How does an out of state seller collect correct sales tax in Viriginia

[dizzlebabe]

I am located in Pennsylvania and sell online only. We have economic nexus in Virginia. Virginia is an origin-based state, which means that the sales tax that is charged to customers in Virginia is based on my location, not the customer's location. But because we're out of state, we don't have a location in Virginia.

In Shopify, when you set up sales tax, even if you don't have a physical presence, you need to pick a zip code to enter in order to activate that state for sales tax. So for now, I've chosen a Roanoke zip code. That means that anyone in Virginia that makes a purchase will be charged the sales tax for Roanoke.

However, Virginia's tax website says that out of state resellers (that's me) must collect tax as if it were destination based, meaning the tax collected should be based on the location of the customer in Virginia. But Shopify's system isn't smart enough to understand the difference between economic nexus and physical nexus, so therefore it's not smart enough to know that since I'm not really located in Virginia, it should be charging destination based sales tax.

So now, I'm only collecting one rate for the whole state. But when I go to remit my payment, Virginia wants me to tell them all the jurisdictions that I sold to, and it will charge me the appropriate tax for each of those jurisdictions. So essentially, I'm going to be collecting less money than I'm going to owe.

Has anyone figured out a workaround in Shopify to fix this (i.e., find a way to force Virginia to act like a destination based state instead of the origin based state that Shopify has programmed), since Shopify isn't smart enough to do this for us (yet... they say they're working on it, but I have no confidence that this will be solved anytime soon)?

[AlanaBryantCPA]

Have you considered using Taxjar, Taxify, or Avalara in conjunction with Shopify?

Thanks,
Alana Bryant, CPA

[dizzlebabe]

Yes, I am using TaxJar. TaxJar is great because it tells me what I really owe. But the problem is that Shopify is not set up to allow me to collect what I actually owe.

---

[eCommAccountant]

and keep in mind these states do not allow you to absorb the sales tax...

[eCommAccountant]

based on what I've read for Virginia, if you're selling online you collect on destination location

[dizzlebabe]

---

@eCommAccountant wrote:

based on what I've read for Virginia, if you're selling online you collect on destination location

---

Right. But the problem is that Shopify code won't charge destination based tax for Virginia since Virginia is typically origin based if you have physical nexus. So I'm screwed. I can't make up the difference myself, according to your other screen shot, yet Shopify won't let me collect the correct amount. What am I to do? This is my dilemma. By the way, where did you get that screen shot of the states that frown upon you making up the difference? I need to research that further.

[eCommAccountant]

Have you created your sales tax over-rides for Virginia by collection? When you create the over-rides they collect based on destination

Here's more details on the states that allow absorption and the ones that don't...
https://www.avalara.com/us/en/blog/2019/07/retailers-in-pennsylvania-and-texas-can-absorb-sales-tax....

and here's how to setup your Shopify over rides...

https://help.shopify.com/en/manual/taxes/tax-overrides

and here's the section you'll need to focus on for Virginia...

[dizzlebabe]

Can you give me a little more guidance if you know how to do this? I know how to set up a tax override, but from a logical standpoint, I need to understand what I need to do. I think that what I need to do is in Shopify, in the top section where you enter states and zip codes for where you have physical presence, I think I need to have one zip code entered that is for a city that is charged the normal rate for Viriginia (5.3%, so I picked Roanoke). Then I think I'm supposed to enter all of the zip codes for the areas that have sales tax rates other than the 5.3%. I don't know how many of those there are yet. Then I think I'm supposed to add overrides for all of these special areas that are more than the 5.3%. Am I think about this correctly? Or do I need to enter every zip code in Virginia (for which there are over 1200) and in the override section, enter the 5.3% for most and then the higher ones where appropriate?

[eCommAccountant]

Yes you need to add one zip code for the state as you have done here...
>>I think I need to have one zip code entered that is for a city that is charged the normal rate for Viriginia (5.3%, so I picked Roanoke).<<

No do not enter all the zip codes
<<Then I think I'm supposed to enter all of the zip codes for the areas that have sales tax rates other than the 5.3%>>

Yes, you need to enter an over-ride for each of your collections, so put all of your products into one collection labeled something like... sales tax, then go in and create a tax override for Virginia with their required rate of 5.3% from what you've posted, then mark the box "applies to all county & cities"

[dizzlebabe]

@eCommAccountant wrote:

Yes, you need to enter an over-ride for each of your collections, so put all of your products into one collection labeled something like... sales tax, then go in and create a tax override for Virginia with their required rate of 5.3% from what you've posted, then mark the box "applies to all county & cities"

---

But I don't think that's right. Virginia says that, as an out of state seller, I need to collect/remit as though it was a destination based state. So I can't collect 5.3% for the whole state, because they want me collecting based on where the customer is located. I think what you described would work if I was supposed to collect 5.3% for the whole state.

[eCommAccountant]

I did this same example for Kansas and Shopify did collect all of the taxing jurisdictions above and beyond the rate I set up which was 6.5%.

You'll have to test this to see if it works for Virginia, and I'd contact the Virginia Dept of Revenue and ask for assistance also.

[tax_pro]

Hi dizzlebabe,

I'm a state and local tax professional specializing in multi-state sales and use taxes.  I have a client using Shopify and I file their monthly sales tax returns from the Shopify sales report.  I know exactly what your dilemma is as I have advised my client on how to setup the tax rates in Shopify for states like Virginia which is origin based for sellers within the state but changes to destination based when sales originate from outside the state to customer's destination inside the state.

Since Shopify cannot calculate the tax correctly in these situations (without putting an "unrealistic burden" on your business by telling you to add every zip code in the state to the tax rates ) then my approach has been to use a higher rate (not necessarily the highest) in the state which will result in some excess tax being collected which must be reported to the state by one method or another.  The first and best method to use is to report the excess tax on a separate line item in the sales tax return when it's available.  Unfortunately this is not the case with Virginia. 

So then I called the state to ask how excess tax should be reported and they explained that a "separate " filing / report had to be mailed into the state.  After discussing that option with my client and explaining the additional cost to them to have me make the separate filing I then recommended that the excess tax be reported to the local jurisdiction of "FIPS Unassign" (rate = 5.3%) by backing into the taxable sale figure (excess tax / rate)

The rate I recommended my client setup in Shopify was 6% (either by using a zip code having a 6% rate or using tax override) because the majority of their sales (73%) were actually made in those jurisdictions while 23% were made in 5.3% jurisdictions and 4% were in 7% jurisdiction. 

Something to keep in mind when using the "grossing up taxable sales" method... Be sure to keep detailed documentation (work papers) that support the figures reported on the sales tax returns because under a sales tax audit you will need to explain why the actual taxable sales (from your sales report) were less than the taxable sales filed on the return.  Hope that makes sense.

Hope you find this explanation helpful.  If you'd like further assistance feel free to email me at jerry.shopify@tsttllc.com