Sales Tax Guide. Part III: Sales Tax for Shopify Entrepreneurs and Sellers in the USA outside of Marketplaces
You probably already know from the second part of this article that marketplaces make life much easier for online sellers who work remotely in the U.S. market. Amazon, eBay, Walmart, Etsy, and similar marketplaces not only pay Sales Tax for sellers, but also do a much more mundane job of calculating its value.
What do sellers who sell in the USA using Shopify or their own site do? Today we are going to look into this issue. Remember that we are looking at a situation where the seller is not physically located in the USA.
For Shopify sellers, the Sales Tax situation escalated that same 2018 year, when the U.S. Supreme Court issued its verdict in Wayfair vs. South Dakota, which we wrote about in Part I.
Does Shopify pay Sales Tax on behalf of its sellers?
No, Shopify does not pay Sales Tax on behalf of sellers working on the platform. Already, almost all of the states that have Sales Tax have enacted laws on marketplaces to make it easier for sellers and authorities to collect and remit Sales Tax.
In states that have passed these laws, organizers of marketplaces such as Amazon or eBay are required to collect and remit Sales Tax on behalf of their sellers with economic nexus there. But…
Shopify is not a reseller. You will have to set up your Shopify store to collect Sales Tax independently. The platform will not manage the Sales Tax transfer process for you.
Where do I start? How do sellers deal with Sales Tax?
Algorithm of action for Shopify sellers
You will have to proceed in the same sequence that was outlined in the last part of article for Amazon entrepreneurs.
- Determine whether there are relationships.
As with amazoners, Shopify sellers, too, can have 2 types of correlations with the state regarding Sales Tax. Who is not already working with the platform may not know that Shopify launched its Shopify Fulfillment network in June 2019.
The Shopify Fulfillment Network is similar to Amazon’s FBA service, which outsources order service and product storage. Currently there are such centers in California, Georgia, Nevada, New Jersey, Ohio, Pennsylvania and Texas. And working with them will create inventory nexus and you have to pay Sales Tax in those states.
Another type of nexus, economic nexus, occurs when you sell more goods in a particular state than the threshold set for that state. For example, some have a threshold of $100,000 a year OR 200 transactions – whichever comes first. But the thresholds are different for different states.
For convenience, we repeat the table with the thresholds from Part I of this article, but note that they are current as of the date of publication of this article. Not very often, but states do revise their thresholds and make adjustments.
|State Name||Sales threshold size||What period is counted||When to register (relative to the threshold)|
|Alabama||250 000$||Previous calendar year||On January 1 of the following year|
|Alaska||$100,000 or 200 transactions||Previous calendar year||1 day of the month following the threshold|
|Arizona||$150,000 for 2020, $150,000 for 2021||Previous or current calendar year||1 day of the month following the threshold|
|Arkansas||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|California||500 000$||Previous or current calendar year||Day the threshold is exceeded|
|Colorado||100 000$||Previous or current calendar year||First day of the month, which will come 90 days after the period when the threshold was exceeded|
|Connecticut||$100,000 or 200 transactions||12-month period until September 30||Starting in October 1 of the year in which the threshold is exceeded|
|Delaware||—||—||No sales tax|
|District of Columbia||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Florida||$100,000||Previous or current calendar year||Next transaction|
|Georgia||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Hawaii||$100,000 or 200 transactions||Previous or current calendar year||1 day of the month following the threshold|
|Idaho||$100,000||Previous or current calendar year||Next transaction|
|Illinois||$100,000 or 200 transactions||Previous 12-month period||Quarterly check for compliance with the threshold for the previous 12 months|
|Indiana||$100,000 or 200 transactions||Previous or current calendar year*||Immediately after reaching the threshold|
|Iowa||$100,000 or 200 transactions*||Previous or current calendar year||1 day of the month following the threshold|
|Kansas||$100,000||Previous or current calendar year||Next transaction|
|Kentucky||$100,000 or 200 transactions||Previous or current calendar year||1 day of the month following the threshold*|
|Louisiana||$100,000 or 200 transactions||Previous or current calendar year||Within 30 days of exceeding the threshold|
|Maine||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Maryland||$100,000 or 200 transactions||Previous or current calendar year||1 day of the month following the threshold|
|Massachusetts||$500,000 or more transactions||Previous calendar year||If the threshold is exceeded by October 31 – registration from January 1 of the following year. If the threshold is exceeded from November 1 to December 31 – registration on the first day of the month following 2 months after exceeding the threshold|
|Michigan||$100,000 or 200 transactions||Previous calendar year||On January 1 of the following year|
|Minnesota||$100,000 or 200 transactions*||12-month period*||The first taxable sale after exceeding the threshold. There are exceptions*.|
|Mississippi||over $250,000||Previous 12-month period||Next transaction|
