If you're selling digital products — such as online courses, ebooks, digital artwork, or subscriptions — on the online platform Shopify, you’ll need to pay attention to sales tax.
This guide will provide essential sales tax information for Shopify sellers, explaining when and where to collect sales tax, how to set this process up on Shopify, and options for streamlining the process.
Are digital goods taxable?
The rules around taxing digital goods differ greatly from state to state and from country to country, creating a confusing landscape for vendors. Digital goods include products that are delivered electronically, such as audio files and software. Some jurisdictions consider these products taxable, while others don’t. It’s up to the vendor to determine whether they are liable for sales tax based on where they are and where their customers are. This can be particularly difficult for vendors who are selling things internationally.
Digital goods sales tax in the United States
Sales tax on digital goods in the U.S. is anything but straightforward. For instance, if you’re selling an online course or a downloadable ebook to someone in Texas or New York, you’re generally expected to add sales tax, just like you would for a physical product. These states consider digital goods taxable, so you’re on the hook to collect and remit that extra percentage. New York even applies tax to digital music downloads, treating them just like CDs purchased at a store.
On the flip side, states like Florida and California take a more relaxed view of digital goods, and their sales tax policy reflects this. If you’re selling an ebook or a piece of digital art to someone in one of these states, there’s no need to add sales tax. They see digital items as different from physical products, which makes them exempt in most cases. However, California does tax physical objects housing media — for instance, if the artwork or ebook is on a USB drive or a DVD, tax should be applied. This patchwork system requires that sellers keep a close eye on each state’s unique take on what’s taxable and what’s not.
Digital goods sales tax outside the United States
Outside the U.S., the approach to taxing digital goods tends to be more uniform but also stricter, with many countries applying clear tax rules across borders. In the European Union (EU), for instance, digital goods are subject to VAT (value-added tax) based on the customer’s location, so sellers need to know the specific VAT rate in each EU country. Canada has a similar setup, generally applying GST (goods and services tax) or HST (harmonized sales tax) to digital goods, with rates varying by province.
Types of digital goods and how they are taxed
Not all digital goods are taxed the same. Below are some common types of digital products and some specifics on how they are taxed.
What is nexus, and why does it matter for your business?
Before addressing tax collection, let's first define whether or not your business has nexus and exactly what nexus is. Nexus is a legal term that refers to a connection between your business and a state or country, which obligates you to collect and remit sales tax in that location. There are two types of nexus.
Physical nexus
Physical nexus is based on whether you have a tangible presence in a particular state or country. Some common examples are an office, a warehouse, employees, or physical inventory stored. If you have a physical nexus in a state, you are generally required to collect sales tax from customers there as required by law.
Economic nexus
Economic nexus laws were introduced in many states after the 2018 Supreme Court ruling in South Dakota v. Wayfair. These laws require that businesses collect sales tax even if they don’t have a physical presence, provided they meet certain economic thresholds. Two of the most common thresholds are:
- A certain number of transactions (for example, 200 sales) in the state.
- A minimum revenue amount (for example, $100,000 in annual sales) in that state.
If you cross these thresholds, you’ll need to register for a sales tax permit and start collecting sales tax from customers in that state. Economic nexus rules are particularly relevant for digital goods businesses, as it’s easy to reach these thresholds with online sales.
How to set up sales tax collection on Shopify
Shopify provides tools that help streamline sales tax collection, though the setup process can still be a bit cumbersome. Here’s a breakdown of the steps to configure your store for accurate tax collection:
Enable automatic sales tax calculations
Shopify can automatically calculate sales tax based on your customers' locations. To enable this:
- Go to Settings > Taxes in your Shopify admin panel.
- Follow the prompts to set up tax rates based on the regions you plan to collect tax in.
Consider automating tax compliance with a partner service
One thing that many people should think about is using a partner service to help ease this burden. Shopify makes things easy by working with several partner services.
