Why Shopify Orders Didn’t Collect Sales Taxes?

Merchants found a great e-commerce platform to sell in Shopify. Although Shopify has a user-friendly interface with a wide selection of customizable themes, many found themselves confused when collecting sales taxes. Some were worried when they realized Shopify didn't collect taxes; others were shocked that Shopify didn't collect and remit sales taxes on their behalf. This guide aims to help you deal with this concern.

Why Shopify Doesn't Collect Sales Tax?

Shopify operates as an e-commerce platform, providing merchants with tools to sell online. Unlike marketplaces such as Amazon, eBay, or Etsy, which often act as the merchant of record and remit sales tax on behalf of sellers, Shopify's model is different—each merchant is responsible for their own compliance. However, Shopify provides the ability to collect taxes but leaves the legal responsibility of remittance to the merchant.

Sales tax laws differ significantly between states, provinces, and countries. Shopify merchants sell in multiple locations, making it complex for Shopify to act as a universal tax remittance service. The tax rates, filing requirements, and nexus rules change frequently, making it risky for Shopify to take on this responsibility.

Several Shopify merchants share their sales tax horror nightmares online. They were surprised that Shopify didn't handle their sales tax. Remember, Shopify does not automatically charge sales tax to your customers. You have to set up your tax settings and input your sales tax IDS for each state where you need to collect tax before Shopify does its part in calculating and applying tax rates to the orders.

Keep yourself compliant by being vigilant and learning what you need to manage sales tax. When you notice that Shopify is not collecting taxes when it should, investigate why.

When Shopify Do Not Collect Sales Tax?

Shopify provides the tools to calculate and collect sales tax at checkout, but it does not file or remit taxes on behalf of merchants. However, in some cases, Shopify might not collect sales tax at all. This can be due to various reasons, including incorrect setup, missing registration details, or exemptions.

Some merchants, like those in this thread, are confused about why Shopify doesn't charge customers out of their state's sales tax. Of course, they are worried that they must shoulder the sales tax not collected from the buyers. However, this issue is beyond that. The merchant also needs to consider nexus, registration, tax exemptions, the customers' location and more.

Here are some of the scenarios when Shopify doesn't collect sales tax even when merchants set up tax collection:

Sales Tax Collection Is Not Set Up Correctly

• Tax settings are not enabled: Merchants must manually turn on tax collection in Settings > Taxes and Duties for each region they are required to collect tax.
• Nexus locations are missing: If a merchant is required to collect sales tax in a state but has not set it up, Shopify will not charge tax to customers in that state.
• Tax rates are set to 0%: If a merchant manually enters a 0% tax rate instead of using Shopify's automatic tax rates, no tax will be collected.

Merchant Is Not Registered for Sales Tax in a State/Country

Some states and countries require businesses to register for a sales tax permit before they can legally collect sales tax. If a merchant does not provide a valid tax registration, Shopify cannot collect tax in those regions.

• Example: A merchant based in California selling to customers in New York must register for a New York sales tax permit before collecting tax from New York customers.

The Business Does Not Have Sales Tax Nexus in a State

In the U.S., merchants are only required to collect tax in states where they have nexus (a significant presence based on physical location or sales volume). If a merchant does not have physical presence, employees, inventory, or enough sales in a state, Shopify will not collect tax in that state.

• Example: A California-based merchant with no sales over $100,000 in Texas is not required to collect Texas sales tax.

The Product or Service Is Tax-Exempt

Certain products and services are not subject to sales tax in some locations. If a product is tax-exempt, Shopify will not charge tax unless the merchant manually overrides the settings. In many states, digital products, clothing, groceries, and medications are tax-exempt.

The Customer Has a Tax-Exempt Status

If a merchant sells to resellers, nonprofits, or government agencies with tax-exempt status, Shopify might not collect tax. Merchants must ensure that tax-exempt customers provide a valid exemption certificate and manually set their account as tax-exempt in Shopify.

Shopify Markets Settings Are Incorrect

If a merchant sells internationally and uses Shopify Markets, taxes must be configured correctly. If a country's tax collection settings are disabled, Shopify will not collect taxes on international orders. VAT should be enabled for sales to EU countries under Shopify Markets settings.

Customers Are Buying from a Non-Taxable Region

Some states and countries do not charge sales tax or have special tax rules. Delaware, Montana, New Hampshire, and Oregon do not have a statewide sales tax, so Shopify will not collect tax from customers in these states.

Tax Overrides & Manual Settings in Shopify

If a merchant misconfigures product tax settings, Shopify may not collect tax even when required. Shopify allows merchants to override tax rules, which can result in incorrect tax collection.

For example: A merchant selling handmade jewelry might mistakenly set their products as non-taxable, preventing Shopify from collecting sales tax. Or a clothing store in New York might fail to enable tax collection on items over $110, missing taxable transactions.

Product Categorization Set Up

Product categorization in Shopify significantly influences how sales taxes are applied during transactions. Proper configuration ensures compliance with regional tax laws, while misconfigurations can lead to incorrect tax charges or exemptions. In this thread, some merchants said Shopify did not charge sales tax for items they categorize as "Apparel & Accessories."

