How to Set Up Sales Tax on Shopify
Understanding Sales Tax Nexus
You are only required to collect sales tax in states where you have "nexus," which is the legal connection between your business and a state that creates a tax obligation. There are two types of nexus that apply to online sellers:
Physical nexus: You have a physical presence in the state. This includes a home office, a warehouse, a retail store, employees working in the state, or inventory stored in a fulfillment center in that state. If you use Amazon FBA, you have physical nexus in every state where Amazon stores your inventory, which can be 20+ states depending on Amazon's distribution decisions.
Economic nexus: You exceed the state's sales threshold without a physical presence. After the Supreme Court's 2018 South Dakota v. Wayfair decision, most states enacted economic nexus laws. The most common threshold is $100,000 in annual sales or 200 transactions in the state. Some states use only a dollar threshold ($100,000 in sales with no transaction count), and a few have lower thresholds ($50,000 in Oklahoma, for example). Once you cross a state's threshold, you must register and begin collecting tax.
Five states have no state sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. You never need to collect state sales tax for orders shipped to these states (though Alaska allows local jurisdictions to levy their own sales taxes).
Tracking economic nexus across 45 taxable states manually is difficult. If your store processes more than $100,000/year in total US sales, you likely have economic nexus in multiple states. Tools like TaxJar and Avalara track your sales by state and alert you when you approach or cross a nexus threshold.
Step 1: Register for Sales Tax Permits
Go to each state's Department of Revenue website and apply for a sales tax permit (sometimes called a seller's permit, resale certificate, or sales tax license). Most applications are free or cost $10 to $50, and approval is immediate or takes a few business days. You will receive a registration number that you enter in your Shopify tax settings.
Collecting sales tax without a valid permit is illegal in most states. Even if Shopify's system can calculate and collect the tax, you should not enable collection in a state until your permit is approved. The permit also establishes your filing frequency (monthly, quarterly, or annually), which determines how often you need to submit returns and remit the collected tax.
If you are a new business with nexus in your home state only, start by registering in that one state. As your sales grow and you trigger economic nexus thresholds in other states, register in those states as needed. You do not need to register in all 45 taxable states on day one.
Step 2: Enable Shopify Tax
Go to Settings, then Taxes and duties. Under "Tax regions," click "United States" (or your country). Shopify Tax should be enabled by default. Verify that "Automatically calculate tax" is turned on. This tells Shopify to add the correct tax amount to every order based on the customer's shipping address.
Shopify Tax calculates rates at the jurisdiction level, meaning it accounts for state, county, city, and special district tax rates. Sales tax in the US is not a single rate per state. A customer in Los Angeles, California pays a different rate (10.25%) than a customer in San Francisco (8.625%), because county and city taxes vary. Shopify Tax handles these jurisdiction-level calculations automatically using the customer's ZIP code and street address.
Shopify Tax is included on all Shopify plans at no additional cost for US tax calculations. International tax calculations (VAT, GST) are also included. This is a significant advantage over platforms that charge extra for tax calculation services or require a paid third-party integration.
Step 3: Add Your Nexus States
In Settings, then Taxes and duties, click "United States," then click "Collect sales tax." Add each state where you have nexus. For each state, enter your sales tax registration number (or permit number). Shopify will only calculate and collect tax on orders shipped to states you have added.
If you do not add a state, Shopify will not charge tax on orders shipped there, even if the customer is in a high-tax jurisdiction. This is the correct behavior, because you should only collect tax where you have nexus and are registered. Adding a state you are not registered in creates a compliance problem (you collected tax but have no mechanism to remit it), while not adding a state where you have nexus means you are absorbing a tax liability out of your own pocket.
Step 4: Assign Product Tax Categories
Go to each product in your admin, scroll to the "Product category" section, and select the most specific category that matches your product. Shopify uses this category to determine the applicable tax rate, which varies by product type in many states.
