If you’re running an online business through platforms like Shopify or Amazon, you might think that sales tax is one less thing to worry about. After all, these platforms have extensive tools and integrations for handling orders, shipping, and even payments. Surely, they handle sales tax for you, too… right?
Wrong.
Here’s why relying on e-commerce platforms to automatically handle your sales tax could spell trouble for your business—and how to avoid the costly mistake of assuming it’s taken care of for you.
1. Platforms Only Do Part of the Work
While it’s true that platforms like Shopify and Amazon offer tools to collect sales tax on orders, they don’t always take care of everything. Yes, Shopify has the ability to automatically calculate sales tax based on customer location, and Amazon does something similar for Marketplace sellers. However, the key word here is “automatically”—and automatically is not the same as correctly.
Here’s where things get murky:
- Sales tax rates can vary by state, county, city, and even type of product sold.
- Sales tax laws change frequently, and the responsibility for keeping up with them falls on you, the seller.
- Nexus—the requirement to collect sales tax in a state—depends on a range of factors, such as where your business is located or how much you sell in a particular state. E-commerce platforms may not be fully aware of where you have nexus or how to apply it.
These platforms don’t know your specific business setup—only you do.
2. You Still Need to Understand Sales Tax Laws
Even if Shopify or Amazon automatically collects sales tax at checkout, the job isn’t finished. You still need to understand:
- Where you have a sales tax nexus. With the rise of economic nexus laws (like the landmark Wayfair v. South Dakota case), simply selling a certain amount of goods in a state can trigger the requirement to collect and remit sales tax in that state. Many platforms don’t track this across all states, especially if you sell across state lines.
- What your sales tax obligations are in each state. Some states don’t tax certain goods, while others may have a different rate depending on the type of item. Amazon or Shopify may collect a generic tax, but they won’t handle all the nuances specific to your products.
- When to remit the taxes you’ve collected. Platforms may help you collect tax, but you are ultimately responsible for submitting it to the correct state authorities, which often requires quarterly or annual filings.
In other words, you still have to keep track of your tax responsibilities—and rely on the platform for only part of the process.
3. Platform-Specific Limitations
Each platform handles sales tax differently:
- Shopify offers tax collection features, but it relies on you to properly set up your store’s tax settings. If you don’t configure your settings correctly (for example, if you don’t correctly configure tax rates or identify where you have nexus), Shopify won’t be able to collect the right amount in tax, even if it appears to be doing so.
- Amazon collects sales tax on behalf of sellers in many states, but there are still many nuances you need to be aware of. For example, Amazon might only collect tax for physical goods and may not be set up to handle certain digital products or services, leaving you responsible for any discrepancies.
In short: you are responsible for ensuring that your business is compliant—even if the platform provides some tools to help.
4. The Risk of Errors and Penalties
If you rely solely on your e-commerce platform to handle your sales tax, you might overlook errors, especially when dealing with multi-state sales or complex product categories. And that can lead to:Audits by state tax authorities
Penalties and interest for late or incorrect filings
Reputational damage if customers realize you’re not fully compliant
Back taxes that could cost you far more than if you had been diligent from the start
No platform is immune to errors, and relying on automated features without understanding the underlying rules can leave you exposed to financial and legal risks.
5. What You Can Do to Protect Your Business
Here’s how you can make sure you’re not leaving your business vulnerable:
- Understand nexus: Identify where you have nexus in terms of both physical presence and economic thresholds. Many states require you to collect sales tax once you exceed a certain sales threshold, even if you don’t have a physical presence in the state.
- Consult an expert: Sales tax laws are complex, and they vary greatly by location. A tax professional or accountant who specializes in e-commerce can help you navigate these intricacies.
- Configure your platform correctly: Take the time to configure Shopify or Amazon’s tax settings accurately. Ensure you’ve set up all applicable tax rates for states where you have nexus.
- Use tax automation software: Consider investing in specialized sales tax automation software like Avalara or TaxJar to help you stay compliant across multiple states. These tools can sync with your e-commerce platforms and provide a more accurate, automated solution for tax collection and filing.
- Stay updated on tax changes: Sales tax laws are constantly changing, so keep yourself informed. Many states update their rates and requirements frequently, and it’s your job to stay on top of them.
Final Thoughts
E-commerce platforms like Shopify and Amazon make it easier to run an online business, but they don’t automatically handle all aspects of your sales tax obligations. Relying solely on them to manage taxes can lead to big headaches down the road.While these platforms help with sales tax collection, you remain responsible for understanding and complying with the full scope of sales tax laws. By being proactive and setting up proper systems, you can avoid costly errors and keep your business running smoothly.
Interested in learning more? Contact us today for your free consultation:
https://yellowbrickfinancials.hbportal.co/schedule/663165633aaf34001f4c93c2
