How to Set up Sales Tax in Shopify?

June 22, 2023

Follow our step-by-step guide to set up your sales tax in Shopify

How to Set up Sales Tax in Shopify?

As an ecommerce business owner, we know you have a million and one things on your mind. However, understanding and properly managing your sales tax should be right at the top of your list. We know taxes, especially sales tax can be pretty confusing, but getting it right is crucial for ensuring compliance and avoiding legal complications.

Luckily for you, Shopify offers a seamless way to set up and manage sales tax rates. 

But before you even start to think about setting up your sales tax in Shopify, there are two things you MUST do…

1) Check your sales tax requirements

It’s important for you to know that Shopify sales tax requirements are different than marketplaces such as Amazon. So, for 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 (a close connection to a specific state).

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.

For example, if your business is located in California but you sell a lot in Texas, you could have a physical nexus in California and economic nexus in Texas—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.

To read more about the basics of sales tax read our blog Ecommerce Sales Tax: What Every Shopify and Amazon Seller Should Know

2) Register for a sales tax permit

Once you have identified the states where you have nexus, you need to receive a sales tax permit before you begin collecting sales tax. You can find the registration form on your state’s Department of Revenue website or give them a call. Once set up, you will be advised how often your state requires you to file taxes—monthly, quarterly, or annually.

Most states do not charge a fee to register, however, others cost a small fee ranging from $10 to $100. 

Here are our tips for setting up sales tax in Shopify. 

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How to set up sales tax in Shopify

To set up sales tax in Shopify, follow these steps:

Step 1: Choose tax regions

1. Log in to your Shopify admin panel.

2. In the bottom left of the screen click on "Settings" 

3. In the menu on the left click on "Taxes and duties."

Click on "Taxes and duties"

4. In the "Taxes" section, you'll find "Manage sales tax collection." Click on the region (United States) in the dropdown menu to configure its tax settings.

Click on the region (United States) in the dropdown menu to configure its tax settings

2) Collect sales tax

1. Click “Start Collecting” 

Click “Start Collecting” 

2. A “Collect sales tax” pop-up will come up. In the dropdown menu, choose any states where you should collect taxes due to a physical or economic presence. 

Choose any states where you should collect taxes due to a physical or economic presence

3. Enter your sales tax ID and click “Collect sales tax.” If you don’t yet have that number, you can use your federal employer identification number (FEIN).

Enter your sales tax ID and click “Collect sales tax”

3) Tax rates and exemptions

You can choose to set custom tax rates for shipping destinations by creating a shipping tax override. Additionally, the default tax rates won’t apply to every single product, for example, some children's clothing items might have a lower tax rate or even could be exempt from tax. In this case, you would need to create an override. However, be aware that overriding tax rates can lead to inaccurate tax reporting, so use this feature carefully!

To carry out the override, click “add shipping override” or add “product override’ and follow the prompts to add in your desired rate. 

Click “add shipping override” or add “product override’

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4) Reporting

Click on “Go to tax reports” to download tax reports and file your taxes. You will be able to see where you need to file sales tax together with all the information you need for filing. You can export reports, and see breakdowns by state.

Click on “Go to tax reports” to download tax reports and file your taxes

Conclusion

Follow this step-by-step guide on how to set up your sales tax in Shopify. It’s important to know there are many exceptions and different variables which will alter these steps, so remember to consult with a tax professional to ensure your tax settings fully comply with local regulations. Many of our customers use TaxJar or Avalara to stay compliant with all the states.

Make managing your taxes easier for your Shopify business by having accurate and real-time financials—the only way to give you the full picture of your financials. Consider using AI accounting and AI bookkeeping software that connects directly to Shopify like Finaloop.

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, your accounting software, and your ecomm integrations. 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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