Understanding tax liability

Determine your tax liability

Before you set up your US taxes, you need to determine whether you're required to collect sales tax from your customers and remit tax to a state tax authority, also known as your tax liability.

Key factors influencing sales tax

In the United States, the sales tax that you should charge is affected by the following factors:

• The location that your product is shipped from
• The location that your product is shipped to
• Where you're registered to collect tax
• Item taxability
• Buyer exemptions

Nexus and tax responsibilities

Nexus, or a connection between your store and a US state, determines whether you potentially have tax liability there. Nexus can be physical or economic.

Overview of physical nexus

Generally, physical nexus occurs when you have a physical presence in a state, such as an office, store, warehouse, or employees. Some states have a broader definition of physical nexus, and might include any of the following activities:

• Solicitation of sales
• Fulfillment services
• Presence of inventory

If you're not sure whether your activities outside your own state count as having physical nexus, then consult with state tax authorities or a local tax professional.

Overview of economic nexus

Economic nexus occurs when you exceed a certain threshold of sales to customers in a specific state.

In June 2018, the Supreme Court of the United States ruled that states can require online sellers to collect sales tax based on the volume or value of transactions into a state, also known as economic nexus. For information about how this ruling might affect your business, refer to the Shopify blog post Online Sales Tax: A Guide to Economic Nexus & Ecommerce.

Establishing nexus

The sales threshold that determines whether you have nexus is different for each state. Refer to the state tax reference table to determine whether your sales into a state might constitute economic nexus.

Treatment of digital products in economic nexus

A digital product is a product that customers download and doesn't have any physical components to ship. Some states include digital products for the purposes of determining economic nexus, while others do not. The state tax reference table provides state-by-state information on whether digital products are included in nexus calculation.

Marketplace considerations in determining economic nexus

A marketplace is a website where multiple sellers offer their products. Some states include sales in marketplaces for the purposes of determining economic nexus, while others do not. The state tax reference table provides state-by-state information on whether marketplaces are included in nexus calculation.

The following marketplaces might be taken into account when determining economic nexus, depending on state law:

Shop

As of January 1, 2025, the Shop sales channel automatically collects, remits, and files taxes on all orders shipping to or within the United States. Tax is reported under SC Commerce Services Inc. This happens regardless of your current sales tax settings. Learn more about how tax is remitted for the Shop sales channel.

Dropshipping and nexus considerations

If your store uses dropshipping to provide products to your customers, then you are buying a product from another vendor, and then your customers buy that product from you. Whether you charge tax depends on the location of your customer and where you and your dropshipping vendor have nexus. Review the following scenarios and determine which one applies to your business:

• If neither you nor your dropshipping vendor have nexus in your customer's state, then you aren't obligated to charge tax. Your customer will likely pay a use tax to the destination state for the purchase.
• If you don't have nexus in your customer's state, but your dropshipping vendor does, then your vendor might ask you for a resale certificate or charge you the appropriate tax.
• If you have nexus in your customer's state, but your dropshipping vendor doesn't, then you're obligated to charge tax to your customer.
• If both you and your dropshipping vendor have nexus in your customer's state, then your vendor might ask you for a resale certificate or charge you the appropriate tax, and you're obligated to charge tax to your customer.

Remote seller rules

A remote seller is a merchant that isn't physically located in a particular state, but has economic nexus there. Most states have rules determining what defines a remote seller. If you're not sure whether selling in a particular state creates an economic nexus for you, then you should consult with US state tax authorities or a local tax professional.

Register for taxes

After you determine that you need to collect sales tax in one or more states based on nexus, you must contact each of the relevant agencies and register with them before setting up tax collection in Shopify. The process varies depending on where your business is based, where you sell, and individual government requirements.

The following is some of the general, though not all-inclusive information you might need when you register:

• Entity type
• Business name (legal name)
• Doing Business as Name (DBA)
• Business location address
• Mailing address
• Business phone number
• Date of first sale/liability date
• Contact person
• Contact person's phone number
• Contact person's email address
• Merchant ID, Merchant Account ID, or Merchant Card Processor Account

For more details on a particular state's requirements, refer to the state's tax website found in the State Tax Reference.

Set up your taxes in Shopify

After you've determined the states in which you need to charge tax in the United States and registered with the tax authorities, you can set up your Shopify store to collect taxes. Refer to the following guides, based on whether you're a new or existing user:

• New users: If you're new to Shopify, then refer to Setting up US taxes.
• Existing users: If you already use Shopify and need to update your settings, then refer to Manage your US taxes.
• Further learning: If you want to learn more about the different tax services available in your region, then refer to Choose a Tax Service.