How To Set Up Taxes On Shopify?
In this article, you will learn:
If you are new to Shopify and are struggling to set up taxes in your Shopify store, this blog post is for you. As a seller, you may be required to charge tax on sales and report and remit sales tax to the respective authorities of the states you are selling to. And honestly, you don’t want to go wrong with sales tax compliance and get into legal trouble.
With Shopify, you can set up your store for taxes, automate common sales tax calculations, and ensure that you comply with the respective state sales tax laws. However, before you can start setting up your Shopify store for taxes, you must determine if you are obligated to charge tax on sales.
Also, you must be clear with the regions/locations where you’ll be selling goods. This is because the location of your sales will decide if you’ll need to register with local tax authorities and obtain sales tax IDs or whether location-based sales tax rates will be used for setting up Shopify taxes. Regions like the United States, Canada, European Union, United Kingdom, Norway, Switzerland, Australia, New Zealand, and Singapore will require registrations with local sales tax authorities before setting up Shopify stores for taxes.
Whereas, Shopify stores selling to regions other than these regions would need location-based tax settings. Don’t know how to add taxes in Shopify? Don’t worry as in this blog post, we will cover everything you need to know about how to set up sales tax in Shopify.
How Do Taxes Work On My Shopify Store?
You as a merchant may be obligated to collect tax on your Shopify sales. Sales tax laws change frequently and can get quite complicated given each state/region having its own sales tax rates and rules. This can make reporting and remitting tax to the respective state tax authorities very challenging for you as a merchant. Imagine what would happen if you had to keep track of the changing sales tax laws and update new sales tax rates manually.
Setting your Shopify store for sales tax can automate charging, collecting, and calculating sales tax on customer orders and help you ensure that you don’t wrong in meeting your sales tax compliance.
You can even override taxes in unique tax law situations where the default Shopify sales tax rates do not apply.
That being said, Shopify simply automates the sales tax calculation for you. It does not remit and report sales tax to the relevant state sales tax authorities on your behalf. This means that you will have to register with state sales tax agencies for sales tax, collect tax on your Shopify sales, and remit sales tax to these authorities.
Remember, you will not be able to collect sales tax from customers in states where you aren’t registered with the state tax agencies. Therefore, make sure you are registered with sales tax authorities and obtain sales tax permits to sell goods and collect sales tax from customers. You can use the Shopify sales tax reports and calculations for accurate sales tax compliance.
How To Set Up Taxes On Shopify Store?
As mentioned earlier, your Shopify sales tax settings depend on your sales tax liability and the regions you’re selling goods to. If you are a US-based merchant or a merchant selling to states in the US obligated to collect tax on sales, you’ll first have to