Does Shopify Collect Sales Tax? What You Need To Know

Does Shopify collect sales tax? If you are a new Shopify merchant, then this question has probably come to mind more than once. The collection of sales tax is often regarded as one of the most intimidating tasks by new vendors. To make this process a bit simpler for you, here is a breakdown of exactly what you need to know below. 

If you need a comprehensive overview of sales tax, why you need to pay it, and how it ties into the Shopify platform, then keep reading. 

What Is Sales Tax and Why Do Merchants Need to Pay It?

Before we dive into the collection of sales tax on Shopify, you need to understand what sales tax is. 

When buying a product or service, you almost always have to pay tax on those purchases. Even if you donate money to a cause or inherit a large sum of cash, you still have to pay taxes. Back in the 1990s, governments only required businesses with a fixed physical address to pay sales tax. However, since the boom of eCommerce sales, these tax requirements have changed.

Now, eCommerce merchants have to pay sales tax according to the stipulated regulations of the country they reside in. On top of that, merchants also have to align their tax payments with local jurisdictions. Merchants have to pay sales tax in order to remain tax compliant so they can run their businesses within the bounds of the law. 

So what exactly is sales tax? 

It is a small percentage of a sale that a merchant has to add to all transactions. The customer pays that small percentage sales tax whenever they purchase taxable goods or services at your store. 

Sales tax must be paid on purchases both at physical and online stores. 

Your role in all of this is to keep track of the total sales tax that is paid throughout the year. You then have to submit a sales tax report to the IRS along with the sales tax accrued throughout your financial year on every product sold. 

Since US sales tax is set up by the states and is subject to local jurisdictions, it can differ based on where you live.

Determine Where You Have Economic Nexus

The first thing you have to do to be sales tax compliant is to determine where you have sales tax nexus

Each state’s laws differ on economic nexus. Nexus is established when you exceed a certain amount of sales or when you have a significant business presence in a state. These sales thresholds can vary from $10,000 to $500,00, with some states not subjecting merchants to a transaction threshold. 

A business presence can include any of the following things:

  • Having a physical office
  • Employing people at your company
  • Making use of a warehouse
  • Having a storing inventory
  • Dropshipping from a third-party provider
  • Doing physical business with customers for a limited amount of time

Keep in mind that you will always have a sales tax nexus in your home state. However, some business activities can also generate sales tax nexus in other states.

Each state categorizes itself as being either origin or destination-based. In other words, if you have nexus with a state, you need to determine whether it is destination or origin-based. 

If your nexus is origin-based, you will need to pay a sales tax rate of the location relevant to you as the merchant in that state. If your nexus is destination-based, you need to pay the sales tax rate of the location relevant to your buyer in that state. 

Does Shopify Collect Sales Tax For You?

Seeing that Shopify is not a marketplace facilitator, the platform is not legally required to collect your sales tax for you. 

So, does Shopify collect sales tax information? In short, no it does not. 

All the money that is paid out to merchants is deposited as a lump sum. This can make it tricky for merchants to distinguish between order payments, transaction fees, refunds, or sales tax.

However, this need not be a dealbreaker because there are loads of online tools that can help you to streamline your sales tax collection process. Reconcilely is one of the best accounting automation tools currently on the market. In fact, it was specifically built with Shopify in mind. 

Reconcilely automatically sends Shopify payments, refunds, and fees from any payment gateway to Xero online accounting software in real-time. This enables Shopify merchants to track where their money is coming from and where it is going so they can reconcile their books without any effort.

Frequently Asked Questions Regarding Shopify Sales Tax

We’ve compiled some frequently asked questions that merchants need answered regarding the collection of sales tax on Shopify. 

Do You Have To Charge Taxes on Shopify?

If the products or services you sell on Shopify are taxable items, then you have to charge tax on those items. 

If you need to charge sales tax in one or more US jurisdictions, then you need to contact each of the relevant agencies and register with them.

Does Shopify Collect Sales Tax?

Shopify does not collect or remit sales tax on behalf of its sellers. You have to keep track of the sales tax you owe to the IRS yourself. This is best done with an online tool or app, like Reconcilely.

Does Shopify Calculate Sales Tax?

Shopify does not calculate the sales tax for each online order by itself. You have to stipulate the amount of sales tax owed based on your nexus and the tax rate of each specific state. That tax value will then need to be added to the transaction value of each purchase.

In Summary

So, does Shopify collect sales tax? No, it doesn’t. But with the right tools by your side, you can set up a fully functional online tax management system for your Shopify business in no time. 

By figuring out how to keep track of your sales tax early in the game, you’ll have more time to grow your business.

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