Should I Collect Sales Tax on Shopify? A Merchant’s Guide

Table of Contents

1. Introduction
2. Understanding the Basics of Sales Tax for E-commerce
3. What is Sales Tax Nexus?
4. Taxation of Digital Products and Services
5. Shopify's Role in Sales Tax Collection
6. The Importance of Sales Tax Compliance
7. A Step-by-Step Guide to Setting Up Sales Tax on Shopify
8. Common Challenges and Best Practices
9. Leveraging Tevello for Your Digital Business
10. Conclusion
11. FAQ

Introduction

Did you know that since a landmark 2018 Supreme Court ruling, the "physical presence" requirement for sales tax is largely a relic of the past? For years, e-commerce was treated like the Wild West of retail, where many sellers operated under the radar of state tax authorities simply because they didn't have a brick-and-mortar office or a warehouse in a specific jurisdiction. Today, however, the digital economy has caught up with the tax man. If you are an online merchant, the question is no longer just "where am I located?" but rather "where are my customers, and how much am I selling to them?"

Navigating the labyrinth of U.S. sales tax can feel like trying to solve a puzzle where the pieces are constantly changing shape. Each state—and often each local municipality—has its own set of rules, thresholds, and definitions for what is taxable. For Shopify store owners who are expanding into digital products, online courses, and memberships, the complexity only grows. Are digital downloads taxable in Texas? Does a subscription service count as "tangible personal property" in New York? These are the types of questions that can keep a business owner up at night.

The purpose of this guide is to demystify the complexities of sales tax for Shopify merchants. We will explore the fundamental concepts of sales tax nexus, differentiate between physical and economic presence, and look specifically at the unique challenges of taxing digital goods and services. Our goal is to provide you with a clear roadmap so you can focus on what you do best: building your brand and serving your community. At Tevello, our mission is to turn any Shopify store into a digital learning powerhouse, and we believe that a strong business is built on a foundation of compliance and strategic planning.

By the end of this article, you will have a comprehensive understanding of your obligations as a seller and the tools available to simplify your tax management. Whether you are selling coffee beans with an added "Barista Basics" video course or migrating thousands of members to a more unified platform, staying compliant is the first step toward long-term recurring revenue stability.

Understanding the Basics of Sales Tax for E-commerce

Sales tax is a consumption tax imposed by state and local governments on the sale of goods and services. Unlike income tax, which is based on what you earn, sales tax is based on what your customers spend. As a merchant, you act as an intermediary; you collect the tax from the customer at the point of sale and then remit those funds to the appropriate government agency at regular intervals.

In the United States, there is no federal sales tax. Instead, the authority to levy sales tax rests with the states. Currently, 45 states and the District of Columbia collect state-level sales tax. The "Nomad" states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have a statewide sales tax, though it is important to note that local jurisdictions in Alaska may still impose their own local taxes.

For a Shopify merchant, the challenge lies in the fact that you aren't just dealing with one tax rate. You might be dealing with thousands. Many states allow cities, counties, and special districts to add their own layers of taxation on top of the state rate. This means a customer in one zip code might pay a total of 7.5% in tax, while a customer just five miles away in a different zip code might pay 8.2%.

The Shift in E-commerce Tax Law

The most significant change in the history of online sales tax occurred with the South Dakota v. Wayfair, Inc. decision in 2018. Before this case, states could only require a business to collect sales tax if that business had a physical presence in the state (like an office or a store). The Supreme Court’s ruling changed this, allowing states to mandate tax collection based on "economic nexus." This means that if you sell a certain dollar amount or reach a specific number of transactions in a state, you are legally obligated to collect sales tax there, even if you’ve never set foot in that state.

What is Sales Tax Nexus?

The term "nexus" is the legal bridge that connects your business to a state’s taxing jurisdiction. If you have nexus in a state, you are required to register for a sales tax permit and collect tax from buyers in that state. Nexus is generally categorized into two main types: physical and economic.

Physical Nexus

Physical nexus is the traditional form of business presence. While the laws vary by state, physical nexus is typically established if your business has:

• An office, storefront, or place of business.
• Employees, contractors, or sales representatives working in the state.
• Inventory stored in a warehouse or distribution center (including third-party fulfillment centers).
• Ownership of real or personal property.
• Temporary presence for trade shows or craft fairs (some states have "de minimis" rules for this).

For example, if you are a merchant selling high-end yoga mats and you use a third-party logistics (3PL) provider with warehouses in Pennsylvania and California, you likely have physical nexus in both of those states due to your stored inventory.

Economic Nexus

Economic nexus is based entirely on your sales activity. Each state sets its own thresholds for what triggers economic nexus. Most states have settled on a threshold of $100,000 in annual sales or 200 separate transactions. However, these numbers are not universal.

• Texas: Only uses a revenue threshold of $500,000.
• New York: Uses a combination of $500,000 in sales and 100 transactions.
• Kansas: Historically required collection on the very first dollar of sales, though they have since aligned more closely with the $100,000 threshold.

As your Shopify store grows, it is vital to monitor your sales volume in every state. Fortunately, Shopify provides tools within the admin dashboard to help track your progress toward these thresholds.

