For Sales tax purposes Shopify merchants are treated as a retailer whether it's online or in physical stores. Sales tax is a reality. Being a Shopify merchant you have to find tax liability, in which state its falls, and whether you have to collect taxes or not.
Shopify has a tax automation system, but they don’t submit your taxes to states, the merchant has to comply with the ta authority himself. Shopify merchants have to find the tax liability nexus and product taxability in that state. The US state's authority also needs you to have a tax permit before the collection of any sale tax.
Shopify being the concept of a new era brings technicality to the related services such as accounting, taxation legality many more. Shopify tax treatment is more complex for Shopify merchants than the normal retailer.
What we would try to explain
● Tax liability and nexus finding
● Sale tax registration
● Compliance with sales tax law
● Where to submit sales taxes you have collected
Sales taxes are indirect taxes collected by the seller from the end consumer and submitted to the government.
Before you set up US taxes, you need to determine sales tax liability, which means whether you are required to collect tax from your customer and submit it to the state tax authority. Shopify merchant like other E-commerce sellers is considered retailers for the purpose of sales tax.
They have to collect taxes and file the sale tax return and submit the taxes collected from their customer. Every Shopify merchant is liable to collect tax when they meet certain criteria:
1. Sale tax nexus
2. Product taxability
This is a legal word used to represent the connection between taxpayers and the state before the state has the responsibility to tax taxpayers. In another word, it is the jurisdiction of the state to collect and impose a tax on taxpayers.
If you're an us-based merchant you probably have tax liability in your own state, because of physical nexus.
Frequent sales in a particular state create nexus in the same state this is termed an economic nexus. Economic nexus is the threshold of the monetary value of sale set by the state to fall in the nexus of the same state.
In the United States, the sale tax charge ability is affected by
several factors, such as;
● The location product is shipped from
● The location product is shipped to
● Registration with the tax authority
● Product taxability
Through the Supreme Court 2018 decision, physical presence was required in the state for sale tax and USA tax nexus.
Being a Shopify merchant if you are
in-state nexus, you have to collect tax from your buyers for the state. One
always has tax nexus in their home town but some states have broad definitions,
Conditions, and circumstances for physical nexus, this might include any of the
● Inventory: If you have an inventory store located in the state even though you don’t have business management and further business activity you are considering in the same state nexus.
● Business employees: if you have employees, a sales force contractor, and another person responsible for running your business activities.
● A drop shipper: if you have a drop shipping relationship with someone who resides in the state you have nexus in that state too.
● Trade event and festival sale: Some states consider the temporary sales to have nexus
● Affiliate: Someone who advertises your product and taxes part of the profit in some states it also creates nexus.
Is the platform where many sellers offer their products? Some states define economic nexus based on the marketplace.
Here is some marketplace that might be considered for determining the economic nexus:
● Best buy
● If you and your vendor have nexus in your customer’s state, then you aren’t obligated to charge tax. Your customer is then likely to pay tax to the destination state for the purchase.
● If you don't have nexus in your customer state then your vendor might ask you for a resale certificate or charge you approximate tax according to nexus.
● If you have your tax nexus in your customer state and the vendor doesn't then you have to collect tax from the customer
Shopify made it enable and automate to set up taxes after you have identified both nexus and item taxability. You can select tax rates that are different for different products.
1. Go to setting and then taxes
2. If you are already registered-based taxes then you can go to registration-based taxes in the US.
3. If your Shopify merchant doesn't have set up taxes yet you can go to setting up US taxes.
Now if you have confirmed your nexus fall in which states the next criteria is to check for product taxability, whether the product you are selling is taxable or not.
All tangible products are taxable and the non-tangible that is services are non-taxable. But there are exceptions depending upon the state.
There are products that are either not taxed or taxable at different rates. There are states that offer product-specific exemptions for categories including food, clothing, prescription medicines, and medical (prosthetic) devices. Those states that don't provide a complete exemption for these items often impose a lower tax rate on them.
Once you have found the right nexus, now you have to register with that state. In, order to collect the tax you have to register otherwise it is considered illegal to collect tax without registration.
Once you get registered you get a permit, frequency, and due dates for filling the sale tax return. The filling frequency may be monthly, quarterly, or annually depending upon your sale volume.
As the volume of your sale increases more states want you to file taxes fastly. In other words, the frequency of sale return is correlated with your sale volume. To comply with sale tax it's a technical exercise you need an accountant/Bookkeeper to make tax compliance on your behalf.
In Shopify, the manage tax liability page can help you find where your store has nexus and other tax reports for filling.
Online filing: By logging in to tax authority software through the registration you can file a sale tax return. It can also be done automatically through accounting software.
Things to remember:
● File the tax return in the state you have a permit even if the marketplace is collecting it for you.
Always file a tax return “Zero returns” even if you
don’t have collected sale tax. States required all having permits to file sale
tax returns whether they have collected sale tax or not.