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How To Charge Sales Tax In Shopify

How To Charge Sales Tax In Shopify?

Shopify allows you to automate charging sales tax on your customer orders. With its default tax rules that automatically apply the sales tax rate applicable to your customer orders, you do not have to worry about tracking the ever-changing sales tax laws of various states across the US.

Additionally, if you are a merchant selling in the US, you can use Shopify Tax to automate sales tax calculations and nexus tracking, ensure rooftop accuracy, and prepare for sales tax filing using ready-to-use Shopify sales tax reports.

In case the default sales tax rates as suggested by Shopify do not apply to the state where you are selling, you can even override tax on merchandise and shipping and manually add the sales tax rates applicable.

That being said, one of the typical questions that merchants have when managing taxes on their Shopify store is ‘Does Shopify collect sales tax?’

Well, Shopify helps you automate sales tax calculations and makes sales tax filing easy by providing you with valuable sales tax data and Shopify sales tax reports. However, it does not report and remit sales tax to the states on your behalf.

You as a merchant are required to file sales tax returns and remit sales tax to state sales tax authority where you are obligated to collect sales tax from the customers. In this post, we will help you know everything you need to know about how to charge sales tax in Shopify.

How To Charge Sales Tax In Shopify?

As a Shopify merchant, you may have to charge sales tax on merchandise sold to customers across various regions in the US. You can automate sales tax calculations for customer orders by setting your Shopify store for taxes. Sales tax laws of various states are complicated and are often subject to changes.

This is where Shopify can help you charge sales tax to customers automatically with its default sales tax rules which are updated regularly. By defining the regions where you are liable to collect sales tax and creating shipping zones where your goods need to be shipped, you enable Shopify to charge the latest sales tax rates applicable to your customer orders.

Before Shopify can start charging sales tax on your customer orders, there are certain steps that you need you undergo.

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1. Determining Your Sales Tax Liability

Before setting up Shopify for taxes, the first step is to determine your sales tax liability. In other words, you need to determine if you are obligated to charge from the customers and remit sales tax to states where you are selling goods or services

How Do I Know If I Need To Register For Sales Tax?

Ideally, you must register with a state’s sales tax authority if you are in a nexus with that state. Nexus is a connection your Shopify store has with a particular state. Each state has its definition of nexus. Therefore, it is important to check with the state’s sales tax authority or a professional tax consultant to know if you are in a nexus with a state and are obligated to collect sales tax on goods sold to customers in that state.

Typically, there are two ways in which you can be in a nexus with a state.

a. Physical Nexus

You will be in a physical nexus with your state and will be obligated to collect and remit sales tax to your state’s sales tax authority. Typically, a merchant is in a physical nexus with a state if he has a physical presence in the form of a store, warehouse, or employees selling goods on his behalf.

As mentioned above, a few states have extensive definitions for physical nexus and may include soliciting business via advertising, presence of inventory, and fulfillment of services as part of physical nexus.

b. Economic Nexus

You are in an economic nexus with a state when you cross the threshold of merchandise in units or amounts set by the state. In other words, you may not be physically present in a state but still be obligated to collect sales tax from customers if you exceed the sales limit set by the state that triggers the economic nexus and obligates you to collect sales tax on goods sold to customers in that state.

Many states include marketplace sales, sale of digital products, and dropshipping while determining sales for economic nexus. You must check with the state’s sales tax rules to know nexus rules and whether you are in an economic nexus with the state.

If you are a US merchant calculating sales tax using Shopify Tax, you will be able to track your sales tax liability insights. That is, your Shopify admin will show you the details about the units or amount of goods sold in various states and where you are approaching the thresholds which which may trigger economic nexus with those states.

Read: Shopify Sales Tax: The Ultimate Guide

2. Registration With State Sales Tax Authority

Once you have established a nexus with the states and determined your sales tax liability, the next step is to register with the state’s sales tax authorities. Each state has its own rules and laws for sales tax registration. You must check with the state’s sales tax authority to know how to apply for a sales tax permit in a particular state. To know the rules of registration with various sales tax agencies, read our article ‘How To Apply For Sales Tax Permit’. Upon registration, the sales tax authority of the state will issue you a sales tax ID which is required to set up taxes in your Shopify store.

Also Read:

What Is A Sales Tax ID?

A sales tax identification number is a unique number issued by a state to you as a seller upon registration. The state Sales Tax ID gives you the right to charge tax on sales from customers in that state.

Read: How To Get Sales Tax ID For Your Shopify Store?

Do I Need A Sales Tax ID For Shopify?

