Shopify Sales Tax Guide 2026: Setup, Nexus, Product Tax & Reporting Explained

Hello, e-commerce sellers

If you’re new to Shopify and taxes, don’t worry—this guide focuses on the practical steps you actually need to follow inside your admin panel.

Step 1: Navigate to Shopify Tax Settings

From your Shopify admin dashboard:

Click on Home
Go to Settings
Select Taxes and duties
Under this section, click Manage sales tax collection

If you want deeper theoretical knowledge about Shopify tax, Shopify also provides a detailed help article that explains the basics of shopify and sales tax. It’s a good read and covers many foundational concepts. However, the most important section for sellers is Manage sales tax collection.

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Step 2: Select the United States (or Relevant Region)

After clicking Manage sales tax collection, choose United States (or your applicable country/region).

On this page, you’ll notice three main sections:

Manage tax collection
Tax rates and exemptions
Reporting

These features are relatively new additions to Shopify, and they significantly improve how sellers manage Shopify sales tax.

Manage Tax Collection: Understanding Economic Nexus

The Manage tax collection section helps you monitor your tax liability and understand where you need to collect sales tax.

Here, Shopify categorizes states into three groups:

1. Action Required

These are states where you’ve clearly passed the economic nexus threshold and must register and collect sales tax.

2. Monitor Required

These states are approaching the threshold. You should keep a close eye on them.

3. No Action Required

These are states where you are currently selling but have not reached the sales tax threshold.

All states you sell into will appear under one of these categories.

Example: New York Sales Tax Threshold

Let’s look at a real example:

Sales into New York: $20,362
Revenue threshold: $500,000
Orders: 213
Order threshold: 100

Although this store has passed the order threshold, it has not crossed the $500,000 revenue threshold. Because both conditions must be met, the state remains under No action required instead of Action required.

Shopify clearly shows whether the data is calculated based on:

The past four quarters
Or the past twelve months, depending on the state

This clarity makes managing Shopify and taxes much easier.

Example: Connecticut Sales Tax Requirements

For Connecticut:

Revenue threshold: $100,000
Order threshold: 200 orders (past 12 months)
Actual sales: $7,000
Actual orders: 86

Both values are below the required limits, so the store does not meet the economic nexus threshold. As a result, no sales tax registration is required for Connecticut at this time.

The same logic applies to every state listed. You can click Show details for each one to see:

Sales volume
Order count
Threshold requirements
Time period used for calculation

Important Note About Multi-Channel Sales

Keep in mind:
All of this data is based only on your Shopify sales.

If you’re selling on other platforms (like Amazon, Etsy, or offline), you must combine all sales data when determining your actual tax obligations. Shopify does not automatically account for external sales channels.

Monitoring Your Shopify Sales Tax Regularly

Once a state appears under Monitor required, it’s a good habit to:

Review your tax status monthly
Register for sales tax as soon as you pass the threshold

This helps you stay compliant and avoid penalties related to shopify sales tax.

Tax Rates and Exemptions

The Tax rates and exemptions section works similarly to Amazon’s tax system.

Here, you can:

Categorize products using product categories
Apply correct tax rates based on product type
Manage exemptions for specific products or customers

Proper categorization ensures accurate Shopify tax calculations across different states.

Product Categorization: The Key to Accurate Shopify Sales Tax

One of the most powerful improvements Shopify has made to Shopify sales tax is product categorization. Many products are taxed differently depending on what they are, and Shopify now understands this automatically.

For example, when you categorize a product as:

Apparel
Clothing accessories
Software
Sporting goods
Toys and games

Shopify already knows how each of these categories should be treated for Shopify tax purposes. This is extremely helpful because you no longer have to rely on product tax overrides in most cases.

Why Product Categories Matter for Shopify and Taxes

Different product types are taxed differently across regions:

Clothing may be tax-exempt in some states
Software may be taxable or non-taxable depending on delivery type
Toys and games are generally taxable
Baby products (especially in the EU) may qualify for reduced tax rates
Gift cards are not taxable, and Shopify automatically recognizes this

When you tell Shopify exactly what your product is, the platform applies the correct tax logic automatically. This makes managing Shopify and sales tax far more accurate and stress-free.

