United States taxes

In the United States, sales tax depends on two important concepts: nexus, and origin-based or destination-based tax. In many cases, you can set up automatic tax rates to handle the complexities of sales tax.

Sales tax concepts in the United States

Sales tax nexus

If there is a nexus, or connection, between your business and a state, then you probably need to charge sales taxes there. Traditionally, a nexus occurs when you have some kind of physical presence in a state, such as a store or warehouse. But some states define nexus to include solicitation, presence of inventory, or fulfillment services.

If you're not sure where you have a nexus, then consult with an independent tax expert.

Destination basis and origin basis

Another factor is whether your state determines taxes on a destination basis or an origin basis:

  • Most states use a destination basis, which means that you charge sales tax at the rate in the state where your product is delivered.

  • In origin-based states, sales tax is based on where the seller is located. As of December 2017, only the following states use the origin basis: Arizona, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia.

  • California is more complicated: the state, county, and city taxes are origin-based, but any district taxes are destination based.

For either basis, the location is determined by the 5-digit zip code of either your store’s address or the shipping address of your customer. The rates in effect for that zip code are then used in the tax calculations.

If you're not sure about how these details might affect you, then consult with an independent tax expert.

Examples of United States taxes

Let’s say that you run your online store in Orlando, Florida. You don’t have a presence, or nexus, in any other state.

  • If you sell to a customer in Miami, Florida, then you do charge tax because you have nexus in the state (it’s where you’re located). Florida is a destination-based state, so the specific tax rates are determined by the zip code of the customer’s shipping address in Miami.
  • If you sell to a customer in New York, then you don’t charge any taxes to that customer. That’s because you don’t have nexus in New York.

For the next example, let’s say you run your online store in Pittsburgh, Pennsylvania. You don’t have nexus in any other state.

  • If you sell to a customer in Harrisburg, Pennsylvania, then you do charge tax because you have nexus in the state (it’s where you’re located). Pennsylvania is an origin-based state, so the specific tax rates are determined by the zip code of your address in Pittsburgh.
  • If you sell to a customer in New York, then you don’t charge any taxes to that customer. That’s because you don’t have nexus in New York.

For a third example, suppose you run your online store in San Francisco, California. You also have a distribution center in Seattle, Washington.

  • If you sell to a customer in San Jose, California, then you do charge tax. You have nexus in the state (it’s where you’re located). The state, county, and city taxes are based on your store’s zip code. But the district taxes are based on the buyer’s zip code in San Jose.
  • If you sell to a customer in Olympia, Washington, then you do charge tax, because you have nexus in Washington state (it's where your distribution center is located). The state, county, and city taxes are based on your store’s zip code. But the district taxes are based on the buyer’s zip code in Olympia.

Set up automatic tax rates

If you are a merchant with a business that needs to charge tax within the United States, then taxes might apply in the county, municipality, and state. To handle this complexity, you can use Shopify's automatic tax settings. These settings include default sales tax and shipping rates, and the rates are updated regularly.

Although the rates are updated regularly, you might need to override some of them in some situations.

To set up automatic tax rates:

  1. Make sure your store address is in the United States and that you have a United States shipping zone. In Settings > General, your store address needs to be in the state where you are actually based so that nexus can be determined correctly.

  1. In the Tax rates section, click United States:

    Click United States in the Tax rates section
  2. In the Calculating taxes section, check Calculate taxes automatically.

  3. In the County, municipal, and state taxes section, add a physical presence for each region in which you have an office, warehouse, or other facility:

    1. In the State Name field, select a state:
      Select a state in the State Name field
    2. Beside the state, enter the zip code of the facility:
      Enter the zip code
    3. Click Add state.

    For each physical presence that you enter, the applicable taxes are displayed.

View detailed state tax rates

If you want to view the tax details for a state, including the tax policy and rates on shipping and handling, click the value in the County, municipal and other taxes column.

The County taxes window for each state shows a list of the cities, counties, and zip codes. It also shows the default tax rates and indicates whether shipping and handling are taxable:

County taxes window

Remove a physical presence

Although you can remove physical presences, you have to keep at least one physical presence for the state that is specified in your store address on the Settings > General page.

For tax purposes, Shopify assumes that you have a physical presence at your store address. If you remove that physical presence from the Taxes page, Shopify will add it back.

To remove a physical presence from the County, municipal, and state taxes section:

  1. In the Tax rates section, click United States.

  2. Click the trash can icon beside the presence you want to remove.

    Trash can icon

Set up tax rates manually

If you don't want to use Shopify's automatic tax settings in the United States, then you can manually set tax rates to suit your own needs.

To handle clothing exemptions in some states, see New York, Massachusetts, and Rhode Island clothing rules.

To set up manual tax rates:

  1. Make sure your store address is in the United States and that you have a United States shipping zone.

  1. In the Tax rates section, click United States.

    Click United States in the Tax rates section
  2. In the Calculating taxes section, uncheck Calculate taxes automatically.

  3. In the Base taxes section, specify the taxes manually for each state and region. You can choose whether a tax in a region is used instead of a federal tax, or is added to or compounded with a federal tax.

  4. Click Save.

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