A guest article by Jennifer Dunn of TaxJar. TaxJar is trusted by more than 5,000 businesses to collect, report and file sales tax returns. If you’re tired of laboring over sales tax returns, try a 30-day no-risk free trial today!
Building a successful business is fun and rewarding. But many of the administrative hassles you have to deal with along the way are not. The “not fun” category includes collecting, reporting and filing sales tax.
Getting started with sales tax can be daunting, but a little knowledge goes a long way. So we’ve put together these five steps to sales tax compliance for Shopify sellers.
Step 1: Determine Where You Have Sales Tax Nexus
In the U.S., sales tax is governed at the state level. You are only required to collect sales tax from buyers in states where you have “sales tax nexus.” “Nexus” is just a fancy way of saying a “significant connection” to a state. You’ll always have nexus in your home state because that’s where your business is located. Other factors that create nexus include:
- A location – a store, warehouse, or factory, etc.
- Personnel – an employee, salesperson, contractor, etc.
- A drop shipping relationship – If you use a drop shipper, you and the drop shipper will have to determine who, if anyone, is on the hook to collect sales tax from buyers in each state
- An affiliate – Someone who sends sales your way in exchange for a cut of the profits creates nexus in many states
- Temporarily doing business – Participating in a craft fair or a trade show in a different state may create sales tax nexus.
If you have sales tax nexus in a state, and that state is one of the 45 U.S. states (plus D.C.) with a sales tax, then the state requires you to register for a sales tax permit and collect sales tax from buyers in that state.
Step 2: Determine if Your Products are Taxable
Most “tangible personal property” is taxable, but in some states, items like clothing, groceries or textbooks are tax exempt. Most services are also tax exempt, though some states – like North Carolina – have recently been changing their laws to require sales tax on services. When in doubt, check with your state to determine whether or not the items you are selling are taxable.
Step 3: Register for a Sales Tax Permit
If you have nexus in a state and are selling taxable items, your next step is to get compliant to collect sales tax by registering for a sales tax permit.
Don’t skip this step! States consider it unlawful to collect sales tax from buyers without first obtaining a permit.
When you receive your sales tax permit, you’ll also receive your sales tax filing frequency. This is generally either monthly, quarterly or annually depending on the sales volume. Note your sales tax filing due dates down so you’re sure to file and remit your sales tax on time.
Step 4: Collect Sales Tax from Your Customers
Once you have your sales tax permit, be sure to collect sales tax from your Shopify buyers in your nexus states. Shopify walks you through setting up sales tax collection with their sales tax manual. We’ve also put together some best practices for ensuring that you are collecting the right amount of Shopify sales tax from customers. For example: Some states require you to collect sales tax on shipping charges to customers while others do not. Be sure you’re collecting the correct amount!
Step 5: Report and File Sales Tax
When your sales tax filing due date rolls around, it’s time to determine how much sales tax you’ve collected and file your sales tax returns. Most states want you to break down how much sales tax you collected by county, city and other special taxing district. This can mean poring over all of your transactions and trying to figure out which jurisdiction each sale fell into. That’s where sales tax automation makes your life easier.
A sales tax automation service will connect with Shopify and the other shopping carts and marketplaces you sell on, and then provide you the information you need to file in a return-ready report. You can even AutoFile in most states if you’d rather take sales tax all the way off your plate!
Just be sure to file on-time. Late filing or forgetting to file (even if you didn’t collect any sales tax) can result in fines and penalties.
And from there, you’re all done with your sales tax filing. Until the next filing deadline rolls around!
For more information about Shopify sales tax, check out our Sales Tax 101 for Shopify Sellers Guide or ask your question in the comments!
About the Author
Jennifer Dunn is the Chief of Content at TaxJar. TaxJar is trusted by more than 5,000 businesses to collect, report and file sales tax returns. If you’re tired of laboring over sales tax returns, try a 30-day no-risk free trial today!