How Does Sales Tax Actually Work on Shopify?

Want to know our #1 most asked question? "How the f*ck does sales tax work on Shopify?" 🫠

Let's break it down!

First, what even is sales tax?

If you sell products online or in person, you've probably dealt with sales tax at some point. Sales tax is the percentage your state (and sometimes your city or county) charges on top of a sale. You collect it from your customer, then pay it or "pass it through" to the state.

The good news: Shopify does the heavy lifting

Once your tax info is set up in Shopify, it automatically calculates sales tax based on your customer's order. No need for manual math or adding it in yourself.

And when tax season rolls around? You just pull a report. Much easier than digging through a year's worth of orders!

Here's where people get confused: out of state orders

If an order ships out of state, sales tax usually isn't added. And no, that's not a glitch.! That's actually correct and all comes down to a concept called nexus.

Okay.. so what is nexus?

Nexus is the connection between your business and a state that gives that state the legal right to make you collect sales tax there. In plain terms: you only collect sales tax in states where you have a "presence." For most small businesses, that's just your state wherever you live and operate from.

But nexus isn't locked to just your home state!

Here's the part that surprises people: if you sell $100k+ worth of product into another state (or the number of transactions counts in some states too), you've now gotta established nexus there too. This is also why creating invoices for out of state clients works the same way. Sales tax won't automatically be added unless you've established nexus in that state. See state by state info in 2026.

Not all products are taxed the same

This might surprise you but sales tax isn't a flat rate across everything in your shop. It's determined by your state and your product's category whether that's auto-assigned by Shopify or set by you.

For example: moisturizer, acne treatment, and SPF might all be taxed differently depending on how they're categorized. Which means having accurate product categories is super important for accurate tax collection. It's a small setting that has a bigger impact than people realize!

Bonus round: a few states don't collect sales tax at all

If you're operating out of (or selling heavily into) one of these states, this is good to know:

• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon

In Summary

Sales tax is one of the kinda easy but really complicated parts of having a small business. When you open an online shop, make sure to talk with your CPA or accountant and ask them anything you should know about online sales tax. We hope this blog was helpful!

PS. We're marketing girlies, not accountants. Always loop in your CPA or accountant before making tax decisions for your business. This post is info, not advice.