As mentioned earlier, if you exceed the threshold of sales defined by a state for economic nexus or are in a physical nexus with a state, you will be required to register with the state’s sales tax authority and be obligated to collect and remit sales tax to the state.

Upon registration, you will be issued a unique sales tax ID which will authorize you as a merchant to sell goods and charge sales tax on goods sold to customers in that state. Once you receive the sales tax ID, you need to enter your Sales Tax ID under the ‘Taxes and Duties’ section in your Shopify admin while setting up your Shopify store for taxes.

3. Setting Up Shopify Store For Sales Tax

Once you have registered with the various sales tax agencies of states where you are obligated to collect sales tax, the next step is to set up your Shopify store for sales tax.

The following are the steps that you must follow to enable Shopify to charge sales tax on your customer orders.

1. Managing Locations

It is important to set a location for your Shopify store. This is the address that you put in ‘Store Details’ under ‘Settings’ in your Shopify admin. If you fulfill your inventory from a location that is different from the address put in the ‘Store Details’ section, you must create a ‘Location’ in your Shopify admin. This is because Shopify will use the location from which you fulfill your inventor for determining nexus with various states.

Additionally, the number of locations you can create depends upon what Shopify Subscription Plan do you own. For instance, Shopify Starter allows you to create 2 locations whereas Shopify Plus enables you to create 200 locations.

How To Add A Location In Shopify?

1. Log in to your Shopify admin and go to ‘Settings’

How To Charge Sales Tax In Shopify

2. Then, click on ‘Locations’ in the side menu.

How To Charge Sales Tax In Shopify?

3. Next, click on ‘Add Location’ at the top right.

How To Charge Sales Tax In Shopify?

4. Now, fill in the location details like name, address, phone number, etc and click ‘Save’.

How To Charge Sales Tax In Shopify?

How To Charge Sales Tax In Shopify?

2. Setting Up Regions Where You Have Been Registered

Once you have your location set, registered with the relevant state sales tax agencies, and obtained the sales tax ID, the next step is to set up the regions where you are registered and obligated to charge sales tax from customers.

For setting up regions in your Shopify admin, you will first have to create a market.

What Is Shopify Market?

A ‘Market’ in Shopify, also called ‘Shopify Markets’ is a tool in Shopify that allows you to render customized experiences to your customers by designating specific settings to a region, state, or country. For example, if you are selling to customers in Germany, Belgium, France, etc, you can create a market by the name of ‘Europe’ having the same shipping charges, etc.

Remember, you will not be able to charge sales tax on your customer orders unless you define the markets you are selling goods into. This is because Shopify takes into account the regions you are selling into to establish nexus and apply the default sales tax rates to the customer orders.

Want to know how to set up markets in your Shopify store?

Read: How To Set Up Shopify Markets?

What Is Shopify Shipping Zone?

After defining markets where you would be selling tangible personal property to the customers, the next step is to create a ‘Shipping Zone’.

Shipping Zones are nothing but a collection or group of countries that have the same shipping charges. Defining shipping zones is very important in your Shopify admin as it enables Shopify to calculate the correct shipping rates at the checkout.

An important thing to keep in mind here is that your customers will not be able to buy merchandise from your Shopify store unless the country or region they want the goods to be shipped to is not included in one of the Shipping Zones.

Likewise, the regions they want their goods to be shipped must also be part of an active market.

Want to know how shipping works in Shopify?

Read: How To Set Up Shipping On Shopify?

Setting Up Taxes In Shopify

Once you have your sales tax IDs and have defined the markets and the shipping zones, the next step is to set up your Shopify store to charge sales tax.

All you need to do is:

  1. Go to ‘Taxes and Duties’ under ‘Settings’,
  2. Click on ‘Collect Sales Tax’
  3. Choose the region where you are collecting sales tax
  4. Add your unique state sales tax ID
  5. Choose to add tax on shipping (if applicable) from the ‘Advanced Options’
  6. Click ‘Collect Sales Tax’.

To know the detailed step-by-step process of setting up sales tax in Shopify read our article ‘How To Set Up Taxes On Shopify?’

Creating Product Tax Overrides

What if the default sales tax rates suggested by your Shopify store do not apply to certain merchandise sold to customers? Is there a way you can change those default sales tax rules in Shopify? Yes, by creating tax overrides in Shopify, you can change the default tax rates and apply the correct rates applicable to certain products.

Tax overrides enable you to change the default sales tax rates suggested by Shopify and apply the correct sales tax rates applicable to the merchandise being sold to customers.

