From Etsy to Shopify: Sales Tax Tips to Keep Your Small Business on Track
Sales tax compliance is a critical but often confusing aspect of running a small e-commerce business. With the rise of platforms like Shopify, Stripe, Etsy, and others, managing sales tax has become increasingly complex. Each platform handles sales tax differently, and staying on top of these differences is essential for avoiding penalties and maintaining your business’s credibility. This blog will break down the key challenges and provide practical tips to help you navigate sales tax on popular e-commerce platforms, whether they are selling platforms or marketplace facilitators. Keep in mind there are costs with every solution that vary based on a number of factors. In addition, most of the internal tax functions for the selling systems don’t include preparation of the sales tax returns which we call “compliance”. You’ll need to identify a solution to take care of this critical function. And a word of warning – PLEASE do not turn on tax collection in a jurisdiction unless you have completed the sales tax registration with the jurisdiction!
Need a quick rundown on sales tax essentials?
Click here to jump to details on sales tax, nexus, and marketplace facilitator laws.
Shopify: Selling System Deep-Dive
Navigating sales tax can be overwhelming, but Shopify offers a variety of options that help small e-commerce businesses stay compliant. Depending on which version of Shopify you are using (Basic, Advanced or Plus), tax functionality will differ. Options including using the internal Shopify tax functionality or integrating with an external tax engine such as Avalara or Vertex. The complexity of your business including the nature of the products you sell, which jurisdictions you sell into as well as if you would like a comprehensive solution that can also handle your sales tax compliance will help drive the decision on which route to choose.
With its internal sales tax features, Shopify allows you to set up, manage, and define tax collection across multiple states and even internationally. Let’s help you confidently dive into Shopify’s internal system and discover how it can streamline your tax management process, freeing you up to focus on growing your business.
Does Shopify take care of sales taxes for me?
This selling system has the option of Shopify Tax: “Shopify Tax offers the highest level of sales tax compliance with the least amount of upkeep for merchants that sell to customers in the United States.” You can find out more about it here. You’ll notice that Shopify has two other options for tax compliance, but Shopify Tax offers the most automated and seamless experience of its internal tax options. However, no matter how automated, it is important to thoroughly go through your taxability, product categories, etc. upon setup. Although Shopify Tax will calculate the tax on the orders, it does not offer any compliance options so you will have to decide how you will file the tax returns.
What are the perks of Shopify?
Shopify provides customizable options for small e-commerce businesses such as custom reports and sales tax rate overrides. You can build out custom reports in their system and save the templates to use again later. This option provides you with much more accurate tax collection than their Basic or Manual tax function. And in addition, if Shopify doesn’t have the right taxability for your product(s), you can use their product overrides to drive certain, more accurate, sales tax rates. Keep in mind once you create an override, you are now responsible for tracking any changes in rates or taxability.
I’m worried about my location settings making things more complicated!
If you have a main location in one state but make in-person sales at an event in a second location, you have the option to set up a secondary location that complies with your taxability in that location.
What should I keep in mind if I’m using Shopify Tax?
Something to keep in mind if you are using Shopify and want to use its AI functionality to map your products to their tax codes is that it might result in some unusual mappings depending on how you name your products. If you use food descriptions for your colors – you might end up being mapped to a food category instead of what you are actually selling. So, make sure you review what Shopify has assigned and fix it so the system can learn.
Shopify Tax can only be used to calculate tax in the US but you can use their other internal tax functionality for other countries. In addition, you can’t turn off local level taxes in home rule states like Colorado. You can find more information on that here.
Shopify Tax can’t calculate industry specific taxes or other fees that result in a separate tax line such as e-waste fees. You might need to set up additional charges for these sorts of taxes and fees. In addition, Shopify doesn’t publish a taxability matrix so you’ll need to do testing to confirm the tax results match your expectations.
What if I already have an external tax engine?
Although Shopify has native tax functionality, it can also be connected to an external tax engine. This option gives you even more accurate and complete tax answers. This might be the right answer if you sell products that aren’t maintained in the Shopify product taxability matrix, you are subject to industry specific taxes or special types of fees, or if you need to offer customer-based exemptions.
Whether you’re selling locally or globally, Shopify’s tools, from custom reports to tax overrides, give you the flexibility and accuracy you need to ensure you’re charging the right amount of tax.
Stripe: Selling System Deep-Dive
Stripe offers a straightforward selling solution for small businesses looking to manage sales tax, but it comes with its own set of challenges, some which are similar to what we discussed about Shopify. While it simplifies the process of collecting sales tax, Stripe’s limitations, particularly in complex scenarios like jurisdiction-level taxation and detailed reporting, can create hurdles for growing businesses. Let’s explore how Stripe’s tax features stack up and where they might fall short for small e-commerce businesses.
What’s the best business case to use Stripe?
If your business has a simple product line and minimal tax complexities and you use Stripe to process your credit card transactions, Stripe could be a cost-effective choice. It is ideal for businesses with limited product lines or simple tangible personal property sales. And depending on your situation, it could be a more affordable option for small businesses looking to save where they can.
Does Stripe cover the nuances of local taxes?
