laws vary by region. Always check local regulations or consult a tax professional.

6. Shopify Sales Tax Collection & Reporting

Sales tax compliance is a key responsibility for Shopify sellers. While Shopify provides tax collection tools, it does not handle tax reporting or remittance. Here’s what you need to know:

6.1 Does Shopify Report Sales Tax to States?

No, Shopify does not automatically report sales tax to state authorities. Sellers must track and report taxes to the appropriate tax agencies based on their nexus and tax obligations.

6.2 Does Shopify Remit Sales Tax for Sellers?

No, Shopify only calculates and collects sales tax based on your settings but does not remit it. You must submit collected taxes to the relevant tax authorities according to local laws. Some third-party tax automation services can help streamline this process.

6.3 Shopify 1099-K 2023: What It Means for Tax Reporting

Shopify issues Form 1099-K to sellers using Shopify Payments who exceed reporting thresholds:

• $20,000 in sales and 200+ transactions (most states).
• $600 in sales (for states with lower reporting thresholds).

This form helps sellers report income to the IRS and state tax agencies. You can download it from Settings → Payments → Documents in Shopify.

6.4 How to View and Download Shopify Tax Reports

To access tax reports for filing:

1. Go to Analytics → Reports in Shopify.
2. Open the Taxes report to view collected tax amounts by region.
3. Use filters to customize the data.
4. Export the report as a CSV file for tax filing.

7. Special Cases: Exemptions & Non-Taxable Sales in the U.S.

As a Shopify store owner, you may sell products that are exempt from sales tax, depending on the state and customer type. Understanding these exemptions helps you stay compliant and avoid unnecessary tax collection.

7.1 Tax-Exempt Products & Services

Some states do not apply sales tax to specific items, including:

• Essential groceries (e.g., fresh fruits, vegetables, and bread)
• Prescription medications and certain medical devices (e.g., wheelchairs, insulin pumps)
• Educational materials like textbooks and some digital courses
• Clothing and footwear in states with exemptions or price-based thresholds (e.g., New York exempts clothing under $110)

7.2 Selling to Nonprofit Organizations

Nonprofits, including charities, religious organizations, and schools, can be tax-exempt if they provide a valid exemption certificate. When processing their orders:

• Request their Sales Tax Exemption Certificate
• Store exemption documents for tax records
• Ensure purchases align with their tax-exempt purpose

7.3 How to Register Tax-Exempt Customers in Shopify

To ensure the correct tax treatment:

1. Go to Shopify Admin → Customers
2. Select the customer’s profile
3. Click Edit and check Tax-Exempt
4. Save the changes

Since tax laws vary by state, it's best to use Shopify Tax, Avalara, or TaxJar for automated compliance. Always consult a tax professional if unsure.

8. Useful Apps for Charging Tax on Shopify

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

8.1 Zonos Duty and Tax

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

Pricing:

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

8.2 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

8.3 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.

=>> Read more: How to add taxes on Shopify (Include taxes in product prices)