It’s no secret: the world is becoming more and more digitally inclined, and so is business. With the global e-commerce industry, nearly tripling since 2014, it is imperative that companies operating in this space get their tax planning in order, as the industry continues to expand.
Shopify is the third-largest e-commerce platform in the United States and accounts for $319 billion of global economic activity.
Shopify is not a “marketplace facilitator.” This means that Shopify, unlike eBay or Amazon, does not need to collect or remit sales tax for sellers. As a US seller, it is your responsibility to remit sales tax to the state.
How Do the Government Tax Shopify Businesses in the United States?
The way the government will tax Shopify businesses will vary based on multiple factors. These include:
- The location your product is shipped from
- Where your product is shipped to
- Item taxability
- Buyer exemption
- Where your business is registered to collect tax
Each state has its laws for collecting taxes. You will first need to collect taxes for the state where your business is located. To do this, you will need a sales tax license. Exceptions include New Hampshire, Oregon, Alaska, Montana, and Delaware.
As your business grows, you will be required to collect and remit sales tax from other states. For example, if you have a warehouse, employees, or any other physical presence in a state, you will need to collect and remit sales tax for that state. You may be subject to economic nexus laws, requiring you to pay taxes to the state where your customers are located.
Shopify Tax Exemptions
Most customers will need to pay taxes on the items they purchase on Shopify, and these taxes may vary on state or location of residence. Some individuals are tax-exempt customers. For example, a reseller may buy products via your Shopify store and then resell that product. They might be tax-exempt. Other examples of tax-exempt entities are nonprofits and government organizations.
Although sellers will not need to collect sales tax from exempt customers, they will need to have a tax-exempt certificate before not collecting sales tax. Sellers should let Shopify know in advance what products in their stores they want to collect sales tax for and from what states. Certain items should not be taxed. For example, businesses should not collect sales tax on gift cards. Also, certain items are tax-exempt in certain states. For example, clothing items sold in New York that are less than $110 are tax-exempt.
It is important that you familiarize yourself with the tax laws of the state in which your Shopify business sells and remember that the rules that you apply in one state will not necessarily be the same in another. It may be beneficial to consult a CPA with knowledge of the different tax laws in each state and how that might influence the accounting side of your business.
Growing Your Shopify Business with Confidence
As you can gather, Shopify tax reporting can be complicated. Misunderstanding the tax laws of different states can lead to mistakes that might leave you with massive tax expenses at the end of the year. This is not ideal for any business. It is advisable to partner with an accountant that understands how different state laws may influence your Shopify accounting, and who can aid in setting up accounting software that can streamline tax planning for your business. This is crucial to getting a handle on taxes and ultimately saving your business from possible penalties.
Speak to one of our eCommerce accountants to learn more about the different accounting software options for Shopify.
Fusion CPA has been helping businesses like yours manage their e-commerce tax liability successfully for many years. We are experts in the field of business advisory, bookkeeping, tax planning, and financial planning. Our team of accountants can help your business with Shopify tax planning and more. We can also do a free accounting diagnostic assessment on your business. Schedule a discovery call with us to find out more.
This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.