Do I need to collect sales tax on Shopify?

Yes, but only in states where you have 'Nexus' (a physical presence or significant sales volume). Unlike Amazon, Shopify does not automatically file returns for you; you are responsible for registering and remitting the tax.

What is Economic Nexus?

Economic Nexus is a tax rule that requires sellers to collect sales tax in a state if they exceed a certain revenue threshold (often $100,000 or 200 transactions) in that state, even if they have no physical office there.

How much should I save for taxes?

A safe rule of thumb is to set aside 30% of your Net Profit for income taxes. Do not spend this money on inventory. Keep it in a separate high-yield savings account.

Ecommerce Tax Basics: Sales Tax, VAT & Nexus Guide 2025

Disclaimer: We are not CPAs or tax attorneys. This information is for educational purposes only. Tax laws vary by jurisdiction and change frequently. Always consult a professional.

There are two things certain in life: Death and Taxes. In e-commerce, taxes are arguably more painful because they are so confusing.

New sellers often make a fatal mistake: they see $10,000 in their bank account and think it's "Profit." In reality, a large chunk of that money belongs to the government. If you spend it on inventory, you will be in deep trouble come April.

In this guide, we will untangle the three types of taxes you need to worry about: Sales Tax (customer pays), VAT/Import Tax (importer pays), and Income Tax (business pays).

1. Sales Tax (USA)

Sales tax is a tax on consumption. It is paid by the customer, but it is your responsibility to collect it and send it to the state.

The Concept of "Nexus"

You don't have to collect tax in every state. You only collect in states where you have "Nexus" (a connection).

Physical Nexus: You have an office, an employee, or inventory stored in a warehouse (e.g., Amazon FBA center) in that state.
Economic Nexus: You have no physical presence, but you sell a lot there. (Usually >$100,000 revenue or >200 transactions in a year).

Marketplace Facilitator Laws (The Good News)

If you sell on Amazon, eBay, Etsy, or Walmart, you are lucky. Most states now have "Marketplace Facilitator Laws."

This means Amazon collects and remits the tax for you. You don't have to do anything for those sales in most states.

The Warning for Shopify Sellers: Shopify is NOT a marketplace; it is a tool. Therefore, YOU are responsible. You must configure your tax settings in Shopify to charge customers correctly, register with the states where you have Nexus, and file returns manually (or use a tool like TaxJar/Avalara).

2. VAT (Value Added Tax) - Europe & UK

If you sell internationally, the rules change completely.

US System: Price + Tax. (Shown at checkout).
EU/UK System: Price includes Tax. (VAT is baked into the sticker price).

If you list a product for €20 in Germany, and the VAT rate is 19%, you don't keep €20. You keep ~€16.80. The rest goes to the government.

IOSS (Import One-Stop Shop)

Since 2021, if you sell to the EU from outside, you must register for IOSS. This allows you to collect VAT at checkout.

If you don't use IOSS, the carrier (DHL/FedEx) will stop the package at the border and demand the customer pay the VAT + a "Handling Fee" before delivery. This leads to angry customers and refused packages.

3. Income Tax

This is the tax on your Net Profit.

Revenue - COGS - Expenses = Net Profit.

You pay tax on the profit, even if you reinvested that profit into more inventory.

The "Profit First" Strategy

Open a separate Savings Account. Every time you receive a payout from Shopify/Amazon, immediately transfer 30% of the profit portion to that account.

Do not touch it. Do not use it to buy stock. That money belongs to the IRS. When tax season comes, you will have the cash ready.

Common Deductible Expenses

You want your taxable profit to be as low as legally possible. Ensure you are tracking these deductions:

COGS: Product cost + Shipping to warehouse.
Advertising: Facebook/Google/Amazon Ads.
Software: Shopify fees, Helium 10, Canva, Email marketing.
Home Office: A portion of your rent/utilities (if you work from home exclusively).
Education: Courses, books, and consulting fees related to business.

LLC vs. Sole Proprietorship

Sole Prop: Easiest to start. You and the business are the same person. If the business gets sued, you can lose your house.

LLC (Limited Liability Company): Separates you from the business. It protects your personal assets.

Recommendation: Form an LLC as soon as you are making consistent sales. It costs a few hundred dollars but offers essential protection.

FAQ

Do I need a business license to sell on Amazon?

Usually, no. You can start as an individual. However, Amazon will ask for tax information (SSN or EIN). Eventually, suppliers will take you more seriously if you have a registered company.

What is an EIN?

Employer Identification Number. It's like a Social Security Number for your business. It is free to get from the IRS website. Get one immediately so you don't have to give your personal SSN to suppliers.

What happens if I don't pay Sales Tax?

States can audit you years later. They will charge you the back taxes + massive penalties and interest. In extreme cases, they can freeze your business bank accounts or Amazon payments.

Conclusion

Tax compliance is not "optional." It is the foundation of a real business.

Don't let tax fear paralyze you. Start simple: Save 30% of profits, use software like TaxJar if you are on Shopify, and hire a CPA once you hit $50k in profit.

Action Step: Open a separate business bank account today if you haven't already. Never mix personal groceries with business inventory purchases. It makes bookkeeping a nightmare.

Tax Basics for Online Sellers: Sales Tax, VAT, and Income Tax