As a merchant, you may need to charge taxes on your sales and then report and remit those taxes to the government. Although tax laws and regulations are complex and can change frequently, you can set up Shopify to automatically handle most common sales tax calculations. Additionally, you can set up tax overrides to address special tax laws and situations.
Shopify uses a variety of default sales tax rates (these rates are updated periodically). If you use default tax rates, you need to confirm that they are up-to-date and correct for your specific situation. You can override these rates as often as you like.
Shopify does not report or remit sales taxes for you. You may need to register your business with local or federal tax authorities in order to handle sales taxes. The calculations and reports provided by Shopify should help you file and pay your taxes more easily.
You should always check with your local tax authorities or a tax accountant to make sure you are charging your customers the correct sales tax and to ensure you are reporting and remitting your taxes correctly.
General steps for setting up taxes
If you run an online store, then set the countries that you'll ship to.
If you use Shopify POS for in-person sales, then set up tax rates based on your retail location. The default POS tax rate is based on the geographic location where you make in-person sales.
Set the tax rates for the countries and regions you will sell and ship your products to:
– If you're in the United States, choose automatic tax settings or manually specify tax rates for state, county, and city taxes (including shipping taxes). – If you are located in Canada and subject to tax, enter your tax registration information.
– If you are outside the United States or Canada, use the default value or specify the rate for your country and region. You can also specify whether to charge taxes on shipping.
If you're selling digital products, set up the taxes that apply to those items.
If necessary, change the tax rate or exempt the product from tax. Any changes that you make to your settings apply to both online and Shopify POS sales.
After you set up your taxes, you can access and review your settings on the Taxes page in your Shopify admin.
Tax reporting
The Taxes finance report provides a summary of the sales taxes applied to your sales.
Sales finance reports assist with your sales tax reporting. You can export this report to a CSV file, which includes order amount, tax, POS, billing, and shipping location. To get the most out of this report, be sure to select the correct time period (such as a calendar year) and choose the full report when exporting. This report can help you get the information you or your accountant need when processing your sales tax return.
To learn more about these reports, see Tax finance reports and Sales finance reports.
If you need information about Form 1099-K and use Shopify Payments, then review Tax reporting.
The tax concept of US sales tax
Nexus
If your business has a nexus, or connection, to a state, you may be required to charge sales tax. Traditionally, economic nexus occurs when you have a physical facility in a state, such as a store or warehouse. Some states define economic nexus to include a solicitation, inventory, or fulfillment platform.
In June 2018, the U.S. Supreme Court ruled that states can also require online sellers to collect sales taxes based on economic nexus. For information on how this ruling may affect your business, see the Shopify blog posts South Dakota v Wayfair: Economic Nexus, Sales Tax & Ecommerce and Setting taxes for economic nexus.
If you are unsure where you have nexus, consult a tax professional.
Destination and origin basis
Another factor is whether your state determines taxes based on destination or origin:
Most states use a destination basis, which means you need to charge sales tax at the rate of the state where the product is delivered.
In origin-based states, sales tax is determined by where the seller is located. As of December 2017, the only states that determine taxes based on country of origin are Arizona, Illinois, Mississippi, Missouri, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia.
California is more complicated: state, county, and city taxes are based on origin, but all regional taxes are based on destination.
In either case, the location is based on your store address or the 5-digit ZIP code of your customer's mailing address. The actual tax rate for this postal code is then used when calculating taxes.
If you are unsure how these details may affect you, consult a tax professional.
Remote Seller Rules
A remote seller is one that is not located in the state but has a nexus in the state. Many states that use an origin-based system have remote seller rules. If you are a remote seller in these states, you will need to charge taxes based on your customer's location.
For example, you operate an online business in New York, but you also have nexus in Illinois (the shipping origin). This means you are a remote seller in Illinois. When a customer in Illinois places an order, you charge them Illinois sales tax based on the fact that you have nexus in the state.
Example of US taxes
Let's say you run your online store in Orlando, Florida. You have no physical presence or economic nexus in any other state.
If you sell to a customer who lives in Miami, Florida, you need to charge taxes because you have a nexus in that state (which is your location). Florida is the destination state, so the specific tax rate is determined by the zip code of the customer's shipping address in Miami.
If you sell to a customer in New York, you won't charge that customer any taxes. This is because you have no financial nexus in New York.
For the next example, suppose you own an online store in Pittsburgh, Pennsylvania. You don't have nexus in any other state.
