How to Collect Sales Tax Via Shopify and Other Online Carts

Aug 28, 2023 | E-Commerce, Nexus, Sales Tax

Recently we wrote about how easy online shopping cart onboarding can lead to sales tax disaster

Long story short, online shopping carts are very good at onboarding new e-commerce sellers. But there is sometimes a disconnect between setting up sales tax collection on a shopping cart and getting compliant with a state to collect sales tax. In the worst case scenario, an online seller believes that they are sales tax compliant with a state just because they set up sales tax collection on Shopify or another shopping cart. …Except they forgot the crucial step of registering for a sales tax permit

Today’s post walks you through the right way to set up sales tax collection on your online shopping carts. 

Evaluate Your Current Shopping Carts

Before you set up sales tax collection on a new cart, we recommend evaluating how you are collecting sales tax on your current carts. To do this, follow this checklist:

  1. Gather a list of the states where you are registered to collect sales tax
  2. Ensure you are collecting sales tax in each of those states in your current shopping carts
  3. Determine if you have sales tax nexus in any new states 
  4. Register for a sales tax permit in new nexus states

HOST is here to help with #3 and #4. 

When should you look for new nexus states? When your business has had an uptick in sales volume, or at the end of a calendar year when your business may have exceeded a state’s economic nexus threshold. Sign up for a nexus analysis today to ensure you are collecting sales tax from customers in all your nexus states.

Account for Each Cart’s Sales Tax Settings

Once you’re certain you are collecting sales tax correctly on your current shopping carts, you’re ready to add a new cart into your mix. Every online shopping cart is a little different when it comes to setting up sales tax collection. 

These days, most shopping carts understand the importance of allowing e-commerce sellers to collect the right amount of sales tax from customers in the more than 11,000 US taxing jurisdictions. 

Here are the sales tax help pages for some of the most popular online shopping carts:

Remember, when setting up sales tax collection, only collect in states where you:

  1. Have sales tax nexus and
  2. Are registered for a valid sales tax license

Don’t Forget Product Sales Tax Exemptions

These days the most popular carts take into account origin and destination-based sales tax sourcing, and sales tax exemptions for products that are often not taxed or taxed separately. (This includes products like groceries, clothing and digital goods.) 

If you sell items that are taxed differently, you’ll likely need to indicate which items are subject to sales tax exemptions.

Some carts will require that you set up manual sales tax rates rather than allow you to simply “tag” items as groceries, clothing, etc and have the cart automatically adjust the sales tax rate for you.

In those cases, HOST is here to help. We can ensure you are collecting the right amount of sales tax on your shopping carts and marketplaces, even on those tricky items that are taxed differently in different states. Contact us for a consultation.

Consider Edge Cases

Your online shopping cart also may not take into account special occasions like sales tax holidays. These are short periods where certain items, mainly clothing and school supplies, but sometimes also things like emergency preparedness equipment or energy efficient appliances, are tax free. If your shopping cart doesn’t allow for sales tax holidays, you may want to manually turn off sales tax collection on applicable products over these holidays. 

The same goes for any manual sales tax settings. If you have set up your own sales tax settings on things that are taxed differently, like clothing, groceries or digital goods, you’ll want to check your settings at least every January and July. This is when sales tax rates can update or change. Also, keep an eye on the HOST blog for big changes, such as states deciding to tax digital products, or stop taxing groceries.

If you are at all unsure whether you are collecting the right amount of sales tax on your online shopping carts and marketplaces, contact HOST for a consultation.