Are you an ecommerce seller with a Shopify storefront? If so, it’s important that you understand the Shopify state sales tax collection process to stay in compliance with all state agencies. Shopify released a new sales tax nexus alert designed to help ecommerce sellers understand when they should begin charging sales tax.
In this article, we’ll cover when it’s time to charge sales tax in Shopify, the details of the new sales tax nexus alert, and the potential limitations of using this feature.
Should I Charge Tax on Shopify?
Not all ecommerce sellers are required to charge sales tax on Shopify. In fact, the decision to collect sales tax is dependent on the type of goods you sell and your sales levels. Most states have nexus thresholds to determine when a seller has a significant presence in the state. Once a seller hits this level, they will be required to register and collect sales tax on behalf of customers.
To help ecommerce sellers determine when they’ve hit a nexus, Shopify implemented a sales tax nexus alert. Once a seller is near the sales tax nexus amount, they will be notified to start the registration process. This feature is found under “manage sales tax liability.”
The Details of Shopify Sales Tax Nexus Alert
Despite being able to provide ecommerce sellers with a ballpark idea of when a nexus is triggered, there are some concerns with full reliance on this tool. Let’s break these down into more detail.
Shopify Doesn’t Manage Local Requirements
Some states allow localities to charge sales tax, which can have different nexus requirements. Unfortunately, Shopify doesn’t track local requirements. This means that you could have a local sales tax liability even if the state nexus hasn’t been triggered. Tracking your local sales is important to understand when you might need to file and pay sales tax, especially if you utilize multiple sales channels.
Insights are Limited to Shopify
Most ecommerce businesses sell on different platforms, like eBay and Amazon. A major drawback with Shopify’s sales tax nexus alert is that it only includes sales information from Shopify. If you also sell on Amazon, your combined sales could trigger a sales tax filing requirement. This makes it important to combine your Shopify accounting with your bookkeeping for Amazon and other platforms to get a true picture of your filing obligations.
Discounted Items Might Be Included in Sales
If you dive into your bookkeeping for Shopify, you might notice that your sales total in Shopify might hold other transactions. For example, sometimes Shopify includes a “free gift” that the customer didn’t actually pay for in your sales total. By including fictitious sales, your gross sales to that state can be overstated, resulting in you incorrectly collecting sales tax.
Shopify Doesn’t Include Exemptions
There are certain goods that are sales tax-exempt. Common items include clothing, groceries, and other basic necessities. Shopify’s sales tax nexus alert doesn’t differentiate between taxable and non-taxable goods. This can lead to overpaying in sales tax and incorrect nexus alerts. Tracking exemptions can be difficult, especially if you sell both taxable and non-taxable products, which is why many sellers turn toward ecommerce accountants.
Shopify Issues a Disclaimer
Shopify understands the limitations of their sales tax nexus alert, which is why they have a disclaimer. This disclaimer outlines that the sales tax nexus feature isn’t a substitution for professional advice, such as from an ecommerce CPA. This means you can use Shopify’s sales tax nexus for an overall big picture but should consult with an expert before registering in a new state.
Shopify Doesn’t Pay Sales Tax
If you receive a legitimate nexus alert, Shopify doesn’t automatically begin collecting sales tax. In fact, you need to register with the corresponding state, set up the collection feature in Shopify, and remit sales tax on a regular basis. Unlike other platforms that operate as marketplace facilitators, Shopify places the sales tax collection burden on sellers. This is where expert help comes in to ensure the accuracy of your Shopify sales tax collection process.
Next Steps
The intricacies of Shopify sales tax and the limitations of the new sales tax nexus alert make it important to utilize other channels of sales tax tracking. This might include enlisting the help of a Shopify CPA that can analyze all of your sales channels to determine your filing liability.
Not to mention that a Shopify accountant can assist you throughout the sales tax setup process, ensuring you are charging accurate amounts on Shopify and other platforms. Reach out to a team member today to learn more.
