Finally, in the dropdown menu, choose any states where you should be collecting taxes due to a physical or economic presence. Be sure to have your sales tax ID ready to input on this menu. If you don’t yet have that number, you can use your federal employer identification number (FEIN).
Step 2 – Categorize Products for Tax Purposes
Here is where you will manage categories for your products. If you don’t have products in designated categories for tax collection, Shopify will tell you how many products you need to review.
If you have accurately selected the states in which you’re collecting taxes, Shopify will automatically apply exemptions to products on which sales tax is not collected for certain regions.
i.e. If you’ve added Pennsylvania as a region in which you sell clothing, those products will automatically be exempt from sales tax collection. If you skip adding the regions, you’ll have to select the product override option to create a collection of all clothes and add it to Pennsylvania with 0% sales tax.
Product categorization should collect all the rules in the regions, so you shouldn’t have to spend time with overrides.
Step 3 – Sales Tax Shipping Options
Note: Shopify has mostly integrated shipping and sales tax collection, so it will automatically apply sales tax to shipping in applicable regions. If that’s not the case, shipping overrides are an option when needed.
Step 4 – Tell Shopify Which Products Should Collect Sales Tax
Now Shopify needs to know which products in your store you want to collect sales tax for in the states you have entered. Not all products are taxable. For example, an e-commerce business shouldn’t collect sales tax on gift cards.
States can also have differing laws regarding sales tax (yeah, not cool). For instance, in New York, certain clothing and footwear with a price tag of less than $110 per item are tax-exempt (learn more about New York’s laws). So, you may want to check the taxability of your products in each state you have nexus. Either search online or we have product taxability lists in our sales tax course.
For your taxable products, go to “Products”, then “Add product”. You’ll need to edit each variant of the products you want to collect sales tax for.
When you go to edit each variant, check the box “Charge tax on this product”:
Step 5 – Add Warehouse Locations
Now you need to enter your warehouse locations that are fulfilling orders. Under “Settings,” click on “Locations.” This is really about where you’re shipping your product from.
This step helps Shopify know what rates to charge. For example, if a product is shipped from a warehouse to a customer in the same state as the warehouse, the sales tax rate may differ from if that product was shipped to another state. Shopify needs to know the fulfillment location vs your office location to accurately apply tax rates.
Step 6 – Add Information for Sales Tax Exempt Customers
Finally, you may not be required to collect tax from all your customers. The most common exempt customer you may have is a reseller who buys product through your Shopify store and resells that product. Other tax-exempt entities are government organizations and nonprofits.
These are likely repeat transactions, and you don’t need to collect sales tax from these customers. For these customers, you need to get a tax-exempt certificate from them before not collecting sales tax.
To mark these customers in your Shopify store as tax-exempt. Go to “Customers”, then “Add Customer”:
Then make sure the “Collect tax” box is deselected, and you can enter a reason as to why:
Final Thoughts & Next Steps
We hope this blog and video contain helpful information to get your sales tax settings configured. Some of the information provided has probably brought up more questions and we’re happy to help you get the answers. If you’re not finding all the answers you need here, you are welcome to schedule a consultation with one of our sales tax experts.
You may also find it helpful to take our sales tax maturity assessment to clearly see where you are and how to get the help you need. If your business is larger than $1M in annual sales, you are reaching a point where you may need help from appropriate tax experts. Please don’t hesitate to reach out to LedgerGurus for help on this subject or other e-commerce accounting needs.
Regardless of whether you’re ready to outsource or not, we encourage you to download our 10 Steps to Ensure Sales Tax Doesn’t Burn Down Your eCommerce Business. It is a complete guide to online sales tax compliance and will help you have much more peace of mind with this issue.
Our final recommendation is that you check out our masterclass The Uncomplicated Truth about Sales Tax. Make note, especially, of the three things you must NOT do when you’re setting up your sales tax. Believe me, you don’t want to miss it!
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