Struggling to make sense of Shopify’s sales tax features? You’re not alone. Many online sellers find sales tax compliance overwhelming, especially when dealing with multiple states, ever-changing tax laws, and platform limitations.
The good news? With Shopify Tax, the platform simplifies some of the complexity by automating sales tax calculations at checkout. But while it helps with the basics, it leaves many questions unanswered—questions that could lead to costly errors if ignored.
In this guide, we’ll break down exactly what Shopify Tax does (and doesn’t do), so you can confidently manage your tax obligations without losing sleep over compliance.
What is Shopify Tax?
Shopify Tax is functionality in the Shopify platform that allows merchants to charge sales tax at checkout when they sell in or into the United States.
Calculating how much tax to add to your sales price is based on where your customers are based and the products you sell. Shopify Tax will use your buyer’s address information and your product codes to determine an accurate tax rate to apply at checkout.
What does it cost?
It’s free to use sales tax collection at checkout for your first $100,000 in US sales each calendar year. Merchants whose stores don’t exceed this amount will never pay to collect tax.
Once a store surpasses $100,000 in US sales in a calendar year, a 0.35% fee (0.25% for Plus merchants) will apply for subsequent orders that calculate sales tax in the United States up to a maximum of $5,000 per store.
It is not possible to opt out of this fee if you have to charge sales tax at checkout on your Shopify store.
What does Shopify Tax do?
Besides calculating the accurate tax at checkout, not very much.
They claim to provide ‘Sales tax insights’, but this simply shows where you might be liable for taxes and what your current sales tax liabilities might be. It also shows you where you are ‘approaching thresholds’, but most Shopify merchants don’t know what any of this means! Without context and explanation, Shopify Tax is not insightful at all.
It does allow you to categorise the products you sell to ensure you are collecting the right amount of tax – but it is very complex to set up correctly.
What DOESN’T Shopify Tax do?
- Explain to you what sales tax obligations mean for your business
- Identify where you should be registered
- Register for sales tax permits in the states where you have obligations
- Prepare and file the tax returns every month for you
- Help you pay the taxes you have collected to the relevant tax office
- Deal with tax offices if they have any questions or audit you
- Help you collect and report sales tax on your US sales via other channels
Shopify Tax only covers sales made directly through your Shopify store, which is great if that’s your sole platform. However, many businesses are multi-channel, selling on platforms like Amazon, Squarespace, Magento, or even in-person at events. For those sales, Shopify Tax won’t calculate or collect taxes for you. This means you’ll need a separate tax solution to ensure compliance across all channels.
Failing to track and remit sales tax for non-Shopify transactions can lead to discrepancies in your filings, and that’s when tax authorities start asking questions. If you’re operating across multiple sales channels, you might want to explore third-party solutions that integrate with multiple platforms and automate tax collection everywhere you sell.
Sales tax in the U.S. isn’t just complicated—it’s a maze of state-specific rules, thresholds, and local variations. Shopify Tax can alert you when you’re approaching sales thresholds in certain states, but it doesn’t give you the whole picture. Each state sets its own economic nexus rules, meaning that even small sellers might have to start collecting tax in a new state after reaching a specific revenue or transaction count. Add in local taxes that vary by city or county, and it becomes clear that Shopify Tax’s one-size-fits-all approach isn’t enough for everyone.
For example, selling clothing in New York? There’s an exemption for items under $110. Selling digital goods in Texas? Those are taxed differently than physical goods. Shopify Tax won’t explain these nuances, and if you’re not on top of them, you could end up undercharging (leading to fines and penalties) or overcharging (which could hurt customer satisfaction). In some cases, it’s a good idea to work with a tax expert who understands the ins and outs of state-specific tax rules to ensure you’re always compliant.
What are product categories and why are they important?
Shopify product categories are labels that are assigned to products or to collections of products that you sell. They are used to indicate the tax obligations and exemptions that customers have when they purchase those particular products from your Shopify site.
Sales tax is calculated based on the address of your buyer and the specific product you sell. You could deliver 2 different products to the same customer and have to charge 2 different rates, or you could deliver the same product to 2 different customers and have to charge 2 different rates.
If you don’t set up Shopify Tax correctly, it will apply the incorrect tax rates to your sales. If you collect and report the wrong amount of tax, tax offices can penalise you and charge you interest on underpaid taxes.
Therefore, it is crucial that you set up your product codes correctly in Shopify Tax. Whilst they do have automatic product code suggestions – it is not wise to trust a bot to do this when the non-compliance risks are so high. It is safer to get a sales tax expert to help you set up your product categories.
Get help from Yonda today and ensure your tax setup is correct and compliant.