|Missouri||$100,000||Previous 12-month period||Not more than three months after the close of the previous calendar quarter|
|Montana||—||—||No sales tax|
|Nebraska||$100,000 or 200 transactions||Previous or current calendar year||The first day of the second calendar month after the threshold is exceeded|
|Nevada||$100,000 or 200 transactions||Previous or current calendar year||1 day of the month following the threshold*|
|New Hampshire||—||—||No sales tax|
|New Jersey||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|New Mexico||$100,000||Previous calendar year||On January 1 of the following year|
|New York||$500,000 or more transactions||Four previous tax quarters||30 days after reaching the threshold|
|North Carolina||$100,000 or 200 transactions||Previous or current calendar year||60 days after reaching the threshold|
|North Dakota||$100,000||Previous or current calendar year||Next year or 60 days after reaching the threshold (whichever comes first)|
|Ohio||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Oklahoma||100 000$*||Previous or current calendar year||1 day of the month following the threshold|
|Oregon||—||—||No sales tax|
|Pennsylvania||100 000$*||Previous 12-month period*||June 1 of each calendar year or earlier*|
|Rhode Island||$100,000 or 200 transactions||Previous calendar year||On January 1 of the following year|
|South Carolina||$100,000||Previous or current calendar year||The first day of the second calendar month after the establishment of the economic tie|
|South Dakota||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Tennessee||$100,000||Previous 12-month period||The first day of the third month following the month in which the threshold is reached|
|Texas||500 000$||Previous 12-month period||The first day of the fourth month after the month in which the seller exceeded the threshold|
|Utah||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Vermont||$100,000 or 200 transactions||Previous 4 calendar quarters||The first day of the month 30 days after the end of the quarter in which you exceeded the threshold|
|Virginia||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Washington||$100,000||Previous or current calendar year*||1 day of the month following the threshold*|
|West Virginia||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
|Wisconsin||$100,000||Previous or current calendar year||Next transaction|
|Wyoming||$100,000 or 200 transactions||Previous or current calendar year||Next transaction|
There is a very rough way to assess whether or not you are close to the point where economic nexus may come.
As an example, let us take Colorado, which has a $100,000 per year threshold. Colorado’s population is about 1.72% of the total U.S. population. Assuming that your product is bought evenly by all states, you may have an economic nexus with Colorado when your turnover reaches $6,000,000 per year.
6 000 000$ * 1.72% = 103 200$
But there are states that have a threshold on the number of transactions. In states such as Hawaii, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, New Jersey, Utah and Virginia, making 200 sales per year (in each state) is enough to reach the threshold and start collecting Sales Tax.
If a unit of your product costs about $25, then 200 orders would create a turnover of $5,000. If you take New Jersey, which has a population of 3% of the U.S. population, an economic relationship with that state can already arise at an annual turnover of $167,000 a year.
However, this is just a rough calculation. Ideally, you will need to check yourself by the number of transactions on Shopify reports and keep track of whether the economic nexus has come and come to collect Sales Tax in one state or another.
One more thing which you should pay attention to. When delving into the material on Sales Tax in the USA, you may come across the information that the Sales Tax x depends on which state you bought the product and which state you sold it in (origin or destination tax basis). If you are selling in the US market remotely, you can ignore this information, you should only be interested in inventory nexus and economic nexus.
If you have determined that you have a nexus in any of the states, the next thing you should do:
2. Get permission to collect Sales Tax in the right states
We wrote about how to do this in Part II, when we looked at the same algorithm for Amazon businesses.
3. Set up Shopify to collect Sales Tax
Once again: the platform will not file your returns for you, but in April 2020 Shopify updated its Sales Tax settings. Now all you have to do is add the Sales Tax registration number of the state in which you have a connection, and the Sales Tax calculation engine will do the rest of the work.
How to do it?
Select your Shopify “Settings” and go into “Taxes” section
Next, find the United States in the list of countries and click the “Set up” or “Edit” button, whichever is available.
After that, select the state you want and enter the data you received after registering with the Department of Revenue of that state.
After that, you may need to make edits to other sections of your store’s tax settings:
- Edit shipping options to collect Sales Tax on shipments
- Select items to be charged sales tax on (some items may be exempt from Sales Tax)
- Add addresses of U.S. storage facilities
- Add details of your Sales Tax-exempt customers (i.e. resellers who buy products from you for resale)
Before making these changes, it is recommended to consult with your tax advisor. How to make changes to the store settings is described in detail in the help on the platform, for example here >>.
