If your Shopify store has just started to bring in sales, figuring out your sales tax obligations can be confusing. And as your sales grow, tracking your sales tax nexus across all the states your customers live in, collecting the appropriate tax, filing accurately, and remitting what your business owes to various tax collection agencies can demand a lot of your time and attention — time you’d probably rather be spending on more important tasks.
So it's important to understand what aspects of the sales tax collection process Shopify can and can't help you with. The platform has tools that can assist in charging sales tax automatically based on a customer's location, applying the most accurate tax rate for products, and providing detailed sales data that simplifies reporting. What Shopify can’t do is register or remit taxes on your behalf.
Does Shopify collect sales tax for sellers?
Yes. Shopify can collect sales tax for sellers, but again, it doesn’t remit sales taxes for you. It’s important to be aware of this when you start using the platform so you don’t run into problems down the line.
Shopify can’t help with remitting sales taxes because it is not a marketplace facilitator like Amazon or eBay. So while it can help you collect sales tax, you remain responsible for making filings in states where you have nexus — and then actually paying the sales tax owed.
What is a marketplace facilitator?
A marketplace facilitator allows third-party sellers to sell their products on its online platform. They may also provide additional services such as payment processing, fulfillment, and customer support. Prevailing marketplace facilitator laws require platforms like Amazon to collect and remit sales tax on behalf of sellers.
Shopify is an e-commerce platform that allows users to build their own online stores. Each user has full control over the products they decide to sell on their store, whereas sellers on a marketplace like eBay have no control over what products others sell on the platform. Shopify isn’t running a logistics network, handling returns, or providing customer service.
It has no retail customer base of its own, like Amazon does, where sellers compete to sell their products to Amazon’s customers. Your Shopify store sells only your products, and it’s up to you to bring in the traffic that will convert into customers. This fundamental difference in the business model is why Shopify is limited in the assistance that it can provide for sales tax obligations.
Understanding nexus for Shopify sales tax collection
Nexus is a relationship between your store and a U.S. state. Nexus is a set of criteria that determine whether sales to customers in a given state are taxable. Nexus can be either physical or economic. Note that different states have different nexus criteria, and that counties and cities may apply their own, additional, sales tax.
- Physical Nexus: A business that has a physical store, inventory in a warehouse, or employees in a state may be considered to have a physical nexus with that state. Consequently, this requires compliance with local sales tax laws.
- Economic Nexus: Businesses that cross a threshold for sales or revenue generated in a state will have an economic nexus with that state. Thresholds vary by state, but once crossed, a business is liable for sales tax there, even if it has no physical presence.
How Shopify Tax handles sales tax collection
Shopify has a feature called Shopify Tax that simplifies the sales tax collection process. The feature makes it easy to understand where you may have nexus, provides precise tax calculation based on customers' addresses, and applies the most accurate rate for products in the store. Shopify Tax is available for all users on any plan but only for products sold within and fulfilled from the United States.
Shopify Tax can be enabled from the platform’s admin settings. It doesn’t start collecting sales tax automatically, though. You have to decide where and when to collect sales tax. Shopify Tax’s liability insights feature simply helps you figure out where you may have nexus. It begins charging tax on every sale in a jurisdiction only when you enable collection for that area.
How to enable Shopify Tax
- Open Settings in Shopify settings and click on Taxes and Duties.
- Click on United States in the Manage Sales Tax Collection section.
- Choose Collect Sales Tax in the following section.
- Enter the sales tax ID for the state or region where you’re registered. Leave this blank if you’ve applied for an ID but haven’t received one yet. Update it when you get the sales tax ID.
How much does Shopify Tax cost?
Shopify Tax is completely free for the first $100,000 worth of sales in the U.S. every calendar year. Once the $100,000 threshold has been crossed, a 0.35% calculation fee will be charged on all orders in states where tax collection has been enabled. Users on the Shopify Plus plan will be charged a 0.25% calculation fee.