Taxation of Digital Products and Services

For many Tevello users, the core of their business is not physical goods, but digital learning and community. This is where sales tax gets particularly murky. The way states define "tangible personal property" often determines whether a digital product is taxable.

Are Online Courses Taxable?

The taxability of online courses often depends on how the course is delivered and the level of instructor interaction.

1. Pre-recorded Video Courses: In many states, a purely pre-recorded course with no instructor interaction is treated as a digital download, which may be taxable.
2. Live Webinars: Some states view live instruction as a non-taxable professional service, even if it is delivered digitally.
3. Hybrid Models: If you sell a bundle that includes both pre-recorded content and a live community component, the state might tax the entire bundle or require you to unbundle the costs.

For a merchant selling fitness coaching, a monthly membership that provides access to a library of videos might be taxed differently than a one-on-one personal training session conducted over Zoom. We believe merchants should own their customer data and brand experience, which includes understanding these nuances to provide a transparent checkout experience.

Digital Downloads vs. SaaS

States are increasingly aggressive about taxing digital goods like ebooks, music, and software. "Software as a Service" (SaaS) is another category that is frequently taxed. In some jurisdictions, if a customer "accesses" software on your server rather than "downloading" it, the tax treatment changes. Because Tevello allows you to keep customers on your own URL, it provides a professional, unified experience, but it also means you must be diligent about how your specific digital products are classified in the eyes of the law.

Shopify's Role in Sales Tax Collection

One of the greatest advantages of using Shopify is its robust tax engine. However, a common misconception is that Shopify "handles" your taxes for you. It is important to clarify: Shopify provides the tools to collect tax, but you are the one responsible for the compliance.

Native Shopify Integration and Taxes

Shopify’s native tax settings allow you to:

• Set up tax collection for specific countries and regions.
• Enter your tax registration numbers for the states where you have nexus.
• Apply tax overrides for specific products (like clothing or digital goods) that may have different rates.

When you use a solution like Tevello, our native Shopify integration ensures that your digital products are treated just like any other item in your Shopify catalog. This means that when a customer reaches the checkout, Shopify’s tax engine calculates the correct amount based on the customer’s address and the taxability of the item. This creates a seamless experience for the user and ensures you are collecting the revenue you need to cover your tax liabilities.

Shopify Tax vs. Basic Tax

Shopify offers different levels of tax support. While the basic settings allow for manual entry of rates, "Shopify Tax" is a more advanced service that provides rooftop-level accuracy and automatically suggests product categories for better tax classification. This is particularly useful as you scale and begin securing a fixed cost structure for digital products. Knowing exactly what you owe allows you to price your offerings competitively while protecting your margins.

The Importance of Sales Tax Compliance

Why go through all this trouble? The risks of non-compliance are significant. If a state determines you have nexus and have failed to collect tax, they won't just ask for the tax you should have collected; they will often add interest and heavy penalties. In some cases, the business owner can be held personally liable for unpaid sales tax.

On the flip side, proper compliance builds brand trust. Customers expect to see tax calculated correctly at checkout. If they are surprised by hidden fees or if they realize later that they were overcharged, it can damage your reputation.

By staying compliant, you are:

1. Protecting Your Bottom Line: Avoiding surprise audits and penalties.
2. Increasing Enterprise Value: If you ever decide to sell your business, having clean tax records is a requirement for any serious buyer.
3. Building Recurring Revenue Stability: Ensuring that your membership models and long-term subscriptions are legally sound.

If unifying your stack is a priority, start by a simple, all-in-one price for unlimited courses.

A Step-by-Step Guide to Setting Up Sales Tax on Shopify

If you have determined that you need to collect sales tax, here is the general workflow you should follow to get your Shopify store ready.

1. Identify Where You Have Nexus

Review your sales data for the past 12 months. Look for any states where you have reached the economic threshold (typically $100,000 or 200 transactions). Also, account for any physical presence, including remote employees or inventory stored in Amazon FBA or other warehouses.

2. Register for Sales Tax Permits

Before you start collecting tax, you must have a permit from the state. It is actually illegal in most states to collect sales tax without a valid permit. Go to the Department of Revenue website for each state where you have nexus and apply for a "Sales and Use Tax Permit." Once received, you will be given a registration number.

3. Configure Your Shopify Settings

Navigate to Settings > Taxes and Duties in your Shopify admin.

• Select the United States.
• Click "Collect Sales Tax" for the states where you are registered.
• Enter your tax registration number.
• Ensure your "Shipping" settings are also configured, as some states tax shipping charges while others do not.

4. Categorize Your Products

This is crucial for digital sellers. Ensure your online courses and digital downloads are categorized correctly so the tax engine knows which rules to apply. If you use Tevello, you can manage all the key features for courses and communities while relying on Shopify's central system to handle the tax math.

5. Establish a Filing Schedule

When you register for a permit, the state will assign you a filing frequency—monthly, quarterly, or annually. Mark these dates on your calendar. You must file a return even if you collected $0 in tax during that period (this is known as a "zero return").

Common Challenges and Best Practices

Even with the best tools, challenges will arise. Here are some pro-tips for managing the complexities of e-commerce tax.

