Tax

Ecommerce Sales Tax: What Every Shopify Seller Should Know

By Finaloop Team
August 01, 2022

We live in a world where you can find any product online and order it straight to your doorstep in seconds. Heck, you can do this on your phone while sitting on the toilet (c'mon, we all know it's true).

For consumers, this has made life so simple. For DTC brands, on the other hand, the change in the selling ecosystem has caused many complexities- specifically, in the already complex world of sales tax.

We'll cover the basics of what you need to know about sales tax to get started as an online seller.

 

What is sales tax?

At a basic level, sales tax is a state-level tax on goods and services. The rates of tax and type of items subject to tax can vary by state. For example, groceries may not be subject to sales tax in certain states or may be subject to a reduced rate or exempt in other states.

 

Do I need to pay sales tax?

Well, here we have some good news and bad news.

The good news is that the financial cost of sales tax is generally charged to the customers, not the ecommerce seller. The bad news is that if you, as an ecommerce seller, have a sales tax liability and do not accurately collect or pay sales tax, you can face some pretty unpleasant fines & penalties.

If you are one of those sellers who don’t enjoy paying unnecessary penalties (we'll take the liberty of assuming this is the case), understanding your sales tax obligations is super important for your business.

 

Do you have to charge sales tax on your ecommerce sales?

As an ecommerce seller, you would generally have to charge sales tax if you:

  1. Sell to a customer in a state that charges sales tax on online sales (this applies to 45/50 states);
  2. You have sales tax nexus in that state; and
  3. Your product is taxable in that state.

Nexus is a buzzword that essentially is a fancy way of describing when a business has a close connection to a specific state. Two main types of nexus are (1) physical nexus and (2) economic nexus.

Physical nexus arises if you or your business have a physical connection to a state. For example, if you live, have employees, a warehouse, or inventory in that state, this can create physical nexus.

Economic nexus occurs when you meet certain thresholds of economic activity in a certain state (such as a certain dollar amount of sales or a certain amount of transactions). For example, in several states, if you sell over $100,000 or 200 units to customers in that state, you could trigger economic nexus.

Once a company has nexus (either physical or economic) in a state, there is generally an obligation to collect, pay (remit), and report sales tax to that state.

Keep in mind, this assumes that the items that are being sold are subject to sales tax in the first place.

 

Why your sales tax obligations could be different if you sell on Amazon or Shopify

There are important differences when it comes to sales tax if you sell on a non-marketplace platform like Shopify or through a marketplace like Amazon, Walmart, or eBay.

The marketplace is a third-party website that consists of products from many sellers. Amazon is a prime (pun intended) example of a marketplace. On Amazon, individual sellers list their products and have their own stores, but all those products are listed on the Amazon platform. Walmart, eBay, and Etsy are other examples of marketplaces.

Non-Marketplace stores are websites that host your online store where customers can view your products and purchase them. Unlike a marketplace, with an online store, there are no products other than those offered by your store. Common non-marketplace platforms are Shopify, WooCommerce, and BigCommerce.

A couple of years ago, many states weren't happy that they weren’t able to collect taxes for online sales in their state if there was no physical nexus. The Supreme Court came out with a famous decision most commonly referred to as the “Wayfair” case that was adopted by most states.

The decision requires any ‘marketplace’ to collect and pay sales tax from customers in states in which the business has economic nexus. Currently, Missouri is the only state that has not yet instituted marketplace facilitator laws. However, beginning in January 2023, they will be enacted in Missouri as well.

For consumers, this makes no difference. Either way, they are obligated to pay sales tax if it applies to their purchase. For ecommerce sellers, this can make a HUGE difference.

 

Sales tax requirement for selling on a non-marketplace platform like Shopify

When it comes to non-marketplace platforms like Shopify, it is your obligation to collect and pay sales tax as well as register and file in each state in which your business has nexus.

For example, if your business is located in California but you sell a lot in Texas, you could have physical nexus in California and economic nexus in Texas. In this case, you are responsible for registering in both California and Texas, collecting and paying sales tax to the relevant states, and filing a sales tax return in the states.

The frequency and format of filling out sales tax returns can vary by sales volume and by state. Some sales tax returns are due annually, some quarterly, and some monthly.

 

Sales tax requirement for selling on a marketplace like Amazon

If you sell on Amazon instead of Shopify, you are not obligated to collect or pay sales tax on your Amazon sales. However, if you have nexus in a state, you still must register and file a sales tax return in that state. For example, if you have Texas in nexus, Amazon will collect the sales tax and pay sales tax to Texas. You are still responsible to register for a sales tax permit in Texas and file the Texas sales tax return.

For many states, if your only nexus is through marketplace sales and you have nothing to pay to the state, you may file a state sales tax return with all $0s.

 

Streamlining the sales tax process

Since each state is different in its criteria and requirements, a sales tax expert should be consulted when determining nexus and sales tax compliance.

Some great sales tax platforms offer auto-filing of sales tax returns. Taxjar may be a great solution for smaller companies with lower sales volume and less complexity while Avalara may be suitable for more complex reporting as well as determining nexus. Many of Finaloop’s Amazon and Shopify customers use these platforms to simplify and ease their sales tax compliance burdens and have been satisfied with the results.

 

Key Takeaways

As an ecommerce seller, being on top of your state sales tax requirements and compliance is crucial. As this article discusses above, sales tax could apply to your business in specific states in which you meet three requirements:

  1. Sales are made to a customer in that state;
  2. You have sales tax nexus in that state; and
  3. Your product is taxable in that state.

If you meet the above 3 requirements, your obligation to collect and pay sales tax depends on whether your business store is hosted on a marketplace platform or a non-marketplace platform. If you sell on a marketplace such as Amazon, Walmart, eBay, or Etsy, it is the responsibility of the marketplace to collect and pay sales tax to the state (except Missouri until January 2023).

If you sell through a non-marketplace store such as Shopify, BigCommerce, or WooCommerce, collecting and paying sales tax is your responsibility.

Under both scenarios, whether or not you are obligated to collect and pay sales tax you may have the obligation to register and file a sales tax return in that state. 

 

About Finaloop

We are a technology company providing automated end-to-end accounting service to ecommerce businesses. Our system connects to your apps, syncs all your data and reconciles your books in real-time, replacing your bookkeeper. We offer reconciled books available 24/7, tax-saving insights, and a single place for all your financial data.

The information provided on this website does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers are advised to consult with their attorney or accountant with any questions or concerns.
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