If you have a new Shopify site and you’re planning to ship to customers in all US states, you’ll need to understand your tax obligations. The good news is that when you start selling, you shouldn’t have to collect tax in most states. You only need to start collecting tax once your sales have reached certain levels. So just start selling! If you’re a US company, you might have to collect tax in your home state – and all merchants will need to register for sales tax in the state(s) they ship from.
As a new Shopify merchant selling across the United States, understanding the intricacies of sales tax compliance is crucial to ensure your business operates legally and avoids potential penalties. In this article, we will explore two key aspects of US sales tax that new Shopify sellers need to consider: physical nexus and economic nexus. We will also touch upon the sales tax implications when working with drop shippers.
You need to get a sales tax ID and start collecting tax in states where you have “physical nexus”. These are main ways physical nexus is created:
If you are based in the USA, you create a physical nexus in your home state. This means that if you have a physical presence, such as an office, employees, or inventory, you are required to collect Sales Tax on all taxable transactions within that state.
If you store your goods in third-party logistics (3PL) warehouses located in different US states, you may establish a physical nexus in those states as well. It’s important to determine whether the states where your goods are stored and fulfilled from have sales tax obligations.
Apart from physical presence, “economic nexus” is the factor that determines your sales tax obligations. Economic nexus is triggered when your sales revenue or transaction volume exceeds a certain threshold set by each state – but most states use 200 orders or $100,000 per year as their threshold.
Therefore, until you have made at least 200 orders or sold over $100k into a state, you shouldn’t have to register and collect tax.
Frequently Asked Questions
Do I need to charge sales tax on Shopify?
Yes, if you have a physical or economic nexus in a particular state, you are generally required to collect sales tax on taxable transactions within that state. It is important to determine your nexus in each state to know where you need to collect and remit sales tax. You are only allowed to collect sales tax at checkout for deliveries to a state if you have registered for sales tax with that state.
Do I need US sales tax IDs for my Shopify store?
To collect sales tax, you may need to obtain a sales tax permit or ID from the respective state(s) where you have a nexus. The requirements vary by state, so it’s crucial to research and comply with the specific regulations of each state where you have nexus.
Does Shopify file and remit sales tax for my new Shopify store?
No. Your Shopify site can be set up to collect Sales Tax, and you can run reports from Shopify to see your sales transactions – but Shopify does not file your tax returns for you. It is essential to note that the responsibility of filing and remitting sales tax ultimately rests with the merchant.
Shopify’s tax features can help automate the process, but you should review and file the necessary tax returns yourself. Most sales tax returns must be filed monthly or quarterly, and failing to do so can result in severe penalties.
Does Shopify automatically add US sales tax?
Shopify’s tax settings allow you to configure automatic tax calculations for your store. By providing the relevant tax rates for the applicable jurisdictions, Shopify can automatically add the appropriate sales tax to customer purchases based on their location. However, this is something that you will need to activate – and you should only activate this once you have nexus in a state and have registered for Sales Tax.
Sales Tax Considerations for Drop Shippers
If you use drop shippers to fulfil orders, it’s important to understand the sales tax implications. Generally, when you use a drop shipper, the responsibility to collect and remit sales tax falls on you, the merchant, rather than the drop shipper. You should collect and remit sales tax based on your nexus and the location of the customer, not the location of the drop shipper.
If you don’t have nexus in your customer’s state, you will not have to charge them sales tax – but it is very likely your supplier will charge YOU tax. In this case, it can make sense to register voluntarily for sales tax in some states. Read more about drop-shipping here.
Complying with US sales tax regulations is vital for new Shopify merchants to avoid legal issues and penalties. Understanding the concept of physical and economic nexus, obtaining necessary sales tax IDs, and ensuring proper sales tax collection and remittance are crucial steps for a compliant and successful Shopify business.
Stay informed about sales tax obligations in the states where you have a nexus, and consider consulting with a tax professional to ensure accurate compliance with sales tax laws.