Most physical products are taxed at the standard rate, so the default category works for the majority of items. However, several product categories have special tax rules in various states:
- Clothing: Exempt from sales tax in Pennsylvania, New Jersey, and Minnesota. Exempt under $110 per item in New York. Taxed at a reduced rate in some other states.
- Food and grocery: Exempt or reduced rate in most states. Prepared food (meals, snacks ready to eat) is usually taxable, while unprepared grocery items are usually exempt.
- Digital products: Taxable in about 30 states, exempt in others. Digital downloads, software, streaming subscriptions, and ebooks each have different tax treatment depending on the state.
- Supplements and vitamins: Classified as food (exempt) in some states and as general merchandise (taxable) in others.
Shopify's product category system handles these variations automatically when you assign the correct category. If you sell clothing and assign the "Clothing" category, Shopify will charge $0 tax on a shirt shipped to Pennsylvania and the full rate on a shirt shipped to Texas. Getting the category right matters, because over-collecting tax creates refund obligations and under-collecting means you owe the difference out of pocket.
Step 5: Configure Tax Display and Inclusion
For US-based stores selling to US customers, the standard approach is to display prices excluding tax and add tax at checkout. This is what American consumers expect, and Shopify's default behavior handles it correctly.
For stores selling to international customers, particularly in the EU, UK, Australia, and Canada, consumers expect prices to include tax (VAT or GST). Shopify lets you configure tax-inclusive pricing for specific regions. Go to Settings, then Taxes and duties, then select the relevant country or region, and enable "Include tax in prices." Shopify will show tax-inclusive prices to customers in those regions and back-calculate the tax component for your accounting.
If you sell both domestically (tax-exclusive) and internationally (tax-inclusive), Shopify Markets handles this automatically when you enable international selling. Customers in the US see prices without tax, and customers in the UK see prices with VAT included, from the same product catalog.
Step 6: Filing and Remitting Sales Tax
Shopify collects tax from your customers and holds it as part of your order revenue. It does not file or remit the tax to state governments for you. You are responsible for filing returns and sending payment on time, according to the filing frequency assigned by each state (monthly, quarterly, or annually).
Shopify Tax Reports: Go to Analytics, then Reports, then Taxes. Shopify provides a report showing total tax collected by state, county, and jurisdiction for any date range. Use this report to fill in your state tax returns. The report breaks down exactly how much tax you collected for each jurisdiction, which is what most state return forms require.
Automated filing with TaxJar: TaxJar ($19/month for the Starter plan) automates the filing process. It pulls your sales data from Shopify, calculates your liability by state, prepares the return, and can auto-file in most states. For stores with nexus in more than 3 to 4 states, the time savings on manual filing easily justifies the cost. TaxJar's AutoFile feature costs $24.99 per state per year on top of the monthly subscription.
Filing deadlines: Late filings incur penalties and interest in every state. Monthly filers typically have returns due by the 20th of the following month. Quarterly filers typically have returns due by the end of the month following the quarter. States assign filing frequency based on your tax liability: higher liability means more frequent filing. If your assigned frequency changes (because your sales grew), the state will notify you.
Common Sales Tax Mistakes
Collecting tax in states where you are not registered: This creates a compliance nightmare. You have collected money on behalf of a state government but have no mechanism to remit it. Register before enabling collection.
Not collecting tax where you have nexus: If you have nexus and do not collect tax, you are personally liable for the uncollected tax. The state can audit your sales records and assess the full amount plus penalties and interest. The longer you go without collecting, the larger the liability grows.
Ignoring economic nexus triggers: Many store owners are unaware that crossing $100,000 in sales to a state creates a tax obligation. Monitor your sales by state monthly, and register promptly when you cross a threshold.
Not accounting for marketplace facilitator laws: If you sell on Amazon, eBay, Walmart, or Etsy, these marketplaces collect and remit sales tax on your behalf in most states. You do not need to collect tax separately on marketplace sales. However, sales through your Shopify store are your responsibility. Keep marketplace sales and direct sales separate in your tax tracking to avoid double-counting.