How to Set up Sales Tax in Shopify?

All About Shopify Sales Tax: Does Shopify Collect and Pay Sales Tax?

As an ecommerce business owner, we know you have a million and one things on your mind. However, understanding and properly managing your ecommerce 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. 

"Sales tax compliance is not just about paying taxes; it’s about ensuring that your business remains on the right side of the law and can scale without unnecessary tax headaches."

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, does Shopify collect sales tax? While Shopify provides the infrastructure to collect taxes, it’s ultimately your responsibility as a merchant to set it up properly. 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).

Does Shopify collect and pay sales tax? Shopify will collect sales tax on your behalf in states where you have nexus (either physical or economic). However, you remain responsible for ensuring the sales tax setup in Shopify is accurate for your business. Sales tax could apply to your business in specific states in which you meet three requirements:

• Sales are made to a customer in that state;
• You have sales tax nexus in that state;
• 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.

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."

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.

2) Collect sales tax

1. 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. 

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).

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. 

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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.

"Understanding your sales tax obligations and leveraging the right tools is key to running a successful ecommerce business on Shopify — it's an investment in both time and financial accuracy."

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5) The Best Sales Tax App for Shopify

To ensure seamless sales tax management on Shopify, it's essential to use the best sales tax app for Shopify. Tools like Avalara for Shopify are specifically designed to simplify the process by automatically calculating the correct sales tax rates for each region, including any special exemptions. Avalara integrates seamlessly with Shopify, updating tax rates in real-time as jurisdictions change their requirements. This automation reduces the risk of errors, ensures compliance, and saves valuable time for Shopify merchants, particularly those operating across multiple states or globally. You can also consider other ecommerce sales tax software- there are lots of good options out there today.

Conclusion

In conclusion, does Shopify collect sales tax? Yes, Shopify collects sales tax for you in states where you have nexus, but you are still responsible for configuring it correctly, registering in required states, and ensuring everything complies with state-specific laws.

To make sure you're compliant and keep your books clean, it's important to track sales tax and related information properly. As you scale, consider using tools like Finaloop to manage your Shopify bookkeeping and automate your sales tax compliance. Finaloop integrates seamlessly with Shopify, helping you track and report all aspects of your ecommerce finances. It ensures that your business is always audit-ready and tax-compliant, making it the perfect solution for growing Shopify merchants. Start simplifying your Shopify accounting today by signing up for Finaloop and ensure your business stays ahead of tax compliance challenges.