If you sell in the United States, you likely know the frustration and complications that come with managing sales tax. We know it sucks, which is why we're committed to making it better with Shopify Tax. Now you can access tax-specific features directly in your admin to know where your business is liable and collect the right amount at checkout.
As your business grows and you become responsible for collecting sales tax, you have to:
- Track your sales in each state
- Parse through state requirements to determine when to start collecting tax
- Register with each state as required
- Make sure you’re collecting the right amount based on the specific tax rules that may apply to your store and your customer’s delivery address
- Remit the right amount, to the right jurisdiction, at the right time
- Stay on the lookout for unexpected regulation changes
Managing this process across the 46 states (and over 11,000 different jurisdictions) that collect sales tax is enough to make anyone want to throw their hands in the air and give up.
Shopify merchant Bryce Rieger, co-founder of Side Fold Media, shared a similar perspective on the complexity of US sales tax: “It becomes very discouraging. I’ve talked to a lot of other merchants where things are going along hunky dory, life is good, and then dealing with tax took the wind out of their sails.”
It’s clear that many merchants are in need of a product that makes sales tax in the United States less frustrating. That’s where Shopify Tax comes in.
Our long-term goal is to build a truly end-to-end solution for your business. Today, we’re starting out by focusing on two areas: knowing where you’re liable and calculating and collecting tax. Why start here? At Shopify, we actively monitor the most common and pressing requests we get from merchants like you. This information helps us decide what to build next and learn about whether our products or alternatives are meeting your needs. These two areas consistently appeared at the top of those lists. Additionally, these solutions provide a universal benefit for all merchants regardless of size, industry, or tax expertise.
Learn the nexus conditions for each state
Shopify has a helpful sales tax reference page for learning the sales tax rates, collection rules, and nexus conditions for each state.See nexus conditions
Pricing for Shopify Tax has also been designed to suit merchants both large and small, and to scale with your business. Use of sales tax calculations is free for your store’s first $100,000 USD in online sales each year, and after that a small fee for tax calculation will apply per online order in states where you have opted to collect sales tax. If you use a Point of Sale (POS) system, tax calculation will remain free when you make a sale through your POS, and won't count towards the $100,000 USD threshold. However, for the remainder of 2022 Shopify Tax is completely free for everyone—no matter how much you sell. Learn more about Shopify Tax pricing here.
Know where you’re liable for state tax
Until 2018, businesses were only required to collect sales tax if they had a physical presence in that state. For most small businesses, it was fairly straightforward to know where you were liable: have an office, employee, warehouse, or other physical entity in a state? You likely need to collect sales tax. Don’t have a physical presence? No requirement. However, in 2018 the South Dakota vs Wayfair Supreme Court decision changed everything. In order to ensure large online retailers were paying their fair share of taxes, a new concept was created: economic nexus.
Because of that change, if your business makes more than a certain dollar amount in sales in a state, or exceeds a certain number of transactions, you now have an economic nexus in that state and are subject to the same sales tax collection rules as a business with a physical presence. What makes this more complicated is the fact that every state has different rules regarding economic nexus. It's enough work to understand the thresholds for one state and how it applies to your business, but merchants have to do this for each of the 46 states that collect sales tax.
The sales tax insights feature within Shopify Tax solves this struggle. It takes the stack of rules and requirements needed to determine when you’re required to collect US state sales tax and automates it for you. In the United States section of the Taxes and duties page in your Shopify admin, you can find out which locations you may be obligated to collect tax in and where you may soon cross tax thresholds. From there, you can find helpful links to relevant tax agencies where you can register and find answers to the questions you have.
Each business is unique, so these sales tax insights are designed to empower you to make an informed decision alongside your accountant or trusted tax professional. Sales tax insights are available to all merchants selling in the United States and Canada, and included as an added benefit of your Shopify subscription, regardless of which plan you’re on.
How to calculate and collect taxes from customers
Once you register with the state, it's time to collect taxes from your customers. With more than 11,000 sales tax jurisdictions in the United States and numerous product-specific tax rates, how do you know you’re doing so accurately? At Shopify, we’ve broken it down into two solutions that, combined, help you collect the right amount of tax based on the type of product and customer location: smart categorization and rooftop accuracy.
Designate product tax rates with smart categorization
Is a hotdog a sandwich? As a society, we may never be able to agree on the answer, but at Shopify, we can help you categorize your hotdog for tax purposes. If you live in New York, you may find that you pay tax when you buy a hotdog from your local stand, but not when you buy a pack for your neighborhood barbecue. In each state, different rules govern the amount of tax that should be assessed on your product.
That’s where smart categorization comes in. Smart categorization works on your behalf to decode these rules whenever you add a new product to your Shopify store. Based on the description you enter, Shopify recommends a product category for you. Once you approve or modify the recommended category, Shopify automatically assigns the proper tax rate based on local regulations so that your customer pays the right amount at checkout.
Confirm tax rates with rooftop accuracy
When you buy your favorite product online, have you ever wondered what goes into the sales tax you're charged? In the US, what you pay is actually a combination of taxes assessed at the state, county, city and district level. In fact, you may be surprised to learn your neighbors down the street are paying a different amount than you are, even if you live in the same city and have the same zip code.
With this level of specificity required to calculate tax rates, historical systems that use city- or zipcode-level precision won’t cut it if you want to be more confident at tax time. Shopify Tax now uses rooftop precision at checkout to optimize your accuracy. When your customer checks out, Shopify reviews the specific sales tax requirements for their exact delivery address and collects the right amount. When a purchase is made, you can review the order summary to determine the specific taxes that have been assessed and collected, with line-item detail down to the district level. This information can be pulled from your tax reports when it’s time to file and remit your taxes.
How Shopify is building for the future of sales tax
Sales tax is extremely disjointed. There are so many steps and nobody owns any of them. Everyone will do a piece, but then they pass the buck or point at someone else. ‘You do this, or this isn’t our problem’.... I have yet to find a service that’s pretty much soup to nuts.
In the coming weeks, these enhancements will roll out to merchants who sell in the United States, and we’re just getting started. Over time, we’re committed to tackling the end-to-end challenge of managing sales tax in the United States and beyond. Next up? Advanced reporting that provides a detailed breakdown of how much you sold, and collected, in a format that makes tax-filing a breeze!
At Shopify, we’re always focused on creating a great experience—and solving merchants’ frustrations—with solutions built right into your store. Don’t want to sweat sales tax? Leave it to us. We also know that every merchant is unique, and want you to make the best choice to manage sales tax for your business, even if we didn’t build it. Our app store lets you incorporate tools that can help with your tax reporting, filing, and insights. If you’re a Shopify Plus merchant, you can choose to integrate with Avalara AvaTax, while wineries and retailers can utilize our partnership with Drinks.com to manage their unique tax requirements. We’ll grow that list to meet your needs as you share them with us.
We encourage you to start exploring the Shopify Tax features, categorizing your products, and getting a bird’s-eye view of your current and upcoming liabilities. Do you have feedback or want to see more features or offerings? We look forward to reading them in the comments below, and using your input to keep building better products for our merchants. After all, there are only two certainties in commerce: that you’ll have to pay taxes, and that Shopify has your back.