For example, the calculation fee will be $0.10 on the sale of a $30 product or $0.08 for Shopify Plus members. The fee is capped at a maximum of $0.99 per order, meaning even if you sell a $10,000 product, the most you’ll be charged is $0.99. There’s also a $5,000-per-region, -per-calendar-year cap; that’s the most you’ll pay in a year for using the feature to collect sales tax in a region.
Does Shopify remit sales tax for sellers?
Much like it’s your responsibility to register and obtain the tax ID for each state where you have nexus, you’re similarly responsible for filing the reports and remitting the payment. Shopify does not remit sales tax.
You can choose to do all of this manually, but keep in mind that it’s going to be incredibly time-consuming. From registering in every state where you have nexus to navigating monthly, quarterly, and annual filings and remittance deadlines that vary by state, it’s entirely possible that you’ll soon find yourself spending more time figuring this out instead of growing the business!
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Other things Shopify Tax doesn’t do
Shopify Tax has a few other significant shortcomings that make it less than ideal for sellers who are scaling up their business.
For example, you could be selling in various international markets in addition to the U.S., but Shopify Tax will provide assistance only for sales that are generated in the U.S.
No automatic alerts or registration
You need to manually check, in the Shopify Tax section, to find out whether nexus thresholds have been crossed, as Shopify Tax doesn’t provide automatic alerts. This means that if you forget to check you might find yourself in a situation where sales tax registration and payment become due in a state and you’ve been neglecting to collect it.
No cross-platform support
Shopify Tax is limited to assisting with your Shopify store. If you’re selling on a platform such as Etsy, Amazon, Walmart, or eBay, you’ll need to handle sales tax matters for those platforms separately. Those platforms may be marketplace facilitators that help with sales tax remittance, but then you have to juggle different reports from different platforms and keep track of it all.
No Audit Support
Sales tax audits are part and parcel of running a business. Shopify Tax provides no assistance with audits. You’ll need to seek assistance for this separately, and that could prove to be costly.
Shopify sales tax apps can help
While Shopify Tax is great at handling rate calculations, collection, and filing, many Shopify merchants opt to use an app to supplement their compliance strategy.
There are quite a few Shopify sales tax apps to choose from. These tools will typically provide real-time nexus tracking, and support for registration, filing, and remittance and will work across a number of platforms.
Numeral is built for growing Shopify brands
Instead of spending valuable time on doing everything manually, use Numeral to automate every step of the sales tax collection and remittance process, so you can focus on more important tasks. Numeral is a powerful tool that makes it possible for you to meet all of your sales tax compliance obligations in fewer than five minutes a month.
The entire process is automated and requires minimal input from you. Numeral monitors sales 24/7 and notifies you when economic nexus has been reached in a state. It will then register your business in that state automatically, so you don't even have to make a single phone call. It also accurately collects sales tax for orders across 11,000 tax jurisdictions in the United States.
Filings and remittances are similarly automated. Numeral will make the necessary monthly, quarterly, and annual sales tax remittances on your behalf to all states where sales tax is owed. It even provides users with the assurance that if their sales tax isn't filed on time, Numeral will pay for their penalty and interest charges.
It’s very easy to integrate this tool with your online store. A flat fee of $75 per filing is charged per state, which includes payment remittances and audit documentation, regardless of revenue. There's also a $150 one-time registration charge for each state when your business establishes nexus.
- Numeral does many things that Shopify doesn’t, including:
- assisting with your sales tax obligations for both domestic and international sales.
- providing comprehensive support, such as the ability to text a licensed CPA and receive a full audit of your store to help with back taxes.
The bottom line
You already know how stressful it is to figure out the sales tax obligations for your business. Not only that, it takes away time that could otherwise be spent on scaling up the business, so it’s not just time you’re losing; it’s money, too.
Don’t operate under the assumption that Shopify can collect and remit sales tax for you. It doesn’t do that even if you opt for its Shopify Tax service. That’s there to help with collection only. You’re still responsible for making sure all of the filings are made on time, and the sales tax is remitted to wherever it’s owed before the deadlines.
With Numeral, you’re getting complete automation. Numeral lets you know when nexus is established and registers the business in that state. Accurate tax rates are applied on sales across all of your platforms; filings and remittances are handled automatically with comprehensive audit support available.