It is crucial for small businesses to be aware of Stripe’s constraints, especially if you’re operating in states with unique tax requirements or need more advanced features. The lack of possibility for customization makes it harder. For example, you cannot set up collection at the jurisdiction level in states like Colorado – you collect everywhere in a state or nowhere in the state.
What else do I need to know?
Stripe does not offer a published taxability matrix, which is a very handy tool for small businesses as they try to understand how tax will be applied to their product. In order to find out Stipe’s tax determination you have to test transactions. Also, there are no tax overrides available, making it challenging for complex businesses with various product lines and locations or if you disagree with Stripe’s tax determination. Finally, the reporting options are limited in comparison to other options. However, Stripe does own TaxJar, so this relationship provides a sales tax compliance option. You will need to license TaxJar separately.
Learn more about all things Stripe and if it’s the right solution for you!
How Do Marketplace Facilitators Fit Into This?
When it comes to e-commerce, not all platforms are created equal—especially when it comes to sales tax compliance. Unlike selling systems like Shopify and Stripe (which are not marketplace facilitators), marketplace facilitators like Etsy and Facebook Marketplace have their own unique qualities and responsibilities. These platforms are typically responsible for the collection and remittance of sales tax on behalf of sellers, simplifying some aspects of tax compliance but introducing new considerations. Understanding the differences between marketplace facilitators and other selling platforms is crucial for small business owners to ensure they meet all their sales tax obligations. Let’s explore the specific sales tax compliance requirements for popular platforms and what you need to know to stay compliant.
Etsy
Etsy automatically calculates, collects, and remits sales tax for items shipped to states that require marketplaces to collect sales tax. This includes all states with a sales tax in the US and Puerto Rico. It’s important to pay close attention to the rules for the states that you are operating in and selling into. For more information on handling sales tax from sales on Etsy, check out this article. Sellers can’t opt out of Etsy automatically calculating the sales tax. Since some states require marketplace sellers to include their marketplace sales on their sales tax returns, Etsy includes the amount of sales tax it collects in your Payment account under your Activity Summary in the Sales and Fees section next to Sales Tax paid by buyer (Remitted).
If you are selling into other territories where Etsy does not have an obligation to collect and remit on your behalf, you need to determine if you have an obligation to collect and remit the tax and if so, you can use the Etsy sales tax tool to have the tax calculated.
When selling on Facebook Marketplace, it’s important to understand that Facebook may be required to collect and remit sales tax on your behalf, depending on the state and local sales tax laws in the area where your buyer is located. This means that if you’re selling products on Facebook, sales tax might be automatically added to your transactions at checkout. Facebook calculates this sales tax based on the buyer’s shipping address, and the amount is determined by the applicable state and local tax rates. As a seller, you don’t need to worry about calculating or remitting this tax yourself, as Facebook handles this for you.
However, it’s crucial to know that while Facebook manages the sales tax collection and remittance, you are still responsible for understanding your obligations, such as registering for a sales tax permit if required in your state. Additionally, the sales tax collected by Facebook does not impact your payouts since it’s added to the buyer’s total at checkout. Sellers can see the amount of tax collected and remitted on sales by Facebook in these states in their financial reports in Commerce Manager.
To ensure you’re fully compliant with local regulations, it’s a good idea to stay informed about the sales tax rules in the areas where you’re selling, even though Facebook takes care of much of the process for you. For more information on handling sales tax from sales on Facebook, check out this article.
Understanding and complying with sales tax requirements is crucial for any small e-commerce business. As platforms like Shopify, Etsy, and others continue to evolve, staying informed about how sales tax is handled is more important than ever. By taking proactive steps to ensure compliance—whether it’s understanding nexus, utilizing marketplace facilitator platforms, or keeping up with state law changes—you can avoid costly mistakes and focus on growing your business.
Don’t hesitate to explore further resources linked throughout this blog or consider professional assistance to manage your sales tax responsibilities effectively. Staying ahead of the curve will not only protect your business but also give you the confidence to expand and thrive in the competitive e-commerce landscape.
Sales Tax Basics Review:
What is Sales Tax?
Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services. It is typically collected by the seller at the point of purchase and then remitted to the appropriate tax authority. The rate of sales tax can vary significantly depending on the location and the type of product or service being sold.
Sales Tax Nexus
Nexus refers to the connection or link a business has with a state that requires it to collect and remit sales tax. This connection can be physical, such as having a brick-and-mortar store, employees, or inventory in a state. Alternatively, it can be economic, where the business reaches a certain level of sales or transactions within a state, even without a physical presence. Understanding where your business has nexus is crucial, as it determines your obligation to collect and remit sales tax in that state.
Marketplace Facilitator Laws
Marketplace facilitator laws shift the responsibility of collecting and remitting sales tax from individual sellers to the online platforms they use. For example, platforms like Etsy and Facebook Marketplace are considered marketplace facilitators and are required to handle sales tax on behalf of their sellers in all US states. This simplifies the process for small business owners by reducing their direct tax compliance burden. However, it’s important for sellers to understand where these laws apply and what their remaining responsibilities might be.
Here are more tips for e-commerce businesses. If you’re looking to dive even deeper, explore this Sales Tax Starter Kit for E-Commerce Businesses On-Demand Webinar Bundle.