Shopify helps to automate charging sales taxes, but Shopify doesn't remit or file your taxes for you. You can follow this guide to determine where in the United States you might be responsible for charging taxes. After you know where you're liable for tax, you can configure your store to charge taxes accordingly.
If you need information about 1099-K forms and you use Shopify Payments, then refer to Tax reporting.
Determine your tax liability
Before you set up your US taxes, you need to determine your tax liability, which means whether you're required to collect tax from your customers and remit tax to a state tax authority.
If you're a US-based merchant, then you potentially have tax liability in your own state because of physical nexus. If you frequently sell products to customers in a specific state, then you potentially have tax liability there because of economic nexus, whether or not you're based in the United States.
In the United States, the sales tax that you should charge is affected by several factors:
- The location that your product is shipped from
- The location that your product is shipped to
- Where you're registered to collect tax
- Item taxability
- Buyer exemptions
Nexus, or a connection between your store and a US state, determines whether you potentially have tax liability there. Nexus can be physical or economic.
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 physical nexus, and might include any of the following:
- solicitation of sales
- fulfillment services
- presence of inventory
If you're not sure whether your activities outside your own state count as having physical nexus, then consult with state tax authorities or a local tax professional.
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. Refer to the state tax reference table to determine whether your sales into a state might constitute economic nexus. If you think you might have economic nexus in a state, then consult with state tax authorities or a local tax professional.
A digital product is a product that customers download and doesn't have any physical components to ship. Some states include digital products for the purposes of determining economic nexus, while others do not. The state tax reference table provides state-by-state information on whether digital products are included in nexus calculation.
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 whether marketplaces are included in nexus calculation.
The following marketplaces might be taken into account when determining economic nexus, depending on state law:
|Amazon by Codisto
|Amazon by CedCommerce
If your store uses dropshipping to provide products to your customers, then you are buying a product from another vendor, and then your customers buy that product from you. Whether you charge tax depends on the location of your customer and where you and your dropshipping vendor have nexus. Review the following scenarios and determine which one applies to your business:
- If neither you nor your dropshipping vendor have nexus in your customer's state, then you aren't obligated to charge tax. Your customer will likely pay a use tax to the destination state for the purchase.
- If you don't have nexus in your customer's state, but your dropshipping vendor does, then your vendor might ask you for a resale certificate or charge you the appropriate tax.
- If you have nexus in your customer's state, but your dropshipping vendor doesn't, then you're obligated to charge tax to your customer.
- If both you and your dropshipping vendor have nexus in your customer's state, then your vendor might ask you for a resale certificate or charge you the appropriate tax, and you're obligated to charge tax to your customer.
If you're not sure of your responsibilities in a state, then consult with state tax authorities or a local tax professional.
Register for taxes
After you've determined where you need to charge tax in the United States, you can register with the state tax authorities. The authority to contact is different for each state, and the method of registering might differ. The state tax reference table provides state-by-state contact information for tax authorities.
Set up your taxes in Shopify
After you've determined where you need to charge tax in the United States, you can set your Shopify store to automatically manage the tax rates used to calculate sales on taxes and set up tax overrides for products that have special tax rates.
- If you're new to Shopify, then refer to Setting up US taxes.
- If you already use Shopify and need to update your settings, then refer to Registration-based taxes in the US. If you aren’t registered to collect sales tax in any states currently listed in your tax settings, then you can remove them.
- If you already use Shopify and would like to learn more about the different tax services available in your region, then refer to Choose a Tax Service.
After your store is open and has started to make sales, the Manage tax liability page can help you to determine where your store has nexus.