If you’re an e-commerce seller using Shopify to sell your wares, you might have noticed the new Shopify feature alerting sellers of potential new sales tax nexus.
Sales tax is a unique concern for e-commerce businesses, because they can be required to register for and collect sales tax in any state in which they hit the nexus threshold. These thresholds are the point at which the state considers the seller to have “a significant presence” in the retail market. Once a seller has that presence, they’re required to register for and pay sales tax in the state. These thresholds also differ from state to state, but may be based on total sales (often $100,000) or number of transactions (often 200).
Shopify recently debuted a new feature which notifies Shopify sellers that they may have nexus in a new state. It can be found under “manage sales tax liability” and looks like this:
This will take you to your sales tax settings options and display the new “Manage sales tax liability” section as shown here:
ECOM CPA offers Sales Tax Nexus studies for e-commerce sellers. Recently, our clients have been asking: are nexus studies are still advisable, if Shopify is monitoring sales tax obligations?
Yes. Here’s why.
Shopify Doesn’t Track Local Tax Requirements
Some states, like California, Alaska, and Colorado, have local tax filing requirements that are separate from state filing requirements. That means that while the state may not impose sales tax, some cities do. And these cities’ nexus requirements are not tracked by Shopify.
Shopify Doesn’t Account for Other Sales Channels
Shopify’s nexus alert tool only accounts for the sales made through Shopify. Many sellers utilize multiple sales channels including Amazon, Walmart, Etsy, WooCommerce, and more. If you’re one of them, be aware that this nexus alert only covers Shopify sales.
Shopify Doesn’t Automatically Account for Exemptions
Did you know that not all products or services are subject to sales tax? Depending on the state, there may be exemptions for food, medical items, clothing, books, and “intangibles” (and that’s just for starters). Each state has different exemptions based on product type. Without comparing the product or service sold to the state regulations, you won’t know if you’re able to exempt hundreds of transactions, or not. However, Shopify can be manually configured with sales tax overrides once you know what items are exempt, and in which states. A good nexus study will have this information.
Shopify May Not Account for Discounted Items
While this is not clear based on information provided by Shopify, it is possible that the nexus alert may overstate the number of separate sales transactions – if it includes sales that netted to $0, such as a “free gift with purchase”. Shopify does calculate the nexus obligations based on “net sales” so it takes discounts into consideration. However, if the item is still counted as an order (one item sold for $0), it counts towards nexus.
Shopify Doesn’t Estimate Exposure
Shopify’s economic nexus analysis tool tells you where you have sales tax exposure – but not how much. ECOM CPA offers a nexus study which also analyzes and estimates monthly and annual sales tax exposure. This allows businesses to understand how much they can expect to pay for sales tax, after successfully registering in new states. This information is part of making an informed decision, and allows sellers to plan for the expense.
Shopify Issues a Disclaimer for the Nexus Alert
Shopify clarifies the methodology and limitations of their nexus alert here. It’s accompanied by a disclaimer on this specific topic.
To illustrate, one of our clients recently pulled up the sales tax alerts from their Shopify store and compared it side by side with their TaxJar account, which also advised that they had reached nexus in additional states.
The thing is…they didn’t match.
TaxJar showed nexus had been reached in 12 states, while Shopify only showed 7.
The Bottom Line
While the nexus alert in Shopify is a great feature, it’s not comprehensive for many sellers, especially larger ones. If you have multiple nexus alerts on your Shopify dashboard, ask your e-commerce CPA about a nexus study.
Tax Director Jeff Stonerock recommends that businesses “[run] a nexus study every year in which business activities in a state increase significantly based on the original nexus study. If the nexus study is performed correctly, a business should have a plan in place to review its activities as they increase in a new state.” He also recommends that companies who have not done a nexus study in the past 5 years ask their CPA whether they may have new exposure. This could be from sales growth, or because of rapidly changing laws.
Additionally, with a comprehensive nexus study, you may find that your sales tax obligations have decreased. If sales have dropped in states you were previously registered in, and you are below the threshold to register and collect sales tax there, you may be able to close these sales tax permits.
Sales tax is complicated for remote sellers, and ECOM CPA can help. We offer full nexus studies, registration services, and return filings for all states.
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