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Shopify Will Alert You About Missing Categories

If your products are not categorized, Shopify will notify you and tell you exactly how many products need review.

Shopify clearly states:

“Your products may be subject to special tax or state tax rules. When you categorize your products, you can be more confident that you're collecting accurate tax rates.”

This message alone shows how important categorization is for Shopify tax compliance.

Reporting: Download Tax Reports & File Sales Tax Easily

The Reporting section is one of the best improvements Shopify has made for shopify sales tax management.

From here, you can:

Download detailed tax reports
See where you need to file sales tax
Export reports by date range (monthly, quarterly, etc.)
View county-level tax breakdowns, which is often the hardest part of filing

For example, if you’re reviewing last month’s data, you can export the report and see exactly how much sales tax you owe per state and per county. This removes a huge amount of manual work when filing returns.

For many sellers, this feature alone makes managing Shopify and taxes significantly easier.

Nexus & Collecting Sales Tax in Shopify

Everything else in the tax settings remains mostly the same:

If you have nexus, you must enable Collect Sales Tax
Select the states where you’re registered
Enter your sales tax ID

Entering a sales tax ID is optional. Many sellers temporarily use their FEIN until they receive an official sales tax ID from the state. Shopify allows this flexibility.

The Manage Tax Liability section and Manage Tax Collection essentially lead to the same place and help you understand:

Registration requirements
Nexus rules
When you’re required to collect sales tax

Example: Clothing Sales Tax in Pennsylvania

Let’s look at a practical example:

If you sell clothing and have nexus in Pennsylvania, you would:

Add Pennsylvania under Collect Sales Tax
Select sales tax collection
Ensure your products are categorized as clothing

Since most general-use clothing is tax-exempt in Pennsylvania, Shopify will automatically apply a 0% tax rate—but only if products are properly categorized.

If you fail to categorize products:

You would need to create a product override
Build a clothing collection
Manually set tax to 0% for Pennsylvania

With correct product categorization, this extra work is usually unnecessary.

Why Product Overrides Are Often No Longer Needed

In most situations, Shopify product categorization correctly handles:

State-specific tax exemptions
Special taxability rules
Reduced or zero tax rates

Because of this, most sellers won’t need to rely on manual product overrides anymore. Categorization catches the majority of tax rules automatically and ensures better Shopify sales tax accuracy.

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Shipping Overrides in Shopify Sales Tax

In most cases, you do not need to add shipping overrides.

Shopify is now deeply integrated with state tax rules and automatically knows whether a state taxes shipping or not. This means Shopify handles shipping taxability correctly for the majority of sellers without any manual setup.

Shipping overrides are only necessary if:

You want to manually override Shopify’s default behavior
A state taxes shipping, but you do not want to charge tax on shipping for a specific situation

In those rare cases, this is where you can add a shipping tax override.

Product Overrides: When and Why to Use Them

The same logic applies to product overrides.

Shopify clearly explains:

“If you create a tax override for a categorized product, the taxes will be calculated using the override in jurisdictions where it applies. For all other jurisdictions, the taxes will be calculated using the product category.”

This means:

Product categorization is the default tax rule
Overrides only apply where you explicitly set them

Example: Overriding Clothing Tax in Pennsylvania

Let’s continue using Pennsylvania as an example.

If:

You sell only clothing
All products are properly categorized as clothing
Pennsylvania is added under Collect Sales Tax

Then Shopify will not charge sales tax, because most general-use clothing in Pennsylvania is tax-exempt.

However, if for a specific business reason you need to charge sales tax on clothing, you can:

Create a product override
Select the clothing collection
Choose Pennsylvania
Set the desired tax rate
Save the override

This allows you to manually control Shopify sales tax even when products are otherwise exempt.

A Better Example: Software Tax Overrides

Software taxation is one of the most complex areas of Shopify tax.

