Shopify Sales Tax Risks Every Store Owner Should Know
Shopify is a great platform to start your e-commerce business. It provides you almost everything prebuilt that you need to run your e-commerce store. But there is something that, if you rely on Shopify’s accuracy, it can cost you thousands of dollars.
Let’s first talk about the best thing Shopify provides
States Threshold Check
This is one of the best features of Shopify for multi-state sellers – Economic nexus threshold limit. You will find it here.
Shopify Admin
→ Settings
→ Taxes and duties
→ United States
→ Review Liability Insights
Here, you will find a list of each state you are selling with the graphical representation and threshold details. As a business owner, this gives you a clear picture of the threshold when you’re about to cross.
This can save you from potential penalties & interest of late registration and reduce the risk of an audit.
The Next Step – Registration Process
Most states provide an online registration portal where you can easily register your business for collecting and remitting remote seller sales tax. Most states offer free registration, though some states charge a nominal fee between $50 to $100.
The Crucial Step
Once you have crossed the nexus threshold, do not hold or delay the registration process. This can be the costliest mistake ever. You cannot delay compliance, not even by a few weeks. I have seen cases where this delay had triggered an audit with a lookback period of 4 years.
Now, Let’s discuss what you shouldn’t rely on Shopify
Once you have completed the state registration process, you have to file a sales tax return for each state you registered. The filing frequency can be monthly or quarterly depending on state rules.
Shopify provides a state-by-state sales tax collected report but you shouldn’t rely solely on those reports because of multiple reasons.
It’s not that Shopify is wrong but sometimes states require reporting in different formats, or you have some product which requires manual review while preparing the Sales tax filing report. Here are some most common issues I have encountered.
Marketplace Sales
While filing the sales tax return you must report taxable sales and total tax collected. You can get this state-by-state report from Shopify.
Traditionally, marketplace platforms acted as marketplace facilitators and were responsible for collecting and remitting sales tax on behalf of sellers. Because of this, many sellers assumed that marketplace sales did not need to be included in their own tax filings.
However, this position has changed.
On August 26, 2025, Meta announced that Facebook and Instagram would no longer serve as marketplace facilitators. This means that starting August 26, 2025, sellers are responsible for collecting and remitting sales tax on sales made through these platforms, depending on the state’s rules.
Many Shopify sellers are still unaware of this update. Shopify officially published its notification regarding this change on November 10, 2025 which is more than two months after Meta’s announcement. If you are relying on previous assumptions, you may unintentionally under-report or misreport your sales tax liability.
Going forward, you must carefully review your Facebook and Instagram sales and ensure they are properly included in your sales tax reporting where applicable.
Wrong Sales Tax Threshold Tracking
While Shopify tracks most remote seller sales tax rules, it can miss state-specific exemption.
In many cases, you won’t need to register in Pennsylvania at all if you only sell exempted items.
However, in Shopify Admin under Nexus Threshold, you’ll see a progress bar indicating you’ve crossed the nexus threshold and should register in Pennsylvania. This happens because Shopify’s threshold tracking doesn’t account for product-specific exemptions. This requires manual verification.
If you’re unaware of this exemption, you’ll register your business with the state and start collecting sales tax unnecessarily. This actually increases audit risk – collecting tax where you shouldn’t raise red flags with tax authorities.
State-Specific Tax Rules Require Manual Separation
When you’re selling to multiple states, you must be aware of the different state specific rules for your industry. Different products have different tax rules. You must reconcile the numbers before filing to ensure accuracy.
For example: In New York State, apparel and clothing under $110 are exempt from sales tax.
Here’s the catch: Some cities don’t follow state rules. They still charge city sales tax on apparel & clothing.
Shopify handles the city-specific tax calculations automatically. However, when preparing your return, you must manually separate city tax from state tax for proper reporting. When gathering taxable sales and sales tax collected, you need to manually separate city sales tax from state sales tax. If you miss this, you’ll likely receive a notice from the city requesting the local tax portion, plus penalties.
Reference: NY State locality-specific tax rates https://www.tax.ny.gov/pdf/publications/sales/pub718c.pdf
Custom Products and Special Transactions
In the case of an exchange, return, or customized product or if you haven’t set the proper tax rate or exemption, the order might count as taxable or non-taxable, your sales tax report will be inaccurate which can cause you an interest & penalties.
This also applies when selling to B2B customers where you don’t charge them sales tax because they have a resale certificate or exemption certificate. You will need to manually check these orders while preparing the sales tax return.
State by State Filing Complexity
Sales tax becomes more complex when it comes to sales tax filing. Filing complexity varies dramatically by state, with some states requiring zip-code-level reporting. Some states have simple formats, requesting only gross sales and taxable sales while the system calculates the rest automatically.
However, some states require complex reporting by zip code, locality, county, district, and state level – each requiring separate calculations. A single mistake can trigger interest & penalties. On top of that, the headache of long call queues and mails back and forth.
For this type of filings, you can not solely use Shopify reports or tools that claim automated filing. Your manual review is essential.
Example:
Colorado: Uniquely Complex Registration and Filing Requirements. Under Colorado state law you must register separately with the state and with each city where you make sales. This means if customers in 45 different cities order your products, total of 46 registrations: one with Colorado state and 45 with individual cities.
That’s not all. You also have to file. Imagine filing 46 separate returns every month for a single state – an administrative nightmare.
Don’t worry, you don’t have to, thanks to SUTS portal. If you register through SUTS platform, you avoid individual city registrations. Instead, you can file one consolidated return for all cities and the state through the SUTS portal. https://tax.colorado.gov/SUTS-info
Final Takeaway
As a business owner it’s important that you should maintain a simple checklist for the sales tax filing preparation. If you are providing data to your CPA or accountant, don’t simply extract Shopify reports and forward them. Ensure someone manually reviews edge cases and exceptions that automation tools can’t catch.
This might save you some money but more importantly, it gives you peace of mind that you have thoroughly checked what you reported and that you haven’t overlooked anything critical.
Sales tax compliance isn’t just about rules or automation – it requires awareness and careful manual review.