Shopify Guide: What is Sales Tax and How To Set It Up
It is always exciting to start a new company. You have a new product and a fresh start. You’re excited to see how your consumers will react to your new brand and how well it will perform. Though starting a new business is exhilarating, it can also be a bit frightening because to effectively manage your business, you'll need to set up several things in place.
Thankfully, platforms like Shopify exist to make our lives simpler.
One of the many things you must set up when starting any company or business is collecting taxes, a subject that many internet merchants find intimidating. Changes in tax remittance or charges may be intimidating. Taxes are an unavoidable aspect of life, whether you run a company or not.
When you purchase products or services, you will almost always have to pay tax. Even if you inherit money or donate it to someone else, you will have to pay taxes.
eCommerce store owners must provide sales tax for the country in which they sell, and align to the local jurisdictions.
To assist you, we at Webinopoly have written a guide on Shopify sales tax and explain to you how you can utilize the platform to comply with tax regulations.
Don't miss out on this post if you operate a Shopify store in the US and plan on reporting taxes!
If you need help setting up your Shopify store, your taxes, and other Shopify needs, get in touch with Webinopoly’s Shopify Experts today.
Introduction: Online Sales Tax
Let’s first go over the basics of online sales tax. If you are already familiar with this, consider it a refresher, and if you’re not, this can be your beginner’s guide.
To be clear, Shopify taxes are not taxes you must pay to the platform.
As a merchant, the government may require you to levy sales taxes that you must record and pay for. Even though tax rules and regulations are complicated and subject to change, you can configure Shopify to handle most typical sales tax computations. You may also use tax overrides to deal with specific tax rules and circumstances. Shopify’s tax report tool helps save a lot of time.
Manually keeping track of all your items might be a daunting chore, but Shopify allows users to automatically use sales tax computations by aligning with ever-changing tax rules and regulations. So while Shopify isn't responsible for filing or remitting your sales taxes it does save you time and effort.
The Shopify platform has several default sales tax rates ready that are updated on a regular basis. You just need to make sure that the proposed tax rates are current and correct when using such default tax rates. Shopify also allows merchants to create tax overrides that may be manually adjusted.
To manage sales tax, you may need to register your company with your local or federal tax authorities.
SHOPIFY SALES TAX: THE BASICS
Shopify gives merchants a lot of flexibility when it comes to setting up taxes on their website. Here is a quick overview of everything you need to know about Shopify taxes.
Sales tax is a tiny percentage of a sale that an online merchant adds to any transaction. It is a “consumption tax,” which means that customers pay sales tax only on taxable goods purchased at your store. Your role as a vendor means that you need to report & remit taxes for every product you sell.
Because sales tax in the US is set by the states and local jurisdictions, it may be confusing. Check out the US sales tax on digital goods to learn more.
- What are sales tax nexus and economic nexus?
The phrase "sales tax nexus," as established in the Quill v. North Dakota Supreme Court decision, should now be familiar to most internet retailers. Back then, before a state can force a business to collect sales tax from consumers in that state, the retailer must have some type of presence in that state.
However, the case of South Dakota v. Wayfair in 2018 changed everything. Instead of requiring internet merchants to establish a physical presence (known as nexus) in a state before becoming liable for sales tax, simply an economic presence is now required.
This all means that even if you do not have a physical presence in a state, if you exceed a state's economic threshold for total income or number of transactions in that state, you are legally required to collect and return sales tax to that state.
Economic nexus laws
State laws on economic nexus vary. Economic nexus occurs when you exceed a certain threshold of sales to customers in a specific state. Sales thresholds can range from $10,000 to up to $500,000, while there are states with no transaction threshold.
- Who needs to pay sales tax?
eCommerce merchants with an economic nexus in a certain state are required to pay that state's sales tax.
The yearly revenue thresholds define economic nexus. A vendor is considered qualified to pay tax once they reach that level. As mentioned above, each state varies and has its own tax rates and thresholds so you will need to check for states where you are selling to.
You'll always have a sales tax nexus in your home state, so keep that in mind. Certain business activities, however, generate sales tax nexus in other states as well.
- How much is sales tax?
Every US state sets its own sales tax rate. You can check this guide from Avalara to know about each state.
Determine whether you need to charge sales tax: You must determine whether or not to impose a sales tax. Not all states require you to collect a sales tax. Currently, 45 states and DC require eCommerce sellers to collect sales tax under Economic Nexus. To be sure, best to consult a US state tax authority or a tax specialist.