Creating tax overrides in Shopify involves the following two steps:

1. Creating Product Collections

A Product Collection is nothing but a grouping of products of a certain type/category. Let’s say you run a clothing store that has clothes of different categories such as athleisure, workout clothes, etc. Also, athleisure clothing has lower tax rates than the default sales tax rates recommended by your Shopify store. By grouping all athleisure clothing under one category, you can apply the tax override applicable to this collection. You can create two types of Product Collections in Shopify. These include Automated and Manual collections.

a. Automated Collections

Automated Collections are created by using certain conditions that you select to define a collection. Each time you add a new product that matches the conditions so selected for a particular collection, the product gets automatically added in that collection. Automated collection is ideal for big companies that have a large number of products.

b. Manual Collections

Manual Collections are created by handpicking each product individually. Unlike automated collections that use selection conditions to add the product automatically to the collection, manual collection doesn’t get updated unless you include a product in it. Let’s say there is a list of products that have lower sales tax rates. You can create a manual collection of such products and apply the same lower sales tax rate to such a collection.

Likewise, there can be products in your Shopify store that are tax-exempt. In such a case, you can avoid applying taxes to these products by unchecking ‘Charge Taxes On This Product.’

Want to know how you can not charge sales tax in Shopify?

Read: How Not To Charge Taxes On Shopify?

2. Specifying The Region Where The Tax Override Is Applicable

Once you have created product collections to which tax overrides will apply, the next step is to define the regions where such tax overrides will be applicable.

Just like products, tax overrides can also be applied to shipping charges under ‘Taxes and Duties’.

Want to know the step-by-step process of creating Tax Overrides in Shopify?

Read: Tax Override Shopify: All You Need To Know

Including Or Excluding Tax In The Product Prices

You must know as a Shopify merchant that selling goods in certain regions requires you to show display prices inclusive of tax on your Shopify store.

For instance, if you are selling tangible personal property in the UK, you are required to show prices of the property inclusive of VAT. Although, VAT would appear as a separate line item. But it will not be added to the price as the price of the product is already inclusive of VAT.

On the other hand, if you are selling products in the US, you need to show prices excluding sales tax and show sales tax as a separate line item. The sales tax would be added to the product price (which is excluding tax) at the checkout.

Want to know how you can add or exclude tax from the product price in Shopify?

Read: What Does Charge Tax On This Product Shopify Mean?

Charging Tax On Shipping Rates

There are certain states where sales tax laws require Shopify merchants to charge tax on shipping. Shipping charges are taxable in Shopify depending upon the state/region you are selling goods into and the sales tax laws of those regions. For instance, states such as California, Colorado, Florida, Illinois, Louisiana, Maryland, and Maine have sales tax laws that influence tax on shipping rates.

Want to know why are you being charged tax on shipping In Shopify? Do You know the sales tax laws of states where shipping is taxable?

Read: Why Is Shopify Charging Me Tax On Shipping?

Tax Rounding In Shopify

Shopify even allows for rounding of taxes that improves your tax calculation. Earlier, tax amount was rounded off at the invoice level. That is, the tax amount on the total invoice amount was calculated and rounded off. For instance, let’s say a customer bought 10 items priced at $2 per item. The sales tax rate applicable is 5.87%. Total sales tax on 10 items would work out to to 0.0587 x $20 = $1.174 which was rounded off as $1.18.

Now, Shopify rounds off taxes at every line item. Accordingly, sales tax on $2 works out to be $0.1174 which is rounded off as $0.12. Accordingly, total sales tax on the order of 10 items will be $0.12 x 10 = $1.20.

FAQs

1. Does Shopify Collect Sales Tax?

As mentioned earlier, Shopify does not collect and remit sales tax for merchants. It only calculates the amount of sales tax a merchant is liable to collect on goods sold to customers. Read our article ‘Does Shopify collect sales tax’ to know more.

2. Should I Charge Taxes On Shopify?

You are required to charge sales tax on Shopify orders if you have a Nexus with states/regions where you are selling goods. If you are in a physical nexus with a state or have crossed the threshold for the economic nexus set by the sate, you must register with that state’s sales tax authority, obtain a sales tax ID, and charge sales tax from your customers in that state.

3. Does Shopify Report Sales Tax To States?

No, Shopify does not report sales tax to the states. It is the merchant’s responsibility to collect, remit, and report sales tax to the sales where he is obligated to collect sales tax. Shopify only helps Shopify merchants create sales tax reports that can be used to file sales tax returns easily.

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