How to Handle Sales Tax on Shipping Charges in Shopify

by TaxJar April 12, 2017

Do you charge your Shopify customers for shipping? If so, you may not know that you need to consider sales tax.

Some states consider shipping charges taxable. Others say that shipping charges are not taxable, as long as they are separately stated on the invoice. And some states get even more complicated than that. Virginia, for example, states that shipping is not taxable, “handling” is taxable, and if both charges are combined, then both are taxable. Talk about confusing!

As a Shopify seller, you want to make sure that you are following your state’s rules when it comes to taxing shipping. If you forget to tax shipping charges, the state’s taxing authority is going to require you to dig into your profits for the sales tax you didn’t collect. And if you charge sales tax on shipping charges in states where shipping isn’t taxable, your customers may complain or worse – move on to the next store that treats shipping and sales tax correctly.

This post will explain the very basics of sales tax on shipping, and how to handle shipping taxes within your Shopify store’s tax settings.

Sales Tax and Shipping 101

In the U.S., each state gets to make their own individual sales tax laws. For this reason, some states consider shipping charges a necessary part of an online transaction, and want online sellers to charge sales tax on shipping.

Other states have different opinions, and their laws state that shipping charges aren’t a necessary part of a transaction as long as the buyer has the option to pick the item up. (Even if it’s infeasible for your customer to travel hundreds or thousands of miles to physically pick up their purchase.)

Generally, if the item you are shipping isn’t taxable, then shipping charges are also non-taxable. Though states vary,  in cases where you are shipping a taxable item and a non-taxable item, then you should divide the package up by either shipping price or weight and only charge sales tax on the shipping charged for the taxable item. (Who knew algebra would come in handy after all?)

Keep in mind that many states’ sales tax laws were written before online selling was as common as it is today, so were written with brick and mortar stores in mind. If you have any questions about whether or not you should be charging sales tax on shipping, speak with a vetted sales tax expert.

You can find a whole lot more about sales tax and shipping in our “Is shipping taxable?” blog post.  When reading, keep in mind that that post was written for online sellers who deliver products by common carrier, and not all scenarios may be applicable to your individual business. Also be sure to click on the link to your state to read what they expressly say about sales tax on shipping. Every state’s laws are different!

Setting Up Sales Tax on Shipping in Your Shopify Store

First of all, if you need help setting up all of your sales tax settings in your Shopify store, check out our Sales Tax 101 for Shopify Sellers Guide, as well as Shopify’s online tax help section.

Before you setup sales tax collection in Shopify:

  1. Determine whether or not you need to charge sales tax on shipping. You can read what each state has to say about shipping taxability here.
  2. If you have sales tax nexus in more than one state, be sure to determine if shipping is taxable in each state.
  3. Make sure your business isn’t an exception to your state’s general shipping rules. If you use your own vehicle or a private delivery service, or otherwise ship using anything but a common carrier like UPS, FedEX or the USPS, then be sure to check with your state whether or not their general rules apply to you.

From there, to setup sales tax on shipping in Shopify:

  1. Login to your Shopify account and navigate to the Taxes section of your dashboard. (In this case, I’m assuming that you’ve already set up your other Shopify sales tax collection settings. If you haven’t, refer here first.)
  2. If your state requires that you charge sales tax on shipping charges, check the “Charge taxes on shipping rates (US shipping taxes automatically calculated)” box at the top of the page. If your state does not require that you charge sales tax on shipping charges, leave that checkbox blank.

But what if you collect sales tax in more than one state, where shipping is taxable in one state and non-taxable in another?

If you have nexus in more than one state with varied shipping taxability rules, you can set an override on your Shopify Taxes page.

    1. Check the box next to “Charge taxes on shipping rates (US shipping taxes automatically calculated).” This will ensure that you are charging sales tax in states where you are required to charge sales tax on shipping charges.
    2. Scroll down and click “United States” at the bottom of the Taxes page

3. Scroll down to “Tax overrides” and click “Add a tax override”

4. Choose the “Shipping” option, and pick your state from the drop down menu

5. Make sure the tax rate is set to “0%” then click “Add Override”

There! You should be all set to collect sales tax in some states and avoid collecting sales tax in others.

The basics of US sales tax

Learn the fundamentals of sales tax.

Watch the video