🤷 How to Manage Sales Taxes in Shopify
Sales taxes can be tricky, especially if you run an online business. But don’t worry – we’re here to help!
In this article, we’ll walk you through everything you need to know about managing sales taxes in Shopify. We’ll cover everything from setting up your tax rates to collecting taxes from your customers. So, let’s get started!
🤷 How to Manage Sales Taxes in Shopify
Sales taxes can be complex and confusing, especially when starting in eCommerce. If you’re selling products online, it’s important to understand how sales taxes work and how to collect them from your customers.
In this article, we’ll give you a crash course in sales taxes and show you how to set up and manage sales taxes in your Shopify store.
❓ What are sales taxes?
Sales taxes are levied on the sale of goods and services. In the United States, sales taxes are imposed at the state and local levels. The tax rate can be as high as 7.5%, depending on the state.
Canada has no national sales tax, but each province has its own provincial sales tax (PST) or harmonized sales tax (HST). The tax rate varies depending on the province but is typically around 10%.
In the European Union, value-added tax (VAT) is levied on the sale of goods and services. The VAT rate varies from country to country, typically around 20%.
🤷 How do sales taxes work?
Sales taxes are imposed on the sale of goods and services. The tax is usually calculated as a percentage of the sale price. For example, if a product is sold for $100 and the tax rate is 5%, the tax owed would be $5.
The seller usually collects the tax and remitted to the government. Sometimes, the buyer may be responsible for remitting the tax to the government.
❓ What products are subject to sales taxes?
Most states tax the sale of physical goods, but some exceptions exist. For example, some states exempt food, clothing, and prescription drugs from sales taxes.
In general, services are not subject to sales taxes. However, there are some exceptions, such as in the case of repair services.
🤷 What are the sales tax rules in Shopify?
When it comes to sales taxes, there are a few things you need to know about Shopify. In this article, we’ll go over the basics of sales taxes in Shopify, how to set up your tax rates, and how to exempt certain products from taxes.
Sales taxes in Shopify are calculated based on the customer’s shipping address. You must set separate tax rates for each location if customers are in multiple states or countries.
To get started, go to your Shopify admin and click Settings > Taxes.
From here, you can add, edit, and delete tax rates.
When adding a new tax rate, specify the country and state/province where the tax rate applies.
You can also specify whether the tax rate should be applied to shipping charges.
Once you’ve added your tax rates, you can exempt certain products by going to the product page and checking the “Exclude from taxes” box.
That’s all there is to it! With Shopify’s built-in sales tax features, you can easily manage your taxes and ensure you comply with the law.
🤷 What are the common mistakes in managing sales taxes in Shopify?
Merchants make a few common mistakes when managing sales taxes in Shopify. Here are a few of the most common:
1. Not Keeping Up With Tax Rate Changes 📜
One of the most common mistakes is not keeping up with tax rate changes. Tax rates can change frequently, and staying on top of those changes is important to ensure you’re collecting the correct amount of tax from your customers. A tax automation tool can help you stay compliant with changing tax rates.
2. Not Collecting Taxes on Shipping 📦
Another common mistake is failing to collect taxes on shipping. In most states, shipping charges are taxable. Be sure to configure your shipping rates in Shopify to include taxes so that you can collect the correct amount of tax from your customers.
3. Not Filing Tax Returns 📑
If you must file tax returns in multiple states, staying on top of your filing deadlines is important. Failure to file a tax return can result in penalties and interest. You can use a tax automation tool to help you comply with filing deadlines.
4. Not Keeping Accurate Records 📝
It’s important to keep accurate records of your sales and purchases for tax purposes. Accurate records will help you file your tax returns correctly and help you if the IRS audits you. Keep receipts, invoices, and other documentation for your records.
5. Not Offering Tax-Exempt Purchases 💵
If you have customers exempt from paying taxes, you need to offer them a tax-exempt purchase option. Be sure to configure your tax settings in Shopify to offer tax-exempt purchases.
6. Not Remitting Taxes Collected 💸
If you collect taxes from your customers, remitting those taxes to the appropriate tax agency is important. Failure to remit taxes can result in penalties and interest. A tax automation tool can help you stay compliant with remitting taxes.
🤷 How to avoid mistakes in managing sales taxes in Shopify?
You must collect and remit sales tax to the appropriate tax authorities to sell products online. Sales tax is a tax on the end consumer, generally based on the buyer’s shipping address.
Depending on the products you sell and the states in which you have nexus, you may need to collect and remit sales tax to multiple states.
Shopify makes it easy to collect and remit sales tax. In this article, we’ll give you some tips on how to avoid mistakes when managing sales taxes in Shopify.
1. Know your nexus ✅
Nexus is the legal term for the connection between a business and a state that requires the business to collect and remit sales tax. There are many types of nexus, but the most common are physical and economic nexus.
Physical nexus exists when your business has a physical presence in a state, such as a retail store, office, warehouse, or distribution centre. If you have physical nexus in a state, you must collect and remit sales tax to that state.
Economic nexus exists when your business has a certain level of economic activity in a state, even if you don’t have a physical presence there. For example, if you sell products online and your customers are located in a state with economic nexus laws, you may be required to collect and remit sales tax to that state.
It’s important to know which states you have nexus in to collect and remit sales tax correctly.
2. Know your tax rates 🤗
Once you know which states you have nexus in, you need to know the sales tax rates for those states. Sales tax rates can vary depending on the type of product you’re selling, the city or county where the sale occurs, and even the type of customer who makes the purchase.
To complicate things further, sales tax rates can change frequently. It’s important to stay up-to-date on the latest sales tax rates to calculate and remit the tax correctly.
Sales taxes are a necessary evil for businesses operating in the United States. However, with the right tools and knowledge, sales taxes can be easily managed in Shopify.
In this article, we have outlined the basics of sales tax management in Shopify, including how to set up tax rates, create tax-exempt customers, and file sales tax returns.
By following these tips, you can streamline the sales tax process in your Shopify store and keep your business compliant with state and local tax laws.