Have you noticed the new Shopify sales tax collection alerts in your storefront? Shopify is looking for ways to make sales tax reporting simpler for sellers. One way Shopify is achieving this goal is through a new sales tax nexus alert.
This new feature on Shopify can give you a bird’s eye view of your Shopify net sales to each state, but it shouldn’t be the only indicator you rely on. In this article, we’ll cover the basics of the new features, including potential limitations and the next steps once you receive an alert.
What is Shopify’s New Sales Tax Nexus Alert?
Shopify’s new sales tax nexus feature alerts sellers when they trigger a nexus in a new state. Nexus is the sales threshold at which each state requires businesses to collect and file sales tax. Receiving an alert means you might need to register and collect sales tax for that state. These alerts can be found under the “manage sales tax liability” page. Here, you will find a breakdown of each state you have sales in and how close you are to meeting the nexus threshold.
What are the Problems with Shopify’s Sales Tax Nexus Alerts?
There are limitations to Shopify’s new sales tax nexus alerts. For one, Shopify doesn’t track local tax requirements. Certain states, like Alaska and Colorado, have local sales tax filing requirements that differ from the state’s standards. If your Shopify accounting processes don’t track individual county filing obligations, you could receive letters with fines and penalties.
Another drawback of Shopify’s sales tax nexus alerts is the inability to track other sales channels. Many Shopify business owners will also sell their products on other channels, like Amazon and eBay. Shopify only tracks the sales made within Shopify’s platform. This is why it’s important that you work with a Shopify CPA or an Amazon FBA CPA who can track gross sales to states throughout your business.
Moreover, Shopify doesn’t account for sales tax exemptions and discounted items. There are numerous goods that are exempt from sales tax, such as medical items, clothing, and books. These exemptions vary by state. Shopify’s sales tax nexus alerts only track your gross sales to the state, without considering exempt goods. Additionally, discounted items aren’t trued up when analyzing nexus. The sales amount used is net of any discounts, such as a free product. This can lead to you reaching the nexus before an alert is given.
What Should You Do After Receiving an Alert?
After you receive an alert, there are a few things you need to do. First, you need to evaluate the authenticity of the alert. You might find that your sales tax settings aren’t properly set up or that you are selling goods that are exempt from sales tax in that state. Talking with an ecommerce CPA can help you determine if you need to collect and file sales tax in that state.
If your Shopify accountant validates the authenticity of the nexus threshold being met by looking at gross sales to that state, including other channels, you will need to go through the registration process. It’s illegal to collect sales tax before you have a proper registration. Unfortunately, when it comes to answering the question, “Does Shopify Pay Sales Tax,” the answer is no. This means the burden falls on you to properly register with each state.
Utilizing Amazon accounting services or an ecommerce CPA who understands the registration process ensures you are following the necessary steps. Finally, you will need to set up the Shopify state sales tax collection procedures in your storefront. You want to be sure you are activating all applicable local sales tax rates as well.
What Does This Mean for Shopify Sellers?
Although Shopify’s sales tax nexus alert can give you a ballpark idea of when you will trigger a nexus, it shouldn’t be relied on, especially if you sell on multiple platforms. Instead, you should enlist the help of a Shopify CPA or a CPA for Amazon sellers that can combine the data from each platform to get a true picture of your state sales tax obligations.
Since Shopify does have limitations in this new feature, there is a disclaimer statement. Specifically, this statement outlines that the sales tax liability management provided by Shopify doesn’t replace tax advice provided by ecommerce CPAs. Pairing Shopify’s new sales tax tool with expert guidance by a Shopify accountant will yield the best results for your business. Reach out today to schedule your free consultation with one of our Shopify CPAs.
