Sales generally fall into two categories, interstate sales and intrastate sales. Interstate sales are sales where the location the product is shipped from and the customer are in different states. Intrastate sales are sales where the location the product is shipped from and customer are in the same state. Typically, sales are taxed in the destination state of the sale.
Tax sourcing rules generally affect sales taxes by determining the tax rate that's charged to customers. With some exceptions, interstate sales are typically taxed at the tax rate in the city to which the products are shipped, referred to as destination state. Intrastate sales might be taxed at the rate in the city to which the products are shipped, the rate in the city where the products are shipped from, some other location of the seller within the state, or a combination of these factors. This is referred to as origin state.
In either case, if you don't have nexus in the state to which you ship products, then you're generally not required to collect sales or use tax.
If you sell through the Shop channel, then the channel collects, remits, and files taxes on marketplace orders independently of your nexus status and store tax settings. For more information, refer to sales tax in Shop.
Destination states
In a destination state, the general rule is that the sales tax you charge is based on the address of your customer:
If you have no nexus in the state of the shipping address, then no tax is charged.
If you have nexus in the state of the shipping address and you're registered to collect tax there, then the customer's location is used to determine taxes.
Origin states
In an origin state, the general rule is that the sales tax you charge is based on your location's nexus, the location where the products are shipped from, or the location where other sales activity occurs:
If you have no nexus in the state of the shipping address, then no tax is charged.
If you have a physical nexus in the state of the shipping address and you're registered to collect tax there, then the location of your nexus might be used to determine taxes. If you have an economic nexus but no physical location, then the customer's location might be used to determine taxes.
Hybrid states
Some states, such as California, use hybrid tax rules, which is a combination of origin and destination rules to determine tax rates.
Notice and report states
Notice and report tax laws exist in some states to ensure that customers pay a use tax. Use tax is a sales tax on purchases that a customer makes from outside their state of residence, on which no tax was collected in the state where it was purchased. If you don't have nexus in these states but you sell to customers there, then those customers are responsible for paying a use tax to their state, rather than paying sales tax to you.
Each state that uses notice and report tax laws has different rules, but in general, if your sales to customers in another state pass a certain threshold, then there are some actions you might need to complete:
Create a notice in your store that indicates customers might need to pay use tax.
Create a notice in your checkout process that indicates customers might need to pay use tax.
Send an annual notice to customers spending over a certain amount in your store, reminding them that they owe use tax.
Send an annual notice to the state, reporting information about customers that owe use tax.
Third-party logistics considerations
There are fulfillment service apps that you can use to integrate with a service that stores your inventory and fulfills orders. Your inventory is then distributed across a network of fulfillment centers to ship to customers. Because fulfillment centers might count as having physical nexus, you might be liable for taxes in states where your third-party logistics provider has a fulfillment center.
State tax reference
There are five states that don't have a state-wide sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Although there aren't any sales taxes levied at the state level, you still might need to collect municipal taxes.
Comprehensive list of states in the United States with direct links to tax information, highlighting states without state-wide sales tax, and specific local tax considerations.
Although Alabama is classified as a destination state, it's also defined as a home rule state. This means that some local jurisdictions might have differing tax rules and registration requirements. If you don't have a physical presence in Alabama, then you might be able to participate in their simplified seller use tax (SSUT) program, which allows collection of a single tax rate under a single registration throughout the state.
Alaska
Tax details
Alaska state tax: State tax website, tax sourcing rules, and local tax applicability.
Alaska itself doesn't have a state wide sales tax. however, it's a home rule state, which means that some local areas might choose to charge their own sales tax. If you do business in a local area that charges sales tax, then you might need to register, collect, and file the sales tax with the local jurisdiction.
If you're out-of-state, selling to customers in Arizona, and have nexus there, then you might need to register with the local jurisdictions you're selling into and charge destination taxes.
Arizona has implemented a single system for registering and filing taxes in most jurisdictions. Taxpayers are required to file and pay for all tax jurisdictions, including the city of Phoenix, to the state.
California uses a mixture of origin and destination sourcing rules. These rules only affect how sales are reported on your sales tax return, and generally don't affect the tax rate collected.
Colorado is defined as a home rule state. This means that some local jurisdictions might have differing tax rules and registration requirements.
Despite being a home rule state, some Colorado localities use the same use tax laws and registration requirements as the state of Colorado. This means that in these locations, you can complete a single registration form to register to collect and remit local taxes. Other localities in Colorado have special registration and filing requirements that require taxpayers to register and file returns directly to that locality. Finally, some localities participate in the Sales and Use Tax System (SUTS) that allows simplified local registration and filing for multiple localities using one site.
