E-commerce platforms like Shopify make it outrageously easy to start your own business online. For a small monthly fee, you can create a website, fill it with products, and start selling. With a dropshipping business model, you don’t even need to worry about carrying inventory. What about the usual legal requirements for brick-and-mortar stores? Do you need a business license to sell on Shopify?
Do E-Commerce Businesses Need a License To Sell on Shopify?
It’s practically a given that your business needs some type of business license to sell on Shopify. In reality, there’s not much difference between online and physical retailers when it comes to business laws.
Put simply, if you need a license to open a local shop, you need it for your Shopify store. Whether you run your e-commerce site from home or have a warehouse where you make custom products, there are sales tax laws to follow.
Common Type of Business Licenses for E-Commerce
What type of licenses do you need before you can officially open your “doors” on Shopify? The specifics always depend on where you live and/or operate your business:
- State business license: Also known as a general business license or business operating license, this document involves registering with your Secretary of State’s office.
- Local business license: Some cities and counties require all business owners to register for a license, employees or no employees.
- Home operating permit: In some places, you need a permit to run your business in a residential building. This is more likely if you store inventory or handle shipping from your house.
- Sales tax license: Most states require sellers to have a sales tax license. You need it to charge and file sales tax for your business.
- Professional licenses: Some business professionals need a state license to legally offer services — online or offline. This primarily applies to doctors, mental health professionals, and lawyers, but even certified public accountants generally need a state license to offer services on Shopify.
You probably won’t need all of these licenses or even most of them. Many Shopify sellers only need a sales tax license and a general business license. Some states don’t even require you to register your business, like Texas or Iowa.
Do You Need a Business Tax ID To Sell on Shopify?
Shopify can help you collect sales tax from customers automatically, but you need to configure the settings in your account first. To do that, you need to have your sales tax ID on hand. To obtain a sales tax ID, you usually need to register your business with your state’s tax authority, either online or by filling out a form. Check your state’s specific requirements for more detailed instructions.
Where To Charge Sales Tax
Every state approaches taxes a little differently. In general, you have to collect sales tax wherever your business has a significant presence, or nexus. Here are a few examples:
- The state where you run your business
- States where you have a warehouse or distribution center
- Any state where your total sales exceed a certain limit (usually $100,000 a year or 200 transactions)
- States where your employees live
As a Shopify store owner, you need to do your homework. After all, people can buy your products from anywhere in the U.S. If you notice a lot of your sales are going to California or Florida, read up on sales tax laws in those states just to be safe.
How To Set Up Shopify for Sales Tax
It’s pretty easy to manage sales tax from your Shopify admin. Just go to Settings > Taxes and duties > Manage sales tax collection.
Under “United States,” click on “Collect sales tax.” Then, choose a state.
Enter your sales tax ID for that state in the appropriate box. Save your settings by clicking “Collect sales tax” on the same page.
What Happens If You Sell on Shopify Without a Business License?
Shopify takes a hands-off approach to its clients’ legal responsibilities, meaning that Shopify does not verify whether sellers are complying with legal requirements. But even though you can technically open a Shopify store without a license, you shouldn’t. There are significant penalties for failure to collect and pay sales tax when you have an obligation.
If the state finds out, you’re not just liable for the missing taxes. You also have to cover penalties and interest. It’s better to dot your i’s and cross your t’s when launching a business on Shopify.
Do You Need a Resale Certificate To Sell on Shopify?
If you have a dropshipping business or you purchase goods in bulk for your Shopify store, it’s worth your time to get a resale certificate. This document is also called a tax exemption certificate. It lets you avoid paying sales tax on items you plan to resell.
Normally, if you purchase 500 tees, the sales tax can have a major impact on your costs. In Minnesota, you would pay at least:
- Price per T-shirt: $5.00
- State sales tax (6.875%) per shirt: $0.35
- Total sales tax for 500 tees: $175.00
With a tax exemption certificate, you just saved yourself $175 to use for other needs. So, while not legally required, a resale certificate can significantly improve your profit margins.
Do You Need a Business License To Dropship on Shopify?
Dropshipping is growing by leaps and bounds, and we get this question about needing a business license for Shopify a lot. Our answer is always the same: check with a tax professional in your state first, then choose a supplier you trust to follow the rules. At StayTuned Digital, we can connect you with great solutions. Contact us to learn more.