Review your US tax liabilities
In the United States, whether you need to charge sales tax is based on nexus. Nexus is a connection between your business and a state, whether physical or economic. If you have nexus in a particular state, then you probably need to charge sales taxes there.
Generally, physical nexus occurs when you have a physical presence in a state, such as a store, warehouse, or employees. Some states have a broader definition of nexus, and might include any of the following:
- solicitation of sales
- fulfillment services
- presence of inventory
Locations that you create in Shopify are used to help determine your tax liabilities. Current and newly added locations are used to help determine nexus. If you had a location set in a state and then deleted it, it is not used to help calculate tax liabilities.
Economic nexus occurs when you exceed a certain threshold of sales to customers in a specific state.
In June 2018, the Supreme Court of the United States ruled that states can require online sellers to collect sales tax based on the volume or value of transactions into a state, also known as economic nexus. For information about how this ruling might affect your business, refer to the Shopify blog post Online Sales Tax: A Guide to Economic Nexus & Ecommerce.
The sales threshold that determines whether you have nexus is different for each state. If you're not sure whether your sales to customers in another state mean that you have nexus there, then consult with the state's tax authorities or a local tax professional.
Manage tax liability
After your store is open and has started to make sales, your sales and locations are automatically monitored to help you determine whether you have nexus in specific states. Before you monitor your tax liabilities in Shopify, review the following considerations.
- Tax liability can only be displayed for transactions that occur within Shopify, including marketplaces where required by state law. If you make sales outside of Shopify, then they aren't included.
- Tax liability is displayed for states that have economic nexus tax laws at the state level. States that don't have economic nexus laws aren't included.
- Some states have local tax filing requirements that are separate from state filing requirements, such as Alaska or Colorado. Nexus is not tracked for local taxes.
- Tax liability is displayed for states where sales occur during the threshold period for that state. Sales outside the threshold period aren't included.
- Tax liability is calculated using net sales, not gross sales. Net sales are sales less refunds, shipping, or tax.
- Sales aren't reflected immediately in your tax liabilities and might take a few days to update. If you cross a sales threshold that indicates you might need to charge and remit taxes in a particular state, then the month that you crossed the threshold is displayed.
- Tax liability is displayed for physical nexus in current locations. If you had a location in a state but deleted it, then it is not included.
A state's threshold period is the amount of time that is considered when nexus is calculated. The state tax reference table provides state-by-state information on tax rules, including the period of time that is used to determine nexus. This period varies by state.
|Previous or current calendar year||For states that consider the previous or current calendar year for purposes of determining nexus, the liability tracker first reviews your sales data for the previous year. If your store doesn't meet the threshold for nexus in the previous year, then the current year is reviewed.
If your store doesn't meet the threshold for the previous calendar year and you don't have any sales for the current calendar year, then the state is not displayed until there is at least one sale in the current year.
|Twelve-month rolling period||For states that consider a twelve-month rolling period for purposes of determining nexus, the liability tracker reviews your sales data from the past twelve months. On the first day of every month, the oldest month is removed from the reviewed period, and the newest month is added.|
|Previous calendar year||For states that consider the previous calendar year for purposes of determining nexus, the liability tracker reviews your sales from the previous year. If your store doesn't meet the threshold for nexus in the previous year, then your sales data is not reviewed again until the current year is over.|
|Previous four tax quarters||For states that consider the previous four calendar quarters for the purposes of determining nexus, the liability tracker reviews your sales for the previous four quarters. On the first day of every new quarter, the oldest quarter is removed from the reviewed period, and the newest quarter is added.|
A marketplace is a website where multiple sellers offer their products. Some states include sales in marketplaces for the purposes of determining economic nexus, while others do not. The state tax reference table provides state-by-state information on tax rules, including whether marketplaces are included in nexus calculation.
The following marketplaces might be taken into account when determining economic nexus, depending on state law:
|Walmart Marketplace||Amazon by Codisto||Amazon by CedCommerce|
Reviewing your tax liabilities
From your Shopify admin, you can review your tax liabilities by going Settings > Taxes, and selecting United States. A preview of your tax liabilities is displayed above the states in which you're registered to collect tax. If your sales into specific states indicate a potential tax liability, then the tax liabilities section displays the state, the reason for the potential liability, and the date of the potential liability. To review more information, view the Manage sales tax liability page by clicking Show all liabilities.
On the Manage sales tax liability page, you can view states into which you've made sales. Choose which states to review by using the menu at the top of the page.
- Action required indicates states where potential tax liability has been identified. States listed here are those where you might have physical nexus from a location, or economic nexus from sales into that state. If there are states listed in the Action required section, then you might need to start charging and remitting tax there.
- Monitoring required indicates states where you do not have a location and your sales within Shopify, including marketplaces where required by state law, have reached at least 80% of that state's threshold for economic nexus. If there are states listed in the Monitoring required section, then review your sales into that state, taking into account sales that weren't processed by Shopify.
- No action required indicates states where you do not have a location and your sales within Shopify, including marketplaces where required by state law, are under 80% of that state's threshold for economic nexus.
Address your potential tax liabilities
If a state is listed on the Manage sales tax liability page as a potential tax liability, then you should carefully review the sales tax laws for that state. Links to state tax authorities are listed in the state tax reference table. If you're not sure whether your store has physical or economic nexus in a state, then consult with a tax professional, or contact that state's tax authority.
If you've determined that you need to charge sales tax in a state, then you can set up tax collection from the Manage sales tax liability page. Before you begin, ensure that you've registered with the state's tax authority to charge and remit sales tax.
- On the Manage sales tax liability page, locate the state, and then click Start collecting taxes.
- In Sales tax ID, enter your sales tax ID. If you have applied for a sales tax ID but don't yet have one, then leave this field blank. You can update it when you receive your sales tax ID.
- Click Collect sales tax.