A business owner realizes he’s accidentally charging sales tax on Shopify.
Just realized you accidentally included sales tax on a Shopify order? You’re not alone-it happens. Between Shopify’s automated settings and the maze of state-specific tax rules, it’s easy for something to slip through the cracks. The good news? It’s totally fixable. Taking the proper steps now will help you correct the issue and prevent it from happening again.
Start by Figuring Out What Happened
Take a moment to review the order. Was the customer supposed to be tax-exempt, like a nonprofit or a reseller? Was the product taxable in that state? Or did you collect sales tax in a state where you’re not even registered yet? How long have you been collecting sales tax incorrectly?
Shopify does automate tax collection, but it relies on your store’s settings. If those aren’t accurate, such as when you’ve enabled tax collection in a location where you’re not officially set up, it can result in charging tax when you shouldn’t.
A Quick Heads-Up About Tax Law
You’re only supposed to collect sales tax in states where you’re officially registered. That’s because it is what’s called a trust tax – you’re collecting it on the state’s behalf. Collecting sales tax when you shouldn’t – especially if you’re not registered in that state – is more than just a technical error; it’s a legal and financial risk. You may still need to remit the funds, face penalties for unauthorized collection, or be subject to an audit. Additionally, it can confuse your customers and erode trust if they’re charged tax when they shouldn’t be.
If you notice that tax is turned on in a state where you’re not yet set up, it’s a good idea to go into Settings > Taxes and Duties in Shopify and turn it off until you’re registered.
Don’t Overlook Nexus
So, how do you figure out which states you need to register in for collecting and remitting sales tax? This starts with understanding nexus – your business’s connection to a state that requires you to charge and remit sales tax.
There’s a physical nexus (such as having an office or employees in a state) and an economic nexus (triggered by meeting certain sales or transaction thresholds, which vary by state). You can read more about nexus requirements in each state here.
Triggering Nexus Across Multiple Platforms
Shopify does a significant job of tracking nexus, which can simplify things. However, if you’re selling on multiple platforms, such as Amazon and Etsy, keep in mind that all your sales, across all platforms, count toward nexus thresholds. That means you could trigger tax obligations in a state without realizing it. In these cases, it might be worth working with a professional who can track nexus across the board and alert you when you’ve crossed a threshold in a new state. That way, you can stay ahead and keep your business compliant.
Watch Out for Sales Tax in Non-Taxable States
If your system mistakenly charges customers in states that don’t collect statewide sales tax, it’s essential to catch and correct it. For example, Alaska doesn’t have a statewide tax on sales, though some local jurisdictions may apply their own. If you sold to someone in a state like Oregon, Montana, New Hampshire, or Delaware, and Shopify applied sales tax, you’ll want to double-check your tax settings. This is where it’s helpful to reach out to a trusted tax professional who is familiar with each state’s tax requirements.
If a Customer Was Already Charged – Here’s How to Fix It
Let your customer know what happened. Send a short, straightforward message like:
“We noticed that sales tax was added to your order by mistake. We’ve refunded that amount back to your payment method – thanks for your patience!”
Thankfully, Shopify makes it easy for you to issue a partial refund for just the tax, so you don’t have to touch the rest of the order.
Then, depending on the rules in that customer’s state, you’ll either refund and adjust it on your next return, or remit the tax anyway and let the customer apply for a refund from the state. Some states are more flexible than others, so if you’re not sure, it’s worth checking the local rules – or again, asking a tax professional might be the best next step.
Double-Check Your Settings Going Forward
Once you’ve handled the immediate issue, it’s worth taking a few minutes to clean up your tax setup. Make sure you’re only collecting in states where you’re officially registered. Check that your products are correctly marked as taxable or exempt. And if you have recurring tax-exempt customers, tag them so Shopify doesn’t charge them again by mistake.
Spending a few minutes on this kind of maintenance can save you a significant amount of time later.
What Happens If Sales Tax Was Wrongly Collected Over a Longer Period of Time?
Occasionally, errors in collecting sales tax aren’t spotted for an extended period, and it’s not as simple a fix as refunding a customer. Sometimes it takes years for tax issues to be flagged and corrected. What if your store was incorrectly collecting in all 50 states? Don’t panic – most problems can be corrected if you act quickly.
To reiterate, when a seller collects sales tax but fails to remit it to the appropriate state, it’s considered a serious compliance issue, even if it was accidental. The first step is to gather your sales and tax collection records to understand how much was collected and in which states. Don’t forget to include sales from all the platforms you sell on, not just Shopify.
A helpful option to get back on track is to submit a Voluntary Disclosure Agreement (VDA). Many states offer these programs to help businesses come forward voluntarily before they’re audited. A VDA typically allows you to file back returns for a limited “lookback period” (often 3-4 years), waive some or all penalties, and potentially reduce interest. It also helps establish good faith and minimizes the risk of harsher consequences, such as fraud investigations down the road.
To move forward, it’s usually best to work with a tax professional who can help you identify where nexus was established, determine which states offer VDA programs, and handle the application process in each relevant state. After approval, you will need to submit any missing returns, remit the tax owed, and bring your business back to good standing. We always recommend addressing tax issues as soon as they are noticed, rather than waiting for a state to contact you. This protects your business and ensures compliance as you grow.
Keep a Digital Paper Trail
In case you are audited down the line, we always recommend hanging onto everything related to your sales. In case of mistaken sales tax charges, download a copy of the original order, refund details, screenshot any emails or messages, and document the changes you made in your settings. This helps to cover your back in case any questions arise later or if you are audited.
Still Not Sure What to Do? We Can Help
Sales tax is one of those areas that can become complicated quickly, especially when you just want to focus on running your store and not on becoming an expert in tax matters. If you’re unsure about the rules in each state or how to ensure your Shopify settings are correct, it’s perfectly okay to ask for help.
At RJM Tax Exemption, we work closely with Shopify sellers to resolve sales tax and exemption issues, ensuring everything remains compliant without added stress. If you’ve got questions, we’re happy to walk you through it. Contact us if you have any questions.
Summary
If you accidentally added sales tax on a Shopify order, start by figuring out what went wrong – whether it was a settings issue or a registration gap. Please inform the customer and refund the tax if necessary. Remember, you should only collect sales tax in states where you’re officially registered. After resolving the issue, update your settings to prevent it from happening again. Keep records of everything, and don’t hesitate to reach out for support if you’re unsure what to do next.