Sales tax permit: Once you've reached your state's threshold, you must apply for a sales tax permit. You should visit your state's Department of Revenue website to check the requirements first before you enroll.
Note: Some states call sales tax permits different things, such as a tax license or a seller’s permit, but these are all the same and the registration process is also similar in most cases, which are:
- Register your company and its name.
- Apply for an Employer Identification Number through the IRS if necessary (EIN).
- Fill out the registration form, which often asks for your business kind, start date, and contact information.
Payment for sales tax permit: Registration for a sales tax permit is usually free in most states. In others, the charge may be as high as $30 or $50.
Check for product taxability: The majority of tangible personal property is taxed. Some states, however, allow exceptions for certain goods. Each state determines which goods are taxed and which are not. Check with your state if you believe you're selling anything that isn't taxed.
The tax rates you impose are influenced by whether your state is an origin or a destination based state.
Shopify sales tax is computed on a destination basis, which means it is calculated depending on where each of your customers is situated. There is no tax if you have no nexus in the state where the shipping address is located. If you have nexus in the state of the shipping address, taxes are calculated based on the customer's location.
Shopify calculates sales tax depending on your location. If you have no nexus in the state of the shipping address, then no tax is charged. If you have a physical nexus in the state of the shipping address, then the location of your nexus is used to determine taxes. If you have a nexus but no physical location, then the customer's location is used to determine taxes.
Use the states in which you do business in as a basis for checking whether you must compute taxes on a destination or origin basis.
There really is a lot of data and information to keep track of, but thankfully, Shopify eliminates a lot of the guesswork when it comes to setting up and collecting sales tax. You can rest assured that you're collecting sales tax properly and appropriately this way.
Now that the above terminology and concepts are clearer, let’s move onto the actual guide.
GUIDE: Setting up taxes on Shopify
Step 1: Create Shipping zones
This determines where your items will be sold and shipped across the world. You need to create a shipping zone for each state and city. If you're in a destination-based state, where tax is computed depending on client location, this is very beneficial.
- Click on Settings ⟶Shipping to set shipping zones.
- Click on ‘Add shipping zone' in the Shipping zones section
- Give your zone a name (the country or region name, for example)
- Add all the countries that you want to include in the shipping zone
Step 2: Set up the countries and regions in which you're registered
Since you are operating as an online shop, you'll need to set up countries to which your goods will be shipped.
From the US
If you're from the United States, you may choose between automatically setting up taxes or manually selecting rates for state, county, and municipal taxes, which include shipping taxes.
If you live in Canada and need to collect taxes, all you have to do is write your own tax forms.
Outside Canada and US
If you are not located in one of the two nations listed above, you may use the default settings and provide rates for their respective countries and regions. Don't forget to indicate whether or not you wish to charge taxes on your shipment at the same time.
Now, if you're using Shopify POS to sell in person such as a brick and mortar store or a pop-up shop, you'll want to set up taxes depending on your retail location. Keep in mind that the POS tax rates will vary depending on where your in-person transactions are taking place.
- Go to Settings > Taxes.
- In the Tax regions section, beside United States, click Set up.
- In the Sales tax collection section, click Collect sales tax.
- Select a state in which you are registered.
- In the Sales tax ID, enter your sales tax ID. Leave this box blank if you have applied for a sales tax ID but have been unable to get one. When you obtain your sales tax ID, you can update it.
- Optional: If your company is located in a state with different shipping tax regulations, you may choose whether or not to charge shipping tax.
- Click Advanced options.
- Under Shipping tax, choose whether you want to apply shipping tax.
- Click Start collecting sales tax.
- Optional: Add more regions and account numbers by clicking Collect sales tax.
NOTE: If you're not sure whether or not to charge taxes on shipment, keep it at the default setting and consult with state tax authorities in the United States or a local tax specialist.
Step 3: Set up tax rates
Now you will set up tax rates for all of the shipping zones you've defined. To make the procedure easier, Shopify's sales tax rates may be adjusted automatically.
- Set your address depending on your nexus under Settings⟶ General.
- Then, under Settings ⟶ Taxes, enter tax rates.
- Set these taxes to compute automatically, and Shopify will handle the sales tax computation according to state, county, and municipal tax laws.
It's a good idea to double-check these numbers every year to ensure that Shopify sales tax is computed using the most up-to-date rates.
Step 4: Set tax exemptions or tax overrides
While Shopify calculates taxes automatically, shop owners may override these settings for more control over the taxes charged. It is essential that you override tax rates and, if necessary, exempt items from taxation. If the default rates don't apply, then you need to create an override.