Destination vs. Origin Sourcing

Most states use "destination sourcing," meaning the tax rate is based on where the buyer is located. However, a few states use "origin sourcing," where the tax is based on your location as the seller. Some states even use a hybrid "mixed" sourcing model. Shopify typically handles these calculations automatically, but it is good to be aware of how the math is being done.

Handling Exemptions and Resale Certificates

If you sell B2B (business to business), your customers may be exempt from sales tax if they intend to resell your products. You must collect and store their resale certificates to justify why you didn't collect tax on those transactions. Shopify allows you to mark specific customers as tax-exempt in their customer profile.

Managing International Taxes (VAT and GST)

If you sell globally, you may run into Value Added Tax (VAT) in the EU or Goods and Services Tax (GST) in countries like Canada and Australia. These systems work differently than U.S. sales tax and often have much lower thresholds for digital goods. For instance, the EU requires VAT collection on digital services from the very first cent of sales for non-EU businesses. Using a platform that enables keeping customers at home on the brand website helps you maintain a consistent global brand while you navigate these international requirements.

Leveraging Tevello for Your Digital Business

As a merchant, your time is your most valuable asset. Spending dozens of hours every month on manual tax calculations is not a sustainable way to grow. This is why we created an ecosystem where technical hurdles are minimized.

The Value of Native Shopify Integration

By choosing a solution that is built specifically for Shopify, you avoid the "Frankenstein" stack of multiple third-party platforms that don't talk to each other. When you use Tevello, your courses, memberships, and physical products all live in one place. This means:

• One Checkout: No more confusing redirects to external LMS platforms.
• One Data Source: Your sales tax reports in Shopify will include all your revenue—physical and digital—in one report.
• Customer Trust: Customers use the Shopify checkout they already know and trust.

Transparent Pricing and No Success Fees

Many platforms in the digital learning space charge "success fees" or take a percentage of your sales. At Tevello, we believe you should keep 100% of what you earn. Our model is simple: The Unlimited Plan is $29.99 per month. There are 0% transaction fees. This flat-rate plan includes unlimited courses, unlimited students, and unlimited video hosting.

When you are comparing plan costs against total course revenue, the advantage of a flat fee becomes clear. It allows you to scale your community without your software costs eating into your profits or complicating your tax liabilities with variable fee structures.

Success in Action

We have seen incredible results from merchants who lean into the Shopify ecosystem. For example, see how merchants are earning six figures by combining their expertise with a robust delivery platform. Consider the case of how one brand sold $112K+ by bundling courses alongside their physical goods. By strategies for selling over 4,000 digital courses natively, they were able to maintain high margins and a clean, compliant back-office operation.

These examples of successful content monetization on Shopify show that when you remove the friction of separate platforms, your business can truly thrive. Whether you are reviewing the Shopify App Store listing merchants install from or diving deep into your tax settings, the goal is always the same: building a sustainable, profitable business.

Conclusion

The question of "should I collect sales tax on Shopify?" is one that every growing merchant must eventually answer. While the landscape of U.S. tax law is undoubtedly complex, it is also manageable with the right approach. By understanding your nexus, categorizing your products accurately, and utilizing the powerful tools within the Shopify ecosystem, you can turn a potential headache into a streamlined part of your business operations.

Remember, compliance is not just about following rules—it’s about protecting the brand you’ve worked so hard to build. As you transition into selling high-margin digital products and memberships, having a reliable partner like Tevello ensures that your technology works with you, not against you. Our commitment to a 0% transaction fee model and a native Shopify experience means you can scale with confidence, knowing your costs are predictable and your customer experience is top-tier.

Ready to transform your store? You can see how the app natively integrates with Shopify and begin building your curriculum today. Take advantage of our 14-day free trial to explore all our features—from drip content to community directories—without paying a cent upfront.

To build your community without leaving Shopify, start by reviewing the Shopify App Store listing merchants install from.

FAQ

1. Do I need to collect sales tax on digital courses if I don't have a physical office in that state?

Yes, you may still be required to collect sales tax due to "economic nexus." Most states have established thresholds (like $100,000 in sales or 200 transactions) that, once met, obligate you to register and collect tax regardless of your physical location.

2. How does Tevello help with sales tax compliance?

Tevello is natively integrated with Shopify, which means it uses Shopify's built-in tax engine to calculate taxes. When you sell a course through Tevello, Shopify identifies the customer’s location and applies the appropriate tax rate you've configured in your admin settings.

3. Are there any transaction fees when selling courses on Tevello?

No. Tevello charges 0% transaction fees. We believe in transparent, flat-rate pricing. You only pay your monthly subscription of $29.99 for the Unlimited Plan, and you keep 100% of your earnings (minus whatever processing fees your payment gateway, like Shopify Payments or Stripe, charges).

4. What happens if I forget to collect sales tax on a sale?

If you have nexus in a state but fail to collect tax, you are still responsible for paying that tax to the state out of your own pocket. Additionally, states can levy penalties and interest for late filing or underpayment. It is always best to install Tevello from the Shopify App Store today and set up your tax regions correctly from the start.