Shopify Tax – What Online Sellers Need to Know

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PLEASE NOTE: Daybreak Commerce does not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only. You should consult your own tax, legal, and accounting advisors before making any decision or engaging in any transaction.

If you run an e-commerce store or online business of any kind, you likely know the challenge that’s posed when it comes to understanding, charging, and remitting online sales tax. Just hearing the words “sales tax” may be enough to make you cringe. But it doesn’t have to be that difficult. There are a variety of sales tax management platforms that are designed to help you accurately charge the right amount of sales tax to the right customers. These programs can even eliminate the headache of filing and remitting payment to state tax authorities by doing it for you automatically! In addition to these third-party tax solutions, Shopify sellers have a new option for tax management: Shopify Tax.

Why do Sellers Need a Sales Tax Solution?

E-commerce sales tax can be complicated for online sellers because it is often governed by a patchwork of state and local laws that can vary significantly from one jurisdiction to another. This means that an online seller may be required to collect and pay sales tax in some states but not in others, depending on the specific tax laws of each jurisdiction and the seller’s level of activity in those states.

In addition, the concept of “nexus,” or a sufficient physical presence in a state, can affect an online seller’s sales tax obligations. In general, an online seller is required to collect and pay sales tax in a state if the seller has nexus in that state. Nexus can be established in a number of ways, such as:

  • Having a physical location, employees, or inventory in the state (physical nexus)
  • Making a certain number of sales or transactions in the state (economic nexus)
  • Exceeding a certain amount of revenue in the state (economic nexus)

Another complicating factor is that some states have different tax rates and exemptions for different types of products and services. This means that an online seller may be required to apply different tax rates to different items depending on where they are being shipped.

What is Shopify Tax?

Shopify has always allowed sellers to set up tax rates manually for each state and collect sales tax from customers, but it has put the burden of understanding sales tax laws and responsibilities entirely on the seller. For many sellers, this process involved lots of Googling, guessworks, and uncertainty which was far from ideal. As of October 2022, however, Shopify has introduced a new and extended online sales tax functionality to make that process similar for its sellers: Shopify Tax.

This program has a singular goal: to offer the highest level of sales tax compliance with the least amount of upkeep. It accomplishes this goal through a variety of useful features, including:

Sales tax liability insights – As you know, there are a variety of factors that determine whether or not a seller is required to pay sales tax in a state. With this tax program, you’ll have access to a counter that tallies your progress toward establishing an economic nexus in each state and alerts you when your sales tax liabilities change.

Precise tax calculations at checkout – Shopify Tax uses precision calculations based on your customer’s address to determine the tax amount that should be charged in that zip code. With over 11,000+ US tax jurisdictions and many changes based on city or county, this level of precision prevents inaccurate calculations and prevents additional costs to your business.

Product categorization – In some tax jurisdictions, certain categories of products have unique tax requirements or additional taxes/fees. With Shopify’s ability to categorize products, you can ensure that any additional product-specific taxes are being properly charged to your customers at checkout.

Enhanced reporting – This program provides users with access to filterable sales data, making it quick and easy to generate reports that can be sent along with your tax payment to each tax jurisdiction.

Limitations of Shopify Tax

While there are a variety of incredibly useful features built into Shopify Tax, there are a few limitations of the program as well. 

Requires manual filing – Although this program does provide enhanced reporting to make your filing process simpler, you’ll still be responsible for manually sending in your reports and remitting payment to each tax jurisdiction in which you are responsible for sales tax.

Available in the US only – Currently, Shopify Tax is only available to United States sellers that are shipping to United States buyers. The benefits of the program would not be available on orders that originate outside the US or orders that are shipped to a country other than the US.

Only available for certain transactions – The biggest limitation by far is on the type of transactions that are eligible for program calculations. That includes on orders that are paid using credit cards or gift cards or those that are manually marked as paid in Shopify’s admin. Unfortunately, Shopify Tax calculations are not available on point of sale orders or those paid with bank transfers, multiple payment methods, or deferred payments. It’s also unavailable for orders that take advantage of “buy now, pay later” offers through apps.

Alternative Tax Solutions

As we’ve explained, Shopify Tax is a huge step forward for sellers with simple tax configurations who were previously utilizing Shopify’s basic tax collection settings. However, for sellers with more complex tax needs, this may not be the right solution. For those businesses, we’ve compiled a list of alternative tax solutions that may satisfy those additional needs.

Avalara

Avalara is a great option for online sales tax compliance because it is a comprehensive and automated solution that helps businesses accurately calculate and collect the correct amount of sales tax on their transactions. Some specific benefits of using Avalara include:

  • Avalara offers a range of services beyond just sales tax compliance, including tax rate lookup, tax calculation, exemption certificate management, and returns preparation. This can make Avalara a one-stop-shop for businesses looking to manage their tax obligations.
  • Avalara provides a variety of integrations with accounting and e-commerce platforms, allowing businesses to seamlessly incorporate sales tax compliance into their existing workflow.
  • Avalara offers a free trial period and a pay-as-you-go pricing model, allowing businesses to try out the service before committing to a long-term contract.
  • Avalara has a dedicated customer success team that provides support and guidance to help businesses ensure that they are in compliance with tax laws.
  • Avalara has a strong reputation and a long history in the industry, which can provide businesses with added peace of mind and confidence in the service.

TaxJar 

TaxJar is another particularly attractive and effective option for businesses that need a comprehensive and customizable solution for managing their e-commerce sales tax obligations. A few reasons you might consider TaxJar include:

  • TaxJar’s AutoFile feature allows businesses to automatically file their sales tax returns with the click of a button, saving time and reducing the risk of errors.
  • TaxJar’s SmartCalcs API allows businesses to integrate sales tax calculations directly into their own e-commerce platforms or shopping carts, providing a seamless experience for customers.
  • TaxJar provides a variety of resources and support options for businesses, including a detailed knowledge base, live chat support, and email support.
  • TaxJar offers a free trial period, allowing businesses to try out the service before committing to a paid plan.
  • TaxJar has a user-friendly interface and provides clear and detailed reports, making it easy for businesses to understand and manage their sales tax compliance.

Overall, the specific needs of your business will be the ultimate determining factor as to which online sales tax program is right for you. You’ll also want to consider each option’s compatibility with your existing systems, the ease of use, the accuracy of calculations, the availability of customer support, and the cost of use. Whether you choose Shopify Tax or another provider’s tax software, you’ll appreciate the convenience and time savings that come along with simplifying your sales tax process. Still intimidated by the sales tax process? Reach out to us and we’ll be happy to guide you through!

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