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Platforms like Shopify make it much easier for ecommerce businesses to operate. With Shopify, you can easily facilitate both online sales and POS transactions. However, running your business on Shopify also presents unique challenges. One of the most confusing aspects of operating a business through Shopify is the collection and payment of sales tax to various taxing authorities. As an ecommerce business owner, you may have many questions about sales tax, such as when you should collect it, how much you should collect and whether you are responsible for sending it to the state yourself. The purpose of this guide is to help you understand your sales tax responsibilities when using Shopify, as well as how to go about collecting taxes, making payments and ensuring that you are always fully in compliance with state law.
What do Shopify business owners need to know about sales taxes?
Sales taxes are taxes collected by state and local governments when sales are made to consumers. These taxes are typically assessed on the price of the items or services purchased and are calculated as a set percentage. The laws that determine which products are taxable, as well as the rate of tax assessed, will depend on the state in which the sale is made.
For the owner of a business operating online, sales tax can be a bit tricky. Your online business’s operations may take place in more than one state. In addition, it is likely that you are making sales to customers across multiple states. As a result, it may be hard to determine whether you should collect tax on each sale you make, as well as the rate you need to use.
As a business owner, it is important to understand that you are responsible for collecting applicable sales taxes. If you fail to collect these taxes at the time of the sale, you may face penalties from state or local taxing authorities. For this reason, it is important to be aware of the tax laws that apply to your business so you can be sure that you are fully in compliance at all times.
Should I charge taxes on Shopify?
If you make sales on Shopify that are subject to sales tax by law, you will need to collect taxes through the platform. To determine whether you need to be charging sales taxes on Spotify and meet the state’s legal requirements, follow the steps below.
1. Determine your sales tax nexus.
The first step to figuring out whether you need to collect sales tax is to determine where you have a sales tax nexus. A sales tax nexus is simply a connection between your business and a given state that makes it necessary for you to charge sales tax.
Each state has its own definition of what constitutes a sales tax nexus. However, the majority of states will consider your business to have a sales tax nexus if it has any physical connection with the state, such as a warehouse or office located within the state’s borders. States may also consider your business to have a sales tax nexus if you have employees working within the state, or if you participate at a tradeshow located within the state. Because states use their collected sales tax to pay for a variety of projects and services, it is in their interests to make the definition of sales tax nexus as broad as possible.
At this time, 46 states require merchants to collect sales tax. To determine which states will expect sales tax from your business, make a list of all states with which your business is connected physically. Check each state’s requirements individually to determine whether you will be expected to collect and pay sales taxes. Keep in mind that you will typically have a sales tax nexus in any state where you use Shopify POS to facilitate transactions.
2. Register with each state.
After you have determined which states will require you to collect and remit sales tax, you should register for a sales tax permit with each of these states. To learn about the process of registering for a permit in each state, simply contact the state’s department of revenue or explore the information available from the department of revenue online.
In addition to completing the required paperwork, you may be required to pay a fee when registering for a state sales tax permit. In some states, you may also be required to renew your sales tax permit on a regular basis. Be sure to keep track of your renewal dates so you can keep your permit active with all states in which you collect tax.
It is also important to note that you cannot legally collect sales tax unless you are properly registered with the state in question. For this reason, it is important to complete the registration process before making any online sales.
3. Start collecting sales tax.
As soon as you have registered to collect sales tax from each state where you have a nexus, you can begin collecting sales tax. When using Shopify, you can collect this tax by setting up your Shopify account appropriately.
How do I set up taxes on Shopify?
In order to collect taxes through your Shopify account, you will need to configure your shopping cart accordingly. Shopify has designed its platform to make this process as simple as possible. Once the platform has been configured properly, Shopify will collect sales tax on your behalf, and you won’t need to worry about it.
