Sales tax guide for Shopify stores in the US

Do you own a Shopify store in the United States (U.S.)? If so, now might be a good time to refresh your knowledge of the country’s taxes.

If you’re selling goods in the States, you’ll need to know all about sales tax—a consumption tax levied on the sale of goods and services. While, most times, businesses are required to collect sales tax from consumers, knowing when and how to charge it can still be confusing.

With each of the 50 states writing their own policies (plus some local jurisdictions, too!), and the ever-changing landscape of taxing online businesses, it’s enough to make you want to click the ‘X’ on your browser window right now. We totally get it.

Lucky for you, we’ve got the knack for turning confusing jargon into plain and simple talk. Stick around, and you’ll leave here with the knowledge you came for, minus the headaches!

This article will cover:

• What is sales tax?
• What goods and services are subject to sales tax?
• How to determine economic nexus and how it works
• How to apply the right rate of sales tax
• Sales tax in California
• Sales tax in New York
• Sales tax in Florida
• Sales tax in Texas
• Where to seek further advice

Sales tax is a consumption tax levied on the sale of goods and services. It is a percentage of the purchase price and it’s added to the final cost of the product or service. You, as the seller, must then pay the sales tax to the government.

The rate of sales tax varies by location, with different states and localities having their own rates. In the US, it is not a federal tax, but rather a state and local tax. This means individual states impose and collect sales tax, and it’s not mandated or governed by the federal government. This distinction is important because it means that the rates and regulations regarding sales tax can vary significantly between different states and local jurisdictions.

Up until a few years ago, you only had to pay sales tax on the sale of goods in a state where you had a physical presence (or “nexus”).

A physical presence means that you have a business facility in that state. It can vary state-by-state, but usually it could be any type of business operation, including an office, a manufacturing facility, a warehouse, or even a single employee.

However, following the South Dakota v. Wayfair, Inc. case, you, as an online Shopify store owner in the US, must now pay sales tax if you have an economic nexus in the state your customers are located.

Economic nexus means sales tax is applicable when a business reaches a certain threshold of sales to a particular state, which of course varies by state.

This means that where your business exceeds the threshold, you are required to register in that state and collect sales tax for the government. This applies regardless of where your business, warehouses, or employees are located.

Sales tax can be taxed in two different ways, known as sourcing:

• Origin-sourced sales are taxed where the seller is located.
• Destination-sourced sales are taxed where the buyer takes possession of the item sold.

In an origin-based tax system, you use the tax rate where your Shopify store is located (the origin of the sale). The tax rate you apply to the sale must be the local rate where your business is located.

In a destination-based tax system you use the tax rate of the destination of the product or service—so where the customer is located. For physical products, charge the tax rate of the ship-to location of the physical product. For digital products, charge the tax rate of the customer’s billing address.

Now, which one of these you use depends on where your business is located. Different rules apply to in-state businesses versus out-of-state businesses.

Origin base states include Arizona, California, Illinois, Mississippi, New Mexico, Ohio, Pennsylvania, Tennessee, Texas, Utah, and Virginia. All other states which charge sales tax not listed are destination-based sales tax states.

Once you have determined whether you have a physical or economic nexus in a state, you will need to determine the rate of sales tax applicable.

Sales tax rates in the U.S. can vary significantly because they are imposed at the state and local levels.

The total rate applied to the transaction whether origin-based or destination-based includes all relevant levels of sales tax together: state, county, city, and district.

These taxes are added together to result in the total sales tax rate in a particular location.

For example, if state A has a state sales tax rate of 10% and City A has a local sales tax rate of 2%, the total sales tax applied to the purchase would be 12%.

Some items are exempt from sales tax. For example, some states allow nonprofit organizations to purchase items free from sales tax if they meet certain criteria and have relevant certificates, or exempt sales where purchaser isn’t the final consumer, for example a distributor.

California is a mixed-sourced state because city, county, and state sales taxes are origin based, and district sales taxes are destination-based.

California generally follows destination-based sales tax rules for online sales like those sold from your Shopify store. This means that the applicable sales tax rate is determined by the location of your buyer.

For sales made to other states, you do not charge Californian sales tax. You would only collect sales tax for the other states if you have an economic presence in those states.

The economic nexus threshold in California is $500,000 in sales in the current or previous calendar year.

The state rate of sales tax for California is 7.25%. Different counties and cities apply additional rates on top of this. For more information, see: California City & County Sales & Use Tax Rates.

New York is a destination-based state. So, if you live in New York and you sell goods to customers in New York then you would typically charge the local rate to the buyer.

For sales made to other states, you do not charge New York sales tax. You would only collect sales tax for the other states if you have an economic presence in those states.

New York also has an economic nexus threshold of $500,000 in sales in the current or previous calendar year. You also need at least 100 transactions delivered to the state in the past four quarters.

The sales tax rate for New York state is 4%. Different counties and cities apply additional rates on top of this. For more information see: Business NYS Sales Tax (nyc.gov).

Like New York, Florida is also a destination-based state, meaning you would typically charge the local rate to the buyer.

For sales made to other states, you do not charge Florida sales tax. You would only collect sales tax for the other states if you have an economic presence in those states.

Florida’s economic nexus threshold is $100,000 in sales in the current or previous calendar year. Even if you don’t meet the economic nexus, Florida considers a seller to have sales tax obligations if they own, rent, or lease tangible personal property in the state.

Florida’s state sales tax is 6%. For more information see: Florida Dept. of Revenue - Florida Sales and Use Tax (floridarevenue.com).

Texas is an origin-based state. This means you charge tax at the rate where your business is located.

For sales made to other states, you generally do not charge Texas sales tax. You would only collect sales tax for the other states if you have an economic presence in those states.

Texas’s economic nexus threshold is set at $500,000 in sales in the preceding 12-month period.

The rate of state tax in Texas is 6.25%. There are many different local tax regions with additional rates.

With so many local tax regions throughout the state, sellers have the option of using the single local tax rate to help streamline collection and remittance. For more information see: Texas‘s economic nexus guidance.

As the rates and regulations regarding sales tax change year-on-year and can vary significantly between different states and local jurisdictions, it can create complex variations in:

• The goods and services subject to sales tax
• The rates applicable
• Physical nexus threshold
• Sourcing (origin-based or destination-based)
• Registration requirements
• Invoicing requirements and more!

Such differences mean it is important to focus on creating and sending fully compliant Shopify invoices. These documents need to state which taxes you charged and on what product. Sufio makes this simple, making it the perfect option for growing US businesses.

If in doubt, we recommend you seek advice from your local tax advisor to make sure you avoid questions from the authorities. You can search for local tax advisors and find one suitable for your business needs.