Sales tax can be one of the most onerous operational things for your business selling on Shopify. Sales tax implications can vary greatly depending on the structure of your business, and the region you operate within. It is up to the business to remain compliant with sales tax laws in the applicable regions, and there can be lots to think about.
In this post, we will do a quick overview of when you need to charge sales tax, how to set it up in Shopify, and some Shopify apps to help you manage sales tax.
When to charge sales tax?
For U.S. businesses, what products are taxable varies between different states. Generally, tangible products are taxable but services are not. For products you sell that are taxable, you will need to register for and charge tax within your own state.
You will also need to charge tax for buyers in other states only if your business has a significant presence (or “Nexus”) in the customer’s state. The definition of significant presence can vary between states. Your business is considered to have significant presence in a state if you fulfil certain conditions. These can broadly include the below, amongst other things:
- having an office in a state
- having a retail store in the state
- having an employee in a state
- storing inventory in that state
- using a dropshipping provider from that state
- selling at trade shows within a state
If you fulfil conditions for a specific state, you will need to register for sales tax in that state, and charge sales tax whenever you ship products to that state.
For Canada-based stores, typically, you will need to collect tax on sales made within the province of your business, and in other provinces. How much tax you charge will depend on the nature of your products as certain products are exempt from taxes (for example, certain food items). Unlike the U.S., most Canadian provinces require you to collect tax regardless of whether your business has significant presence in that province.
One thing that simplifies things in Canada is that you only have to register on Canada Revenue Agency for charging tax in most provinces, and register for specific filings in a few provinces.
Note that the above are general guidelines, and they may be different as they apply to your business. Please consult a tax advisor or a professional regarding sales tax requirements for your business.
Setup in Shopify
Shopify comes out-of-the-box with tax rates for different regions. These will depend on the shipping zones you set up for your store, and on the location of your business. For example, for U.S. stores shipping to Canada, the default tax rate is 0%, whereas for Canadian stores, the default federal tax rate for Canada is 5%.
You can find the rates under Settings > Taxes. You can click on individual zones to manually assign different tax rates based on the structure and presence of your business.
Digital products may be subject to different tax requirements globally. You can get more information about tax implications for digital products, especially in the European Union, in the Shopify help center.
For Shopify users not on Shopify Plus, there are a couple of apps that can help simplify the sales tax process.
The TaxJar app connects with your store to prepare sales tax reports for each state, with a break down of jurisdictions. This can help you save a lot of time compiling jurisdiction information when you need to file taxes. You can also use the app to automate filing taxes for different states, and get an overview of all your sales tax information in one place.
Here is a quick introductory video by TaxJar:
Note that TaxJar currently only supports U.S.-based stores.
The Taxify app, powered by Sovos, is another solution to help automate preparing and filing your sales tax. Once you set which states you have Nexus in, the app automatically compiles order information for those states to comply with the individual state tax laws.
Taxify allows you to get an overview of all your sales tax information in one place, and see upcoming dates and events. Note that Taxify currently only supports U.S.-based stores.
There are a number of things to keep in mind for Shopify store owners when it comes to complying with tax laws. You would typically need to charge sales tax when you are selling to states where your business has significant presence. This is also known as “Nexus” in the U.S. and is based on a number of different criteria. These can include having employees in a state, keeping inventory in a state, appearing in trade shows, etc.
Shopify automatically assigns suggested tax rates for different shipping zones that you set up based on your business location. You can manually edit these rates based on Nexus in the U.S. You can also
Are there other things to keep in mind regarding sales tax? Are there resources that you have found valuable when setting up your Shopify store? Please tell us in the comments below.
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