One last thing you will need to take care of:
4. Submit reports on time and remit Sales Tax to the state treasury
As you can see, after last year’s update, Shopify has made your job much easier by providing you with a financial tax report and a financial sales report (depending on the settings you have made). These reports summarize your financial data and help you report your taxes.
What should sellers do with their own sites?
Theoretically, you should follow the same algorithm: determine the tax nexus -> get approval to collect Sales Tax -> report and pay tax. However in practice, implementing all of this will be many times more difficult than your fellow marketplace or Shopify counterparts.
You will definitely need:
1. A tax consultant or Sales Tax accountant.
They will be able to analyze your merchandise, your sales, and your interactions with prep centers (if any) for nexus with Sales Tax.
2. Website developers.
You need to set up your order form so that Sales Tax is taken into account for the product and its delivery. And it is not just an additional item on the order form, but the correct accounting of rates, depending on which tax jurisdiction the order came from.
If your site is not “self-written”, but runs on one of the popular CMS (WordPress, Magento, etc.), then there is a chance to simplify your life. How? See point 3.
3. Using API of one of the tax services on the site.
Usually such services track your site transactions and calculate Sales Tax and give you a detailed report. But some of them can send responses to the Department of Revenue of the state you want, using your registration information.
Here is a list of popular services that can be connected via API to popular CMS and CRM-systems:
This is not a complete list of services that can make life easier for online entrepreneurs when working with Sales Tax in the US market. By the way, some of them also work with VAT, while others can be integrated with the Shopify platform and even some marketplaces.
Finally, let us look at the issue of resale certificates, which will be relevant to those involved in arbitrage.
So, if you are in retail arbitrage – you buy goods in bulk with the intention of reselling them yourself at retail – then you do not have to pay sales tax on those goods. All you have to do is present your resale certificate to the supplier from whom you are purchasing.
A Resale certificate (sometimes also called a Resale license or Reseller’s certificate) is a document that allows registered retailers to buy goods for resale without paying sales tax on those goods.
Some states issue official Resale certificates that you can print out and give to your suppliers. In other states, you can fill out a template with the Resale certificate number. In either case, you will need to provide your supplier with some form of resale certificate if you want to buy goods without paying sales tax.
The first interesting feature of these certificates is that vendors are not required to accept your Resale certificate.
Why is this happening?
For example, Target generally does not accept Resale certificates. In this way (as Target believes) it keeps retail prices on its network and resists competition from arbitrageurs.
Sometimes suppliers do not accept Resale certificates for fear of forgery (because there is no single form of these documents for the entire United States) or Expired certificates. After all, in this case, they will be forced to pay Sales Tax themselves, which they mistakenly did not charge. In most states it is possible to check the validity of the certificate online, but sometimes vendors just do not want to bother with it.
If you have a valid Resale certificate, but the vendor from whom you purchase goods for resale charges you Sales Tax, you can get a refund of the s Sales Tax ales tax paid the next time you file your tax return. This procedure has its own peculiarities, so it is better to consult a tax expert.
The second peculiarity of Resale certificates: they are used strictly for the purchase of items you actually plan to resell. It is illegal to use the certificate to buy items such as stationery, packaging materials or goods for personal use. Sometimes there are additional restrictions. For example, in Alabama, you will not buy coffee or office furniture with a Resale certificate.
Sometimes you have to register in that state to pay Sales Tax in order to get a Resale certificate. For example, California does not accept Resale certificates issued in another state and if your supplier is from California, you will have to register in that state to pay Sales Tax. Similar rules apply in Florida, Alabama, Hawaii, Illinois, Louisiana, Maryland and Massachusetts.
As you can see, there are certain difficulties with the use of resale certificates. On the one hand, they allow you to lower your purchase price and get a competitive advantage in resale. On the other hand, they are not always accepted, and it is not uncommon to have to register and get Sales Tax approval in the states where your suppliers are located.
One last thing: If you as a seller are given a Resale certificate when you purchase an item, you can refuse to accept it. It is not illegal for a seller to refuse to accept a resale certificate and is not prosecuted in any way. If you do decide to accept the certificate, however, we recommend that you check its authenticity and expiration date. However, given that there are different forms of Resale certificate and there is no single site where you can check their authenticity – sometimes it is easier to refuse to accept it.
4B company help with Sales Tax
Despite the fact that we have tried to explain everything in detail, we admit that the material may seem difficult to understand at the first reading. In addition, for people who are interested in sales, marketing, production, all this tax “cumbersome” a priori may not be interesting and only take up unnecessary time. If this is your case – contact us. We can take care of the entire routine associated with Sales Tax.
If you have any questions or would like us to handle your Sales Tax, fill out the form and we will be sure to get back to you.
And traditionally, stay tuned to our blog as we continue to track all developments in U.S. tax law.