How to Set Up Sales Tax on Shopify
Before You Start
You need a valid sales tax permit in each state where you plan to collect. Shopify will ask for your permit number when you enable collection for a state. Do not enable collection in states where you do not have a permit, as collecting sales tax without state authorization is illegal.
You also need to know which tax calculation method to use. Shopify offers two options: Shopify Tax (the built-in engine) and third-party tax services like TaxJar or Avalara. Shopify Tax is included at no additional cost with every Shopify plan and provides accurate rate calculation for most sellers. Third-party services add features like nexus monitoring, automated return filing, and more granular product taxability, but at an additional monthly cost. For most Shopify-only sellers with standard tangible products in fewer than 10 states, Shopify Tax is sufficient.
Step-by-Step Setup
In your Shopify admin, click Settings in the bottom-left corner, then click Taxes and Duties. This page shows your tax configuration for all countries. Click on United States to configure US sales tax settings.
Under the tax calculation section, make sure Shopify Tax is selected as your calculation provider. Shopify Tax uses address-level (rooftop) accuracy to determine the combined state, county, city, and special district tax rate for each customer's shipping address. This is the most accurate method available on Shopify and is included free with all plans. If you previously used Basic Tax (Shopify's older, less accurate system), switch to Shopify Tax for better accuracy.
Under the Regions section, you will see a list of US states. Click "Collect sales tax" next to each state where you have nexus. Shopify will prompt you to enter your sales tax registration number (permit number) for that state. Enter the number exactly as it appears on your permit. Repeat for each state. States where you do not have nexus should remain unchecked, meaning no tax will be collected on orders shipping to those states.
Shopify Tax automatically handles shipping taxability based on each state's rules when the "Include shipping in tax calculation" setting is enabled. Verify this setting is turned on. When enabled, Shopify Tax charges tax on shipping in states that tax shipping charges (like Texas, New York, and Ohio) and does not charge tax on shipping in states that exempt it (like California, Virginia, and Maryland). If you disable this setting, Shopify will not charge tax on shipping in any state, which results in undercollection in states that tax shipping.
By default, Shopify treats all products as general taxable tangible personal property. If you sell products that have different taxability in some states, you need to assign the correct product tax category. Go to each product in your Shopify admin, scroll to the Pricing section, and look for Product Tax Category. Select the appropriate category from Shopify's list. Common categories that affect taxability include Clothing (exempt in PA, NJ, MN and some others), Food and beverages (varying exemptions), Digital goods (varying taxability), and Supplements (taxable in most states). If all your products are standard tangible goods, you can skip this step as the default category works correctly.
Before relying on your configuration, place test orders with shipping addresses in several of your nexus states. Use Shopify's Bogus Gateway or set your store to test mode. Check that the correct combined tax rate appears at checkout for each test address. Verify that orders to states where you do not collect show no tax. Check that exempt products (if any) show the correct reduced or zero rate. If rates look wrong, check your product tax categories and state collection settings.
Handling Tax-Exempt Customers
Shopify lets you flag individual customer accounts as tax-exempt. Go to Customers in your Shopify admin, select the customer, and check the "Tax exempt" box under the Tax Settings section. All future orders from that customer will be processed without sales tax. Before flagging a customer as exempt, collect a copy of their exemption certificate (resale certificate, nonprofit exemption letter, or government exemption form) and store it in your records. You need this documentation in case of an audit.
For stores with frequent B2B orders and many exempt customers, consider a Shopify app that manages exemption certificates and automates the exemption process. Apps like Avalara CertCapture, Exemptax, or Tax Exempt integrate with your Shopify checkout to allow customers to self-certify their exempt status and upload certificates, reducing the manual work of processing exemptions.
Tax Reports in Shopify
Shopify generates tax reports that show your total sales, taxable sales, and tax collected by state for any date range. Go to Analytics, then Reports, and look for "United States taxes" under the Finances section. This report breaks down your tax collection by state and helps you prepare your sales tax returns.
However, Shopify's built-in tax reports have a significant limitation: they show data only for Shopify transactions. If you also sell on Amazon, Etsy, or eBay, those transactions are not reflected in Shopify's reports. For filing returns that cover all your selling channels, you need to either manually combine data from each platform or use a multi-channel tax service like TaxJar that aggregates all channels into a single report.
When to Add TaxJar or Avalara
Shopify Tax handles calculation well, but it does not file returns, monitor nexus thresholds, or aggregate data from non-Shopify channels. Consider adding a third-party service when you are collecting in 5 or more states and the manual filing burden is growing, you sell on multiple platforms and need unified tax reporting, you sell products with complex taxability that requires more granular categorization than Shopify offers, or you want automated filing to eliminate the risk of missed deadlines.
To connect TaxJar to Shopify, install the TaxJar app from the Shopify App Store. TaxJar replaces Shopify's tax calculation with its own engine and pulls your Shopify transaction data for reporting and filing. To connect Avalara, install the AvaTax app. The setup process takes about 15 to 30 minutes for either service and involves entering your API credentials, mapping your products to tax codes, and configuring which states to collect in.
Common Shopify Tax Mistakes
Enabling collection in states without a permit. Some sellers turn on collection for all states thinking it is the safe approach. This creates legal liability for collecting tax without authorization and requires you to either remit the tax or refund it to customers.
Not assigning product tax categories. If you sell clothing, food, or digital goods, the default "general taxable" category results in overcollection in states where those products are exempt or reduced-rate. Review your product catalog and assign appropriate categories.
Using old Basic Tax instead of Shopify Tax. Shopify's older Basic Tax system uses ZIP code-level rate lookups, which are less accurate than Shopify Tax's rooftop-level lookups. If your store was created before Shopify Tax launched, you may still be on the older system. Switch to Shopify Tax for better accuracy at no additional cost.
Forgetting to update when entering new states. When you establish nexus in a new state, register for a permit, and then forget to enable collection on Shopify. Set a process to update your Shopify tax settings immediately after each new state registration.