When you set up tax collection, you can decide whether to charge taxes on shipping. If you're not sure whether to charge taxes on shipping, then leave this option on the default setting and consult a local tax professional.
Orders containing taxable goods that are delivered by a motor vehicle in Colorado are subject to a $0.29 USD non-refundable Retail Delivery Fee. If the fee is added to an order in your online store, then it's displayed on the order's detail page. The Retail Delivery Fee is adjusted annually for inflation.
Effective July 1, 2023, merchants can choose whether to collect the Retail Delivery Fee from customers or pay the fee directly as a cost. If you decide to pay the fee directly, then it isn't displayed as a separate line item on customer receipts or contracts.
If you prefer not to collect the Retail Delivery Fee from customers and don't want to tax shipping, then you can adjust your sales tax settings to never charge shipping tax and Retail Delivery Fee for customers located in Colorado. When you select this option, you're still responsible for remitting these fees to applicable authorities.
If you want to collect the Retail Delivery Fee from customers but not tax shipping, then create a shipping tax override of 0% specifically for Colorado.
Retailers with $500,000 USD or less of Colorado retail sales in the previous calendar year are exempted from paying this fee until the first day of the calendar quarter after the retailer's annual retail sales exceed $500,000 USD.
Hawaii's Gross Excise Tax (GET) is a tax on the gross receipts of businesses engaged in certain activities within the state. It's similar to a sales tax, but instead of being based on the final sale price of goods or services, it's based on the total gross income of the business. The tax collected becomes part of the taxpayer's gross receipts subject to the tax.
For example, a taxpayer sells a product for 100 USD and collects 4 USD in tax, at a 4% tax rate. The taxpayer's gross receipts are now 104 USD (100 X 4%). The tax due on the taxpayers return is 4.16 USD, calculated by charging the tax rate on the gross receipt (104 X 4%). Because of the tax on tax, Hawaii has rules that allow taxpayers to gross up the tax rate to capture this. That is, a taxpayer can collect 4.166% instead of the 4% tax rate and 4.712% instead of the 4.5% tax rate.
In addition, Hawaii's GET is charged at every stage of production and distribution, rather than just at the final sale to the consumer. As a result, businesses must pay the tax on all of their gross receipts, even if they're selling goods or services to other businesses for resale.
Louisiana is generally a destination state, but has some particular rules regarding the state's jurisdictions. Different jurisdictions might have different rules on what counts as nexus based on physical or economic presence.
In Massachusetts, clothing products with a price under $175 USD are exempt from state sales tax, and clothing products with a price over $175 USD collect tax only on the amount that their price is over $175 USD. For example, an item of clothing with a price of $200 USD is taxed on $25 USD, because the first $175 USD isn't taxable. Each state defines items of clothing that qualify for exemption differently.
Retailers with $1,000,000 USD or less of Minnesota retail sales in the previous calendar year are exempted from paying this fee until the first day of the calendar quarter after the retailer's annual retail sales exceed $1,000,000 USD.
You must use Shopify Tax to charge the Retail Delivery Fee on applicable orders. If you aren't currently charging the fee and you've confirmed with a tax professional that you should be, or if you're currently charging the fee and you've confirmed that you shouldn't be, then you must contact Shopify Support to request an override to activate or deactivate the Minnesota Retail Delivery Fee for your store.
In New York, clothing products, footwear products, and items used to repair clothing products with an individual price under $110 USD are exempt from state sales tax. For example, two items with a combined price of $200 USD are each exempt from sales tax, but one item with an individual price of $110 USD is subject to sales tax. This exemption applies in some local jurisdictions but not all. For a list of jurisdictions where the exemption applies, refer to Clothing tax rules in US states.
Ohio follows origin sourcing. However, if a seller is based outside of Ohio, sells to customers in the state, and has economic nexus in Ohio, then they should charge destination sales tax based on the customer's location.
In Rhode Island, clothing and footwear products with an individual price of $250 USD or less are exempt from state sales tax, and only the incremental amount above $250 USD is subject to sales tax. For example, if a suit costs $275 USD, then the tax applies only to $25 USD.
Texas is an origin state for sellers that have a physical presence in the state. If you have nexus in Texas but don't have a physical location there, then Texas is considered a destination state.
Washington imposes a business and occupations tax on most companies that operate in or make sales into the state. The business and occupations tax is filed and remitted on the same form as the Washington sales and use tax.