FAQ: US Sales Tax liability

Nick
Community Moderator
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Who’s liable for US state and local sales taxes?

If your store address is based in the US, you sell a lot within the US, or have a physical presence in the US, you might be liable for US state and local sales taxes depending on your business address and where you’ve sold. To be sure of which taxes you’re liable for and before you start collecting taxes, we highly recommend speaking to a local tax professional.

 

What is economic nexus?

An economic tax nexus is when a business exceeds a certain threshold of sales within a specific state, whether that’s physical or online. Each state has a different threshold.  

 

For example, the threshold for an economic nexus in Illinois is USD 100,000 a year in gross revenue OR more than 200 separate sales within that state. Any business that meets or exceeds this threshold is required to register for an Illinois tax permit.


How does Shopify Sales Tax Liability Insights determine its suggestions? 

Once you open a store and start to make sales, your store admin automatically monitors where you’re selling and which states you might have an economic nexus in. Sales in a specific state are then compared to the state threshold, which identifies where you might have a tax liability. Something important to note is that, while the “Manage sales tax liability”  feature might help determine where your store has a nexus, it’s not meant as a substitute for consulting with a local tax official about your tax liabilities. To manage your sales tax liability, let’s review your US tax liabilities.

 

Am I liable for US sales tax if I don’t have a physical location in the US?

In short, the answer to this question is yes, and it falls under the economic nexus we mentioned above. Even if your store is outside of the US, if it exceeds the threshold for a particular state, you must register for a tax permit within that state. If you’re an online seller outside of the US, check out how to deal with the US tax for international sellers.


Am I liable for sales tax if I dropship?

Dropshipping is when you sell products by using a supplier that holds the inventory and ships the product for you. As the store owner, you never see or touch the product. The product might even be made and shipped in a different country than where you’re located. With all that being said, depending on where you operate your business, where you sell, and where your products are being shipped from, nexus could come into play. There are actually two ways in which nexus can affect sales tax via dropshipping. Let’s look at an example below: 

 

Let’s say you already have a nexus in California when a customer purchases from you. This means you could collect sales tax no matter what (with or without dropshipping). 

 

From the other side, let’s say that you don’t currently have a nexus in California, but the drop shipper does. The drop shipper could be responsible for collecting sales tax from you. This does depend from state to state and the drop shipper would also need to check if they qualify. It’s important to make sure that you and the wholesaler are not both paying tax for the same thing. But it’s also important to make sure that you’re both not neglecting to pay tax! 

 

If neither you nor the wholesaler are liable to pay sales tax in the state, then the customer would be responsible for paying the consumer's use tax on the item. 

 

Do orders from other platforms or marketplaces contribute to my sales tax liability?

It’s possible that, if you’re selling/taking orders from other platforms or marketplaces, those sales could also contribute to your overall sales tax liability. If you are selling outside of Shopify (physical store or other online marketplace/sales channel), you'll need to keep track of whether you’re close to reaching any state thresholds. It’s important to remember that any nexus- or tax-related suggestions from the Shopify admin are based solely on your store’s data in Shopify. They vary with the different sales channels.

 

Does sales tax liability expire?

The answer to this question varies by state. If you are registered for tax collection, states can generally assess the sales tax against you for 3 to 4 years, depending on the rules in each state. If you are not registered for tax collection, states generally fall into two categories:

  • The sales tax liability never expires.
  •  The sales tax liability expires after a longer period than it would if you were registered (typically 7 to 10 years).

How do I register for sales tax?

Each state has a different registration process, and you have to register in each state individually. You can find links to each state’s registration process on our US taxes reference page.

Nick | Community Moderator @Shopify 

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