You can configure your Shopify account to collect sales tax for you by navigating to “Settings,” followed by “Taxes.” In the “Tax Regions” section, click “Set Up” next to “United States.” Next, click “Collect Sales Tax” to begin inputting information for each state in which you are registered to collect sales tax. You will need to input your sales tax ID for each state in question. If you don’t have your ID available yet, you can leave the field blank temporarily and input it later.
Different states may or may not require you to charge taxes on shipping. Be sure to configure each state’s settings appropriately.
Filing and reporting Shopify taxes
Although Shopify will automatically collect sales taxes on your behalf based on the parameters you establish, the platform will not file or pay sales tax for you. You will be responsible for making all of the necessary payments and filing all of the required forms. For this reason, it is important to keep careful records of all the tax you collect from different sources, as well as the filing requirements of each state in which you are registered to collect sales taxes.
To find out how much sales tax you have collected on Shopify in a given time period, you can pull sales tax reports from the platform’s database. This part of the process can be daunting, especially if you are required to collect sales tax in multiple states. Many states will expect you to break down the taxes you have collected according to the city, county or other districts that are subject to different requirements.
After calculating how much sales tax you have collected from buyers for each state, you must file your sales tax returns. Every state will have its own unique filing requirements. However, in most cases, you will be able to file by mail or online. To find out more about filing your sales tax returns in each state, check with the state’s department of revenue.
In some cases, you may have a sales tax return due at a time when you have not collected any sales tax within a given state. Many states will require you to file a return at this time even if you have not collected any tax. Be sure to file these returns on time to avoid penalties.
What if Shopify is not charging taxes?
If you find that Shopify is not charging applicable sales taxes on sales you have made, check your settings to determine whether you have configured your account properly. If you find that the account is not configured properly, make the necessary changes to avoid problems on future orders.
For orders that have already processed without sales tax, you may be responsible for remitting the appropriate amount to the state.
Tips for avoiding problems with Shopify taxes
Collecting taxes on Shopify can be a challenge, especially if you are new to the platform. However, with a little bit of research and the proper preparations, you can simplify the sales tax collection process and avoid any potential problems with state or local taxing authorities. To avoid problems, follow the tips below.
1. List sales tax separately.
Shopify gives you the option of incorporating sales tax into your product pricing, as opposed to adding it as a separate charge at checkout. Not only will adding this charge to your product prices make your items seem more expensive to consumers, but it can also be confusing when it is time to calculate sales tax for filing purposes. Keep things simple by electing to add sales tax as a separate charge.
2. Set tax overrides properly.
Many states have regulations that keep certain items exempt from sales taxes. For example, in many states, food is not taxed. Other states may exempt clothing or other such items from tax. Make sure you have up-to-date information about exempt items in all states where you collect sales tax. Use Shopify’s tax override feature to avoid charging sales tax on exempt items.
3. Know your filing requirements.
When you register for your sales tax permit with each state in which you have a nexus, you will receive instructions for filing your sales tax returns and making payments. Depending on the state, you may need to file your sales tax returns monthly, quarterly or annually. Keep careful records of these instructions so you can avoid missing any deadlines.
4. Be mindful of other channels.
Many ecommerce businesses use multiple channels to make their sales. If you are using channels in addition to Spotify, keep in mind that you will need to collect sales tax on all of these platforms for every state in which you have a sales tax nexus. The procedure used to set up sales tax collection will vary by platform. It is also important to remember that you will need to total sales tax from every platform you use when it is time to prepare your sales tax returns and remit payments to the state.
5. Stay on top of things.
Sales tax regulations can change from time to time. In addition, the procedure used to configure your Shopify account for sales tax collection is also subject to modifications. For this reason, it is important to be on the lookout for any changes that may affect your ability to collect sales tax. If you become aware of a change, alter your account appropriately to avoid any problems.
6. Seek professional help.
If you are confused about sales tax regulations or any other aspect of collecting sales tax as an ecommerce business, consider consulting a professional. For example, you may be able to get answers to your questions by meeting with an accountant.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.