Introduction
Selling eBooks, music files, courses, or templates on Shopify? Then you’re a digital product seller and in 2025, that means navigating a maze of sales tax laws, nexus rules, and platform responsibilities.
While physical product sellers have long dealt with sales tax, digital goods are increasingly subject to state-level taxation. Misunderstanding your obligations as a Shopify digital seller can lead to penalties, back taxes, and compliance headaches.
This blog explains when and where to collect sales tax on digital products and how to keep your Shopify store fully compliant.
IRS Tax Code References
- IRC §6050W – Reporting of third-party network transactions (e.g., 1099-K from Shopify)
- IRC §6001 – Recordkeeping requirements for income and sales
- IRC §446 – Accounting method consistency for online sellers
- Note: Sales tax is governed at the state level, not directly by the IRS, but still impacts your federal reporting.
Relevant IRS Forms
- Schedule C (Form 1040) – Report income from digital sales
- Form 1099-K – Issued by Shopify if gross receipts exceed $600 in 2025
- Form 1040-ES – Pay estimated taxes on digital sales income
- State Sales Tax Returns – Filed monthly/quarterly depending on where you have nexus
- Marketplace Facilitator Exemption Forms – In some states where Shopify may collect on your behalf
Example: Digital Seller with Multistate Sales
Example: Neha sells downloadable fitness plans on Shopify. In 2024:
- She made $95,000 in digital sales
- Most buyers were in CA, TX, and NY states that tax digital goods
- She had no physical presence in any of those states
- Shopify issued a 1099-K for her full earnings
Tax Strategy:
- Registers for sales tax in CA, TX, and NY due to economic nexus thresholds
- Collects and remits sales tax for buyers in those states
- Tracks all transactions and exemptions using Shopify reports
- Reports gross income on Schedule C
- Pays federal estimated taxes using Form 1040-ES
Step-by-Step Guide to Sales Tax Compliance for Digital Sellers
- Understand Which States Tax Digital Products
As of 2025, 30+ states tax some form of digital goods (eBooks, PDFs, streaming access). Taxability varies by state check local rules using a sales tax automation tool. - Determine Nexus Thresholds
Even without a physical presence, you may owe sales tax if your digital sales exceed thresholds (e.g., $100,000 or 200+ transactions) in a state. This is economic nexus. - Register for Sales Tax in Nexus States
Use each state’s department of revenue website. After registration, you’ll receive a sales tax permit and must begin collecting immediately. - Enable Digital Sales Tax Collection on Shopify
In Shopify Admin, go to Settings > Taxes > Manage Tax Settings. Configure tax overrides for digital products and select taxable states. - Automate Sales Tax Reporting
Use tools like TaxJar, Avalara, or Sovos to file monthly or quarterly returns based on Shopify’s transaction data. - Reconcile 1099-K with Net Deposits
Shopify may report gross sales on Form 1099-K, but that doesn’t account for refunded sales or collected tax. Match your books to avoid IRS discrepancies. - Track Exempt Sales
Sales to resellers, nonprofits, or international buyers may be exempt. Maintain exemption certificates and documentation. - Keep Separate Bank & Accounting Records
Separate collected sales tax from your income do not treat it as revenue. Remit it to the state monthly or quarterly. - File Zero Returns If Required
Even if you had no taxable sales in a registered state, many states still require filing a zero sales tax return. - Stay Current on State Law Changes
States frequently update sales tax rules for digital goods. Subscribe to updates from their tax departments or use automated software with compliance alerts.
Conclusion
Selling digital products may feel “borderless,” but the tax obligations are very real. In 2025, digital sellers are firmly on the radar of both state revenue departments and the IRS.
With the right systems, software, and setup, you can stay compliant, automate your reporting, and focus on scaling your business not scrambling at tax time.
Call to Action
Confused about where to collect sales tax for your digital Shopify products? Not sure if you meet a state’s nexus threshold or how to file?
Book a 1-on-1 strategy session with Anshul Goyal, CPA, EA, FCA
Anshul specializes in tax compliance for digital entrepreneurs. In your session, you’ll learn how to:
- Determine where you’re liable to collect digital sales tax
- Configure Shopify for accurate collection
- Automate sales tax filings
- Track gross vs. net revenue
- Avoid audit triggers from mismatched 1099-Ks
Book now: https://calendly.com/anshulcpa/
Stay ahead of tax changes and protect your growing digital brand.
About Our CPA
Anshul Goyal, CPA, EA, FCA
Anshul brings 15+ years of U.S. and international tax experience. He specializes in helping online sellers, foreign founders, and U.S. residents with IRS and multi-state compliance. Known for his deep knowledge in Shopify and Amazon seller tax strategy, Anshul has helped hundreds of entrepreneurs minimize taxes and scale legally.
Disclaimer
This blog is for informational purposes only and does not constitute legal or tax advice. Please consult a qualified tax professional regarding your individual tax situation.
Top 5 High-Searched FAQs for 2025
1. Do I have to collect sales tax on digital downloads?
Yes, in many states. It depends on the product type and where the buyer is located.
2. What is economic nexus and how does it apply to me?
If you exceed a state’s sales/transaction threshold, you must collect sales tax even without a physical presence.
3. Does Shopify collect and remit sales tax for digital sellers?
No. Shopify provides tools to collect sales tax, but you must register, file, and remit it yourself.
4. Can I exclude international sales from U.S. tax reports?
Yes. International sales are generally not subject to U.S. state sales tax but must still be reported as income federally.
5. What if I missed sales tax filings for past years?
You may need to file back returns and pay interest/penalties. Consult a CPA for a voluntary disclosure or amnesty program if available.