Many states differentiate between:

Canned software (off-the-shelf software like Microsoft or Adobe)
Customized or personalized software, which is often treated as a service and may not be taxable

Example: Utah Software Sales Tax

Let’s say:

You sell software
All products are categorized as software
Utah taxes canned software
Utah does not tax customized software

In this case, Shopify’s product categorization may not be specific enough to separate customized software from canned software.

To handle this:

Create a collection containing only your customized software
Go to Product Overrides
Select Utah
Set the tax rate to 0%
Click Add Override

Now, Shopify understands that:

General software may be taxable in Utah
Customized software in this specific collection is not taxable

This is a perfect example of when product overrides are useful within Shopify and sales tax.

Do You Really Need Shipping or Product Overrides?

In most situations:

Product categorization handles tax rules correctly
Shipping overrides are unnecessary
Product overrides are rarely needed

Shopify’s updated system covers most taxability scenarios automatically. Overrides should only be used for edge cases or special business rules.

If you’re unsure, Shopify will clearly notify you when:

Products need categorization
Special tax rules may apply

Tax Reports: Filing Made Easy

Clicking Tax Reports simply takes you back to the reporting section, where you can:

Download reports
Review tax collected by state and county
Use the data to file your sales tax returns

This ties everything together for accurate Shopify sales tax filing.

Locations: A Critical Setting for Shopify and Taxes

Next, under Settings, go to Locations.

Your location settings tell Shopify:

Where products are shipped from
Which sourcing rules apply

In the U.S., sales tax sourcing rules can be:

Destination-based
Origin-based

Different states use different rules, which is why this setting is extremely important for Shopify tax accuracy.

Fulfillment Location vs Office Address

When adding a location:

Use your warehouse or fulfillment address if products ship from there
Do not use your office address unless fulfillment happens there

You can also add multiple locations if:

You ship from different warehouses
You use third-party fulfillment centers

Correct location setup ensures Shopify applies the right shopify sales tax based on where orders are fulfilled.

Final Checklist: Products, Customers & Shopify Sales Tax

Once you’ve completed everything under Settings, there are two final areas you must review to ensure accurate Shopify sales tax collection: Products and Customers.

Products: Always Enable “Charge Tax on This Product”

Every time you add a new product in Shopify, make sure you check the box that says:

“Charge tax on this product.”

This is extremely important.

If this box is not checked:

Shopify will not collect sales tax
You may end up paying tax out of pocket
Your Shopify tax calculations will be incorrect

To avoid this, always ensure this option is enabled for every product you list in your store.

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Customers: Managing Tax-Exempt Buyers

By default, Shopify is set to collect tax from every customer.

However, if you sell to tax-exempt customers, this is where you manage that setting.

Examples of tax-exempt customers include:

Distributors or resellers
Schools and universities
Churches
Other tax-exempt organizations or entities

If you do not want to charge tax to a specific customer:

Open the customer profile
Uncheck the option to collect tax
Save the changes

This ensures Shopify does not apply sales tax to exempt customers while still collecting tax from everyone else.

What Shopify Sellers Should Do Next

Shopify has added many powerful tools that make managing Shopify and taxes easier than ever. To stay compliant, make sure you:

Log into your Shopify store
Add the correct business and location information
Confirm the states where you are collecting Shopify sales tax
Click Monitor your taxes to track your nexus footprint
Use Product Categorization to correctly classify all products
Review Tax Reports to understand filing requirements

Each of these steps plays a critical role in managing Shopify and sales tax accurately.

Why the New Shopify Tax Settings Matter

The updated Shopify tax settings provide:

Better nexus tracking
Clear tax reporting by state and county
Smarter product taxability rules
Less reliance on manual overrides

Overall, this makes Shopify tax compliance far more manageable for growing e-commerce businesses.

Thanks for reading, and we’ll see you in the next guide 🚀

Shopify Sales Tax Guide 2026: Setup, Nexus, Product Tax & Reporting Explained

Step 1: Navigate to Shopify Tax Settings

Step 2: Select the United States (or Relevant Region)