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In this guide, we'll walk you through everything you need to know about correctly setting up sales tax on Shopify. We'll cover determining if you need a sales tax ID, how to acquire one, and the step-by-step process of configuring your tax settings in Shopify.
Sales tax nexus: what is it?
Before we get into the details, let's discuss the sales tax nexus and how it affects your ecommerce brand.
Nexus used to be primarily based on physical presence. Having an office, warehouse, or even a sales representative in a state would trigger nexus. However, economic nexus has changed the game.
Economic nexus means if you sell enough to customers in a state, even without a physical presence, you're responsible for collecting and remitting sales tax. Thresholds vary by state but usually involve sales volume or transaction count.
For example, California's economic nexus threshold is $500,000 in sales to California customers annually. New York's threshold is $500,000 in sales and 100 transactions. Texas' threshold is $500,000 in sales OR 200 transactions.
To track these rules, identify the states where you have the most sales and check their nexus laws. After determining where you have nexus, register for a sales tax permit in those states. Each state's process varies, so check their Department of Revenue website for instructions.
Consulting companies like Numeral can integrate with your Shopify to track your sales and notify you as soon as you hit nexus in any state. The company also employs highly qualified accountants who will set up your sales tax ID in the state and start filing.
How do you set up sales tax on Shopify?
Let’s quickly look at the steps to set up sales tax on your Shopify website.
Determining the need for a sales tax ID
The first step in setting up sales tax on Shopify is determining if you need a sales tax ID.
A sales tax ID, AKA a seller's or sales tax permit, is a unique number assigned to your business by your state's tax authority. It allows you to collect sales tax from your customers and remit it to the state.
Whether you need a sales tax ID depends on two main factors: nexus and product taxability.
If you have nexus in a state, you must collect and remit sales tax there. Along with Nexus, you must check if the product is taxable in the state. If it is, you are required to get your sales tax ID or sales tax permit in the said state.
Steps to acquire a sales tax ID
Once you've determined that you need a sales tax ID, the next step is to obtain one from each state where you have nexus. The process varies by state but generally involves the following:
- Visit the state's tax authority website. Shopify's US tax reference provides links to each state's tax authority.
- Look for information on registering for a sales tax permit or seller's permit. This may be under a section like "Businesses" or "Sales and Use Tax."
- Follow the instructions to apply for a permit. This typically involves filling out an application, providing information about your business, and paying a fee.
- Once your application is approved, you'll receive your sales tax ID number. Keep this number handy, as you'll need it when setting up your tax settings in Shopify.
Information you need to register your sales tax ID
When applying for a sales tax ID, you must provide details about your business. While the specific requirements vary by state, here's a general list of the information you may need:
- Business name and address
- Business structure (sole proprietorship, LLC, corporation, etc.)
- Description of your business activities
- Date you started or will start selling in the state
- Estimated sales and/or tax liability in the state
- Your Social Security Number (SSN) or Employer Identification Number (EIN)
- Personal identification information for business owners or officers
Having this information ready will make the application process smoother and faster. If you need help filing sales tax and want to do it yourself, we have many guides for individual states that will guide you through the filing process step-by-step.
Steps to set up sales tax on Shopify
Now that you have your sales tax IDs, it's time to configure your tax settings in Shopify. Here's a step-by-step guide:
1. Log in to your Shopify admin and go to Settings > Taxes and duties.
2. In the Manage sales tax regions, click United States.
3. You’ll then see a page where you can choose to manage tax collection, see tax rates and exemptions, or create tax reports.
4. Click on the Manage Tax Collection link. You’ll see all the states you sell to, where you meet nexus thresholds, and if you have any states where you need to take action or monitor.
You can click Show Details to see the nexus thresholds and how close you are to meeting them.
Go to Tax Rates and Exemptions. Click on Product Category and categorize your products.
For instance, you can categorize your products as apparel, software, etc, to apply the correct tax rates.
To report, click on Reporting to download tax reports.
These reports show where to file sales tax and the amounts required.
Any state with nexus will show under the box that says Regions you’re collecting in. Click Collect Sales Tax to start entering your sales tax ID.
Select the states from the dropdown where you must collect sales tax and enter your Sales Tax ID or FEIN (aka Federal Employer Identification Number).
When adding a new product, check the box that says Charge tax on this product.
If you sell to tax-exempt customers, go to Customers and uncheck the tax collection box for those customers.