You may use tax overrides and exemptions if you need to do the following:
- control how much tax you charge for a particular product
- handle tax exceptions and exemptions
- specify unique tax rates for shipping destinations
- specify unique tax rates for tax-exempt customers
Creating a product override can be done in two phases. The first is to create a collection that contains the items with various tax rates. For example, if you are selling clothes that should be tax exempt, you need to group them together by creating a collection then apply for a tax override over it.
Secondly, indicate the area the override applies to, as well as the tax rate to be used.
Create a collection:
- From your Shopify admin, go to Products > Collections.
- Click Create collection, and then enter a name for it.
- Under Collection type, select Manual
- Click Save collection.
Create the override:
- Go to Settings > Taxes.
- In the Tax regions section, click Edit beside United States.
- In the Tax overrides section, click Add a product override.
- Select the collection.
- Select the region where the override applies.
- Enter the tax rate for the collection in that region.
- Click Save.
If you do not need to charge sales tax, establish overrides and set the tax rates to 0%.
Step 6: Show your prices with taxes (Optional)
This is an optional step but you can show customers the actual price of your products plus taxes. There should be no additional fee for taxes applied to your customers' checkout once this option is enabled. Instead, a computation may be performed to determine what percentage of the product's price is taxed.
In many countries, like the United Kingdom, most types of goods need the addition of sales tax.
If this option is selected, the tax will be calculated using a Tax formula. Even if no taxes are being applied, you and your customers may still see the tax as line items. The total and subtotal are identical; however, the tax amount you want must be paid in order for orders to be placed.
How to include taxes in Product price:
- Head to Settings and Taxes
After logging into, you can head to Settings ⟶ Taxes from your own Shopify admin.
- Check Show all prices with tax included
- Click on Save
You may leave Charge taxes on this product checked on the product pages once you've set up your pricing with taxes included so that taxes can be applied to your displayed price. Customers will be able to view the total and the amount of taxes included at the checkout.
Step 7: Report and file sales tax
Upon granting your sales tax permit, the state already assigned you a sales tax filing frequency. This implies that your sales tax payment is required on a monthly, quarterly, or yearly basis (and sometimes semi-annually.)
Remember, each state's sales tax deadline varies. A majority of states want to hear from you on the 20th day of the month after the taxable period, while some prefer to hear from you on the final day of the month, or the 15th, or the 23rd, and so on.
It's your duty to declare how much sales tax you've collected in each state by the due date.
The next step is to file your sales tax return and remit the sales tax you've collected from customers once you've stated how much sales tax you've collected.
Shopify’s Taxes finance report can provide a summary of the sales taxes that were applied to your sales, while the Sales finance report can help with your sales tax reporting.
These reports may be downloaded as a CSV file, which contains the order totals, taxes, POS, billing, and shipping addresses.
To get the most out of this report, make sure you pick the right time period (such as a calendar year) and export it as a full report. This report assists you in obtaining the information you or your accountant will need to complete your sales tax returns.
We hope that our article Shopify Guide: What is Sales Tax and How To Set It Up has given you a better understanding of taxes and how to deal with them in various regions.
Here is a quick summary:
- Every US state sets its own sales tax rate
- Each state's sales tax deadline varies
- Shopify doesn’t pay sales tax for you
- Shopify’s taxes finance report provides a summary of the sales taxes that were applied to your sales
- Shopify’s sales finance report can help with your sales tax reporting
- The tax rates you impose are influenced by whether your state is an origin or a destination based state.
- If most or all of your products are exempt from sales tax and you are in a country that has both federal tax and regional taxes, then you can override the defaults to 0% in the Base taxes section.
- For products that are taxable, you will need to add those products to a collection, and then create a tax override for that collection.
- Most recommended tax apps for Shopify sales tax collection are: Avalara, TaxJar and Taxify
To properly file and report your taxes, we highly recommend enlisting the assistance of an eCommerce accountant or bookkeeper especially if you're having trouble understanding the newest regulatory developments and how to properly set up your Shopify taxes. They may end up saving you a lot of money in the long run.
Taxes are burdensome, but by staying informed and properly setting up your Shopify shop, you can stay compliant and confident.
For any other concerns on Shopify, you can get in touch with Shopify Experts here at Webinopoly! We can help you from setting up shop to designing your Shopify store and even crafting content for you.
A Shopify expert is a professional who has taken the time to learn the ropes of Shopify and has the experience and knowledge to back up their strategies.
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