Shopify Sales Tax Compliance: 4 common mistakes to avoid as a small business owner

Shopify has become an increasingly popular choice for ecommerce entrepreneurs with its subscription-based platform, which offers sellers unique options to sell online while fully owning their own brands and online storefronts. The company has seen substantial growth in both sales and users in recent years as sellers look to branch out from traditional online platforms, like Amazon marketplace.

However, Shopify merchants must ensure their own sales tax compliance, unlike Amazon sellers. This is crucial as sales tax laws vary from state to state, and compliance mistakes can lead to hefty penalties. Here are four common mistakes to look out for if you are starting out as a Shopify seller.

1. Shopify doesn’t ensure sales tax compliance on your behalf like marketplaces do

Shopify is not classed as a marketplace and therefore does not need to collect and remit sales tax on your behalf.

A traditional marketplace facilitator, like the Amazon FBA (Fulfillment by Amazon) program, allows you to store, pack, and ship products from Amazon fulfillment centers. Amazon is also legally required to collect and remit sales tax to all states on your behalf (as of January 1st, 2023), which is very helpful if you aren’t comfortable navigating the complexities of sales tax compliance.

Shopify, on the other hand, isn’t legally required to do this and it falls on you to make sure you are tax compliant in every state. As the business owner, you must:

  • Identify which states you have nexus in.
  • Register to collect sales tax in those states.
  • Add your tax ID number to your Shopify store manually.
  • File sales tax returns with the corresponding state to pay back any owed sales tax.

2. Not knowing where your business has nexus

Your ecommerce business can establish a nexus in two ways: physical and economic.

  • Physical nexus is established when your business has a physical presence in a state, such as a brick-and-mortar store or warehouse, or when employees are sent to another state, such as traveling sales reps.
  • Economic nexus is established based on the number of sales made within a state. Many states have established economic nexus thresholds, meaning that once your business reaches a certain level of sales in a state, you are required to collect and remit sales tax on those sales. For example, Maryland’s economic nexus is $100,000 or 200+ separate transactions in a year. Once you hit this threshold, you must register to collect and remit sales tax on all transactions.

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3. Not realizing that nexus affects your sales tax compliance when selling on multiple platforms

When an Amazon FBA seller expands their business to Shopify, any physical or economic nexus they have with Amazon immediately comes into play. Amazon’s storage of products across the US creates a physical nexus. While you are not required to register with the states as an Amazon-only seller, as a Shopify seller, you are required to register with each state you have inventory. Economic nexus, based on sales volume, may also be triggered if your Shopify sales hit the thresholds set by individual states.

A common mistake would be to confirm that you have no physical nexus in a state and only track the sales made on Shopify but not across all platforms. The economic nexus threshold can be hit without your knowledge which results in your business not being sales tax compliant.

4. Not understanding your responsibility of sales tax compliance as a small business owner

What happens if you fail to register for a sale and use a tax account as a Shopify seller?

As the business owner, it is your responsibility to make sure that your business is sales tax compliant before your business hits nexus. Not knowing your obligations is not an excuse the states accept. If you fail to collect and remit sales tax you will be required to pay out any sales tax you owe plus penalties, if you were to be audited. Imagine having to pay back 7% of all your gross sales for the last 2 years because you failed to collect sales tax. Most businesses couldn’t bounce back from that.

Sales tax can cripple your online business if not dealt with properly. Seek professional guidance to help  stay up to date with the latest tax regulations to avoid any legal complications.

This blog was contributed by our partners at RJM Tax.

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