Explained: Does Shopify Collect Sales Tax in US for Ecommerce?

Pujun Bhatnagar · January 8, 2024 · 5 min read

"Managing sales tax compliance isn't just about staying on the right side of the law; it’s essential for protecting your business’s bottom line and building trust with customers." [1]

Imagine running an e-commerce business on Shopify, carefully selecting top-tier products, and crafting an impeccable online experience. Now, imagine the high stakes of managing sales tax—a detail that can make or break your compliance efforts.

It's about more than just setting up Shopify to calculate taxes correctly; it's about shielding your business from potential legal liabilities and financial pitfalls.

Why Sales Tax Compliance Matters More Than Ever

In today’s e-commerce landscape, sales tax compliance is a growing concern for business owners. With states across the U.S. imposing stricter nexus laws, the stakes are high for e-commerce sellers operating on platforms like Shopify.

Failing to collect and remit sales tax correctly can lead to hefty penalties, and this is an increasingly common risk for online sellers as states ramp up enforcement.

According to the Tax Foundation, sales tax is now mandatory in 45 states plus Washington D.C., adding layers of complexity for businesses selling across multiple states. [2]

Shopify's Role in Sales Tax Collection

Shopify provides robust tax calculation tools but is limited as a facilitator rather than a tax authority. While Shopify can streamline parts of the process, ultimately, it’s the seller’s responsibility to stay compliant.

Shopify enables automatic calculation of sales tax rates at checkout based on customer location, but it doesn't remit these taxes on your behalf.

How Shopify Determines Tax Liability

Shopify’s tax engine calculates applicable sales taxes based on several variables, including customer location, product category, and store settings. Since 45 states require destination-based tax collection, Shopify's system determines tax rates using sophisticated algorithms.

However, even with such powerful automation, ensuring compliance rests on the correct setup within Shopify, especially as nexus laws continue to evolve.

"For e-commerce sellers, understanding economic nexus thresholds is critical. Overlooking this can lead to unforeseen tax obligations and compliance risks." — National Federation of Independent Business [3]

The Concept of Nexus and Why It Matters

In simple terms, nexus determines where your business has tax obligations. Most states have set sales thresholds (often $100,000 in sales or 200 transactions annually), beyond which you must collect sales tax, regardless of physical presence.

Failing to monitor and act on these thresholds could put you at risk of non-compliance. Shopify’s tax engine helps identify potential nexus changes, yet businesses are still responsible for actively tracking and adapting their tax settings.

Internal links for further reading: To understand each state's unique nexus requirements, check out our guides on Texas State Sales Tax Nexus and New York State Sales Tax Nexus.

Step-by-Step: Configuring Sales Tax Settings on Shopify

Access Tax Settings: Navigate to your Shopify admin dashboard, then go to "Settings" > "Taxes and Duties."

Enable Automatic Tax Calculations: Shopify’s automatic tax calculations are enabled by default, but it’s essential to confirm that they align with your business’s tax obligations.

Set Nexus Jurisdictions: Specify states where you have nexus. This critical step ensures Shopify collects the appropriate sales tax rates in each applicable state.

Apply Tax Overrides: For businesses selling tax-exempt goods or with special tax rates, setting up overrides is necessary for compliance. Use the “Products” section to adjust tax settings for exempt items.

Monitor Tax Liability Reports: Shopify’s tax reports allow you to track sales tax collected, making filing easier at the end of each tax period.

These guides can provide deeper insights on specific items, such as exempt items in California, and help ensure your Shopify settings are aligned with local tax laws.

Automation vs. Manual Tax Setup on Shopify

Shopify's automated system works well for standard tax scenarios, but a manual approach may be beneficial for complex cases. For instance, companies dealing with both taxable and non-taxable goods, like clothing and electronics, may require unique configurations. Businesses gain tighter control over compliance by dividing regions into tax-specific entities within Shopify.

"While automation simplifies tax compliance, a manual approach can be indispensable for handling niche tax requirements and exemptions." — Tax Policy Center [4]

Need help with complicated tax setups? Kintsugi's team of tax experts can support your business, especially in handling specialized requirements that automation might miss in Shopify.

Learn more on our Kintsugi Sales Tax Automation page.

The Role of Shopify’s Tax Engine in Real-Time Tax Calculations

Shopify’s tax engine powers real-time tax calculations, which helps reduce manual errors and makes it easier to stay compliant. The system assesses product type, customer location, and exemptions in real time, though remittance remains the seller's responsibility.

Handling International Sales and VAT

For international sellers, VAT compliance becomes crucial. Here’s how Shopify helps:

Define Your Market: VAT compliance is non-negotiable for businesses operating in the EU. Registering for VAT and configuring Shopify to collect appropriate rates is essential.

Configure VAT in Settings: Once registered, add VAT rates to your products. Shopify can apply these rates automatically.

Monitor VAT Changes: Tax rates in international markets can change frequently, and Shopify does not automatically update these. Regularly review VAT settings to avoid compliance issues.

Reporting and Filing Sales Tax: Responsibilities on Shopify

Shopify provides valuable tools, but the business owner is responsible for remitting taxes to authorities. This includes filing with state agencies and ensuring payments are accurate and timely.

"Compliance can be overwhelming, but using dedicated sales tax automation tools helps reduce administrative burdens, freeing up time to focus on growth." — Sales Tax Institute [5]

Practical Tips for Filing Taxes

Use Shopify Tax Reports: Generate reports within Shopify to track total sales tax collected per jurisdiction.

Stay Organized: Keep digital copies of all tax-related documentation; many states require records for at least three years.

Understand Filing Deadlines: Each state has its own filing requirements, and missing deadlines can lead to penalties.

For more specific information, refer to our 0 Sales Tax States guide.

Simplify Sales Tax with Automation and Compliance Tools

Tax compliance is a formidable task for any business, but platforms like Shopify and dedicated sales tax tools make it manageable. Kintsugi provides tailored solutions for companies looking to streamline tax processes, reduce compliance risks, and allow business owners to focus on growth rather than administrative tasks.

For further details on managing sales tax obligations on Shopify, check out our comprehensive guide to Shopify sales tax and other resources.