Go to Locations under settings. Add the locations where you ship products to ensure accurate tax collection based on origin or destination sourcing rules.
And that's it!
Your Shopify store is now set up to collect sales tax in the states where you have nexus. However, remember that you must also fill out individual sales tax permit forms and keep track of the nexus in each state.
If you find this process overwhelming or prefer an expert to handle it, consider using Numeral. Our white-glove service takes care of all your sales tax needs, from registration to filing, so you can focus on growing your business.
Best Practices for Managing Sales Tax on Shopify
Setting up your sales tax settings is just the first step. To stay compliant and avoid headaches down the road, here are some best practices to keep in mind:
- Collecting sales tax is only part of the process. You must also file returns and regularly remit your collected tax to each state. The frequency depends on your sales volume and varies by state - some require monthly filings, while others are quarterly or annually.
- Filing sales tax returns involves logging into each state's tax portal, entering your sales data, and making a payment. It can be time-consuming, especially if you're registered in multiple states.
- Automation can help. White-glove services like Numeral integrate with Shopify to track your sales and automatically file returns on your behalf. They charge a fee, but the time and hassle saved can be worth it.
- If you prefer a hands-on approach, keep meticulous records of your sales and tax collected. Most states require you to keep this data for at least 3-4 years in case of an audit.
- Another aspect of compliance is product taxability. Not all products are taxed equally—some states exempt certain items like groceries or textbooks, and others have reduced rates for things like clothing or medical supplies.
- To ensure you're charging the correct rate for each product, use Shopify's product categorization feature. Go to Products > All products and edit each listing to assign it a tax category like "Clothing" or "Food." Then, in your tax settings, you can set specific rates for each category based on state rules.
Frequently Asked Questions
You definitely questions and we have the answers. Here are a few questions our customers ask when they're trying to set up
What is Shopify Tax?
Shopify Tax is a built-in feature that helps automate your sales tax calculations. It uses your location and customer information to apply the appropriate tax rates to each order. Shopify Tax is included in all Shopify plans at no additional cost.
Does Shopify automatically collect sales tax?
No, Shopify does not automatically collect sales tax. You must set up your tax settings and enter your sales tax IDs for each state where you want to collect tax. Once you've done that, Shopify will calculate and apply the correct tax rates to orders from those states.
How does Shopify calculate sales tax?
Shopify calculates sales tax using a combination of your store location, customer location, and product taxability. It also considers each jurisdiction's specific tax rates and rules, including state, county, and city taxes.
Can Shopify handle tax-exempt sales?
Yes, Shopify can handle tax-exempt sales. If you have customers exempt from sales tax, such as resellers or non-profit organizations, you can mark their customer profile as tax-exempt in Shopify. This will prevent the tax from being applied to their orders.
What happens if I add a new product or expand my business to a new state?
If you add a new product, categorize it correctly in Shopify for tax purposes. If the product is exempt from sales tax or subject to a reduced rate, you may need to set up a tax override.
If you expand your business to a new state and establish a nexus there, you must register for a sales tax ID and add it to your Shopify tax settings. This ensures you collect and remit tax correctly for orders from that state.
When and how should I remit sales tax?
The frequency and method of remitting sales tax varies by state. Some states require monthly filings, while others are quarterly or annual. You'll need to check the specific requirements for each state where you're registered.
To file your sales tax returns, log in to the state's tax portal and enter the total sales and tax collected for the filing period. You'll then pay the tax due via ACH transfer or credit card.
If you find the filing process time-consuming or confusing, consider using Numeral. Our automated filing service ensures that your returns are filed accurately and on time, with no action needed.
Is shipping taxable, and how does Shopify handle that?
The taxability of shipping varies by state. Some states consider shipping charges part of the item's taxable price, while others treat it as a separate, non-taxable service.
In Shopify, you can choose whether to charge shipping tax in each state where you collect tax. By default, Shopify will apply the state's rules for shipping taxability, but you can override this setting if needed.
Build a sales tax compliant ecommerce brand with Numeral
This guide covers a lot, from nexus to product taxability to filing frequency. It's a lot to digest, but taking it one step at a time is critical.
Start by determining where you have nexus and registering for permits. Then, configure your Shopify settings to collect the right amount of tax from each customer. Stay on top of filing deadlines and consider automating the process.
If you're overwhelmed or want peace of mind, you can partner with Numeral. Our white-glove service covers everything from registration to filing, so you can stay compliant without lifting a finger.
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