Review your US tax liability insights
In the United States, whether you need to charge tax is based on nexus. When you have a business location in one or more states, you automatically have a physical liability, also known as physical nexus. This means you need to register and collect sales taxes in those states. In states where you don't have a physical nexus, your tax liability depends on whether your business exceeds specific sales thresholds set by each state. When you reach a threshold, you have an economic nexus and must register and collect sales tax in that state.
Before you monitor your tax liabilities in Shopify, review the following considerations.
- Tax liability is displayed only for the following types of transactions:
- Transactions that occur within Shopify. This includes marketplace transactions, where required by state law.
- Orders imported into Shopify that include valid shipping addresses. An address is required in order to determine tax authority codes. As a result, if an imported order doesn't contain a shipping address, then it isn't considered when determining your tax liabilities.
- Tax liability is displayed for states that have economic nexus tax laws at the state level. States that don't have economic nexus laws aren't included.
- Some states have local tax filing requirements that are separate from state filing requirements, such as Alaska or Colorado. Nexus is not tracked for local taxes.
- Tax liability is displayed for states where sales occur during the threshold period for that state. Sales outside the threshold period aren't included.
- Tax liability is calculated using net sales, not gross sales. Net sales are sales less refunds, shipping, or tax.
- Sales aren't reflected immediately in your tax liabilities and might take a few days to update. If you cross a sales threshold that indicates you might need to charge and remit taxes in a particular state, then the month that you crossed the threshold is displayed.
- Tax liability is displayed for physical nexus in your store's current locations. If you had a location in a state but deleted it, then it is not included.
On this page
Tax liability statuses
From your Shopify admin, you can review your tax liabilities by going to Settings > Taxes and duties, and then selecting United States. A preview of your tax liabilities is displayed above the states in which you're registered to collect tax. If your sales into specific states indicate a potential tax liability, then the tax liabilities section displays the state, the reason for the potential liability, and the date of the potential liability.
To review more information, go to the Tax liability insights page and check the two following statuses:
- Action required indicates states where potential tax liability has been identified, and that you might need to start collecting and remitting tax there. States listed here are those where you might have physical nexus from a location, or economic nexus from sales into that state.
- Monitoring indicates states where you do not have a location and your sales within Shopify, including marketplaces where required by state law, have reached at least 80% of that state's threshold for economic nexus. If there are states listed with the Monitoring status, then review your sales into that state, taking into account sales that weren't processed by Shopify.
Threshold requirements for each state
The Tax liability insights page from Shopify Tax automatically indicates the reason for the potential liability. To learn more about reasons that trigger an economic or physical presence nexus, refer to the state tax reference table.
Threshold periods
A state's threshold period is the amount of time that's considered when nexus is calculated. The state tax reference table provides state-by-state information on tax rules, including the period of time that is used to determine nexus. This period varies by state.
| Threshold period | Definition |
|---|---|
| Previous or current calendar year | For states that consider the previous or current calendar year for purposes of determining nexus, the liability tracker first reviews your sales data for the previous year. If your store doesn't meet the threshold for nexus in the previous year, then the current year is reviewed. If your store doesn't meet the threshold for the previous calendar year and you don't have any sales for the current calendar year, then the state is not displayed until there is at least one sale in the current year. |
| Twelve-month rolling period | For states that consider a twelve-month rolling period for purposes of determining nexus, the liability tracker reviews your sales data from the past twelve months. On the first day of every month, the oldest month is removed from the reviewed period, and the newest month is added. |
| Previous calendar year | For states that consider the previous calendar year for purposes of determining nexus, the liability tracker reviews your sales from the previous year. If your store doesn't meet the threshold for nexus in the previous year, then your sales data is not reviewed again until the current year is over. |
| Previous four tax quarters | For states that consider the previous four calendar quarters for the purposes of determining nexus, the liability tracker reviews your sales for the previous four quarters. In most jurisdictions, the quarters in a year are the following:
|
Address your tax liabilities
If a state is listed on the Tax liability insights page as a potential tax liability, then you should carefully review the sales tax laws for that state. Links to state tax authorities are listed in the state tax reference table.
If you've determined that you need to charge sales tax in a state, then you must first register for sales tax with the state's tax authority to receive a permit. After you receive your permit, you can set up tax collection from the Tax liability insights page.
Steps:
- On the Tax liability insights page, locate the state, and then click Set up tax collection.
- In the Sales tax ID field, enter your sales tax ID that you received when you registered.
- Click Collect taxes.
Tax liability expiry
Falling below the threshold for nexus in a particular state, whether physical or economic, might not terminate your tax liablity immediately. Some states have tax policies based on the idea that the behavior that created nexus, such as advertising or sales staff, continues to generate sales for some time after the behavior stops. This concept is known as trailing nexus or residual nexus. Trailing nexus tax rules differ from state to state. For example, in one state, merchants have tax liability for the quarter the merchant stops having nexus and for the following quarter. In another, merchants have tax liability for twelve months after the merchant stops having nexus.