Also, each product in Shopify has a "Charge tax on this product" option. If this box is unchecked, Shopify will not apply sales tax to that product, regardless of other settings. It's crucial to ensure this option is selected for taxable products.

Factors Affecting Sales Tax Collection On Shopify

Sales tax collection on Shopify depends on various factors, including product categorization, tax settings, and regional tax regulations. Ensuring accurate tax collection requires proper setup, correct product classification, and compliance with jurisdiction-specific tax laws.

1. Product Tax Settings

Charge Tax on This Product: Each product in Shopify has a "Charge tax on this product" option. If this box is unchecked, Shopify will not apply sales tax to that product, regardless of other settings. It's crucial to ensure this option is selected for taxable products. Ensure that each product and its variants have the correct tax options selected.

2. Product Collections and Tax Overrides

Manual Collections Shopify allows merchants to create manual collections and apply tax overrides to these groups. This is particularly useful for products that require different tax rates. For instance, if certain items are subject to a reduced tax rate, placing them in a manual collection with an appropriate tax override ensures correct tax application.

Also, old or incorrect tax overrides applied to collections can conflict with current tax laws, leading to improper tax applications. So, you should regularly review and update these overrides.

3. Product Variants

Individual Variant Settings: Each variant of a product can have its own tax settings. If a variant's "Charge tax on this product" option is unchecked, Shopify will not apply tax to that specific variant. Merchants must verify that all taxable variants have this option selected.

4. Tax Codes and Third-Party Integrations

Tax Codes for Specific Products: Assigning appropriate tax codes to products ensures that Shopify applies the correct tax rates based on product type and regional tax laws. This is especially important for products that may have unique tax implications.

Failing to assign specific tax codes to products can lead to default tax rates being applied, which may not be appropriate for all product types. Third-party sales tax automation tools can automate tax calculations based on product categories and jurisdictions, reducing manual errors and ensuring compliance.

5. Regional Tax Regulations

Jurisdiction-Specific Rules: Some regions have specific tax rules based on product categories. For example, certain food items might be tax-exempt in one state but taxable in another. Merchants should configure product tax settings in Shopify to align with these regional regulations.

Compliance Tips for Shopify Merchants

For Shopify merchants who are bothered with sales tax compliance, here are some helpful tips.

1. Regularly Review Product Tax Settings: Ensure that each product and its variants have the correct tax options selected.
2. Utilize Manual Collections for Tax Overrides: Group products with similar tax requirements into manual collections and apply appropriate tax overrides to these collections.
3. Stay Updated on Regional Tax Laws: Tax regulations can change, so it's important to stay informed and adjust product tax settings accordingly.
4. Consider Third-Party Tax Automation Tools: Integrating with tax automation services can help manage complex tax scenarios and ensure compliance across different jurisdictions.

Kintsugi – Shopify's No. 1 Sales Tax Partner

Kintsugi is one of the most popular tools in the market among Shopify merchants. Every merchant on Shopify is satisfied and happy with Kintsugi handling their sales tax, and this is evident in Kintsugi's 5-star rating in the Shopify app.

Kintsugi has the following features that Shopify merchants like you love:

1. Accurate Tax Classification for Every Product

Kintsugi uses AI-powered tax categorization to assign the correct tax codes to products based on industry standards and regional tax laws. Shopify merchants no longer need to research whether an item is taxable or exempt manually—Kintsugi does the work for them.

2. Automatic Tax Rate Adjustments Based on Location

Different states and countries have varying tax rules for the same product category. For example, clothing is tax-exempt in Pennsylvania but taxable in New York (if it is over $110). Also, digital goods may be taxable in Washington but exempt in California.

Kintsugi dynamically applies the correct tax rate based on the merchant's sales location and customer destination, ensuring compliance across multiple jurisdictions.

3. Handling Exemptions and Special Tax Rules

Some products, like medical devices, groceries, or books, may qualify for reduced or zero tax rates depending on local tax laws. Kintsugi automatically detects these exemptions and applies them accurately, helping merchants avoid overcharging or undercharging customers.

4. Bulk Product Categorization for Large Inventories

For merchants with large Shopify catalogs, Kintsugi streamlines tax management by enabling bulk tax classification. Instead of updating tax settings product by product, merchants can apply accurate tax codes across thousands of SKUs in just a few clicks.

5. Seamless Integration with Shopify

Kintsugi's no-code integration lets you connect it easily with your Shopify store. It also integrates directly with Shopify's tax reporting tools, making it easy for merchants to track collected taxes, generate reports, and file tax returns. This ensures accurate remittance and reduces the risk of penalties due to miscalculations. Check this out to learn how easy it is to integrate Kintsugi with Shopify.

By leveraging Kintsugi's smart tax categorization, accurate tax calculation and autopilot filing, Shopify merchants can focus on growing their business while ensuring they stay fully compliant with ever-changing sales tax regulations. Book a demo or sign up today to experience the power of Kintsugi.