Popular choices include Numeral, which covers everything from registration to filing and payments — perfect if you want to hand off the whole tax process.
Then there are Vertex and Avalara, which offer a bunch of helpful tools for managing taxes, like automated filing and detailed reports. If tax compliance feels like a lot to keep up with, partners like these can help.
Implementing a process for registration, filing, and remittance
Once you’re setup with tax collection on Shopify, it’s essential to establish a process for registration, filing, and remittance. Here’s what’s involved:
Registration
Registering for a sales tax permit is the first step in getting compliant. You’ll need a permit in each state where you have nexus — that is, where you’re required to collect sales tax. Once you’ve registered, you can input your registration number into Shopify.
If you’re unsure about which states these are, it’s worth double-checking, as each state has its own rules. You can easily find each state’s Department of Revenue website with a quick Google search (“[state] department of revenue”). And there are a number of helpful tutorials and guides on our blog, too.
Filing
Filing requirements vary by state; some require sales tax returns monthly, while others may need them only quarterly or even annually. Keeping track of these due dates can be challenging, especially as your business grows. Many sellers find that using a partner service with automation options helps streamline this process and avoids the risk of missed deadlines. Automation can also reduce time spent on repetitive filing tasks.
Starting on January 1st, 2025, Shopify will begin charging $50-75 for filings.
Remittance
After you’ve filed, the final step is to remit (pay) the collected tax to the state. This is a critical, and often the most straightforward, part of the process. Partner services typically handle remittance for you, which can be a huge time-saver, especially if you’re collecting tax in multiple states. By taking care of these payments, they allow you to focus on other areas of your business without constantly tracking deadlines or worrying about compliance.
Benefits of using a partner service
Partner services can really take the hassle out of sales tax compliance and are a great way to delegate an important part of your business without a huge upfront cost. They will guide you through getting registered and help you snag the right permits in each state. They can handle ongoing filing and payments, so you’re not constantly scrambling to remember deadlines.
For example, many Shopify sellers point to Numeral as a very helpful service. It covers everything from state registrations to filing and payments. With Numeral’s help, you can skip the tax-related headaches and get back to what you’re best at: creating and selling! Vertex and Avalara are also Shopify-friendly choices that offer similar tax compliance tools.
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Additional considerations for international sellers
People selling goods internationally often have very specific questions about tax compliance. A common concern is understanding how VAT applies when a U.S.-based entity sells to a customer in the EU. Questions also come up about registration requirements, whether VAT needs to be collected at the point of sale, and how to handle different VAT rates across EU countries. Additionally, many people wonder whether similar tax rules apply in other regions, like Canada or Australia, and what steps are needed to stay compliant when selling across borders.
For example, let's use an imaginary U.S.-based company, "Quantum Courses," which sells e-learning courses to European customers. As an American entity, Quantum Courses is required to register for VAT in the EU and apply the VAT rate based on each customer’s country of residence. Since rates are different, Quantum Courses might charge 17% VAT for a customer in Luxembourg, 25% VAT for a customer in Sweden, and yet another VAT for a customer in Italy. With over 27 countries in the EU, each applying different rates, businesses like Quantum Courses often turn to automated tax tools or VAT partners to streamline this process, preventing compliance headaches and ensuring proper remittance to each country.
If you’re a U.S.-based seller but have customers in other countries, there are additional compliance requirements to keep in mind.
The bottom line
Getting sales tax set up for digital goods on Shopify can take some effort, but once you’ve got the basics down, it gets a lot easier. We’ve walked through the essentials, like figuring out whether your products are taxable, understanding what “nexus” means for your business, setting up Shopify’s tax features, and even looking at how partner services can help. Following these steps should help you set things up and have your Shopify sales tax situation looking much cleaner and organized. Please do be aware, however, that sales tax rules change pretty often. It’s smart to check in on your setup now and then, or even get advice from a tax pro to make sure everything’s still on track.