If you sell products to customers who live in Harrisburg, Pennsylvania, you will need to charge tax because you have nexus with this state (which is your location). Pennsylvania is an origin-based state, so your specific tax rate is determined by your Pittsburgh zip code.
If you sell to a customer in New York, you won't charge that customer any taxes. This is because you have no financial nexus in New York.
As a third example, let's say you run your online store in San Francisco, California. You also have a distribution center in Seattle, Washington.
If you sell products to customers in San Jose, California, you will need to charge taxes. You have nexus in this state (your location). State, county and city taxes are based on the store's zip code. But the regional tax is based on the San Jose buyer’s ZIP code.
If you sell to a customer in Olympia, Washington, you will need to charge taxes because you have a nexus in Washington state (where your fulfillment center is located). State, county and city taxes are based on the store's zip code. But the regional tax is based on the buyer’s ZIP code in Olympia.
Set up automatic tax rates
If you are required to charge taxes within the United States, there may be county, city, and state taxes. To deal with this complexity, you can use Shopify's automatic tax settings. These settings include default sales tax and shipping rates, and periodically update tax rates.
Although tax rates are updated regularly, there may be situations where you need to make changes.
Shopify tax setting steps:
Make sure that your store address is within the United States and that you have shipping zones within the United States. In Settings > General, your store address needs to be located in the state where you are physically located in order for the economic nexus to be correctly determined and updated regularly.
From your Shopify admin, go to Settings > Taxes.
In the Tax Rates section, click United States:
Click United States in the Tax Rates section
In the Calculate taxes section, check Calculate taxes automatically.
In the County, City, and State Taxes section, add a physical presence (such as an office, warehouse, or other facility) for each region where you have a nexus:
In the State Name field, select a state:
Select a state in the State Name field
Next to State, enter the ZIP code where the facility is located:
Enter postal code
Click Add State.
Applicable taxes will be displayed for each physical store you enter.
View detailed state tax rates
If you want to view tax details for a state, including the tax policy and rate for shipping and handling charges, click the value in County, city, and other taxes.
The County taxes window for each state displays a list of cities, counties, and ZIP codes. Additionally, it displays the default tax rate and indicates whether shipping and handling taxes are charged:
County Tax Window
Delete a physical store
Although you can delete physical stores, you must maintain at least one physical store in the state specified in Store Address on the Settings > General page.
For tax purposes, Shopify assumes that you have a physical store at your store address. If you remove the store from your Taxes page, then Shopify adds it back.
You can remove a physical store from the County, City, Province, and Taxes section.
step:
From your Shopify admin, go to Settings > Taxes.
In the Tax Rate section, click United States.
Click the trash can icon next to the store you want to delete.
Trash can icon
Manually set tax rates
If you don't want to use Shopify's automatic tax setup for US merchants, then you can manually set tax rates to suit your needs.
To process clothing tax exemptions in certain states, see the clothing rules for New York, Massachusetts, and Rhode Island.
step:
Make sure that your store address is within the United States and that you have shipping zones within the United States.
From your Shopify admin, go to Settings > Taxes.
In the Tax Rate section, click United States.
Click United States in the Tax Rates section
In the Calculate taxes section, uncheck Calculate taxes automatically.
In the Base taxes section, manually specify the taxes for each state and region. You can choose to use a region's rate instead of the federal rate, add the regional rate to the federal rate, or combine the regional rate with the federal rate.
Click Save.
Setting taxes for economic nexus
In June 2018, the U.S. Supreme Court ruled that states can also require online sellers to collect sales taxes based on economic nexus. For information on how this ruling may impact your business, see the Shopify blog post South Dakota v Wayfair: Economic Nexus, Sales Tax & Ecommerce.
If you are unsure where you have nexus, consult a tax professional.
You can set up your taxes to handle economic nexus in a number of ways:
If you have a physical presence in the U.S. and use automatic tax:
If a flat rate applies, add your physical store in any ZIP code in that state, then add the tax credit for applicable products.
If this state is the destination, add physical facilities that use any ZIP code in this state, but you do not need to add a tax override. Taxes are calculated based on the buyer's location.
If you sell internationally, don't have any physical stores in the U.S., and don't have a fixed tax rate, then you can set your tax rates manually.
If your store uses Shopify Plus, then you can add Avalara AvaTax to your plan. Once activated, you can use Avalara to create tax jurisdictions for the states to which you have nexus.
Because the Supreme Court ruling is so recent, consult a tax professional to make sure you are collecting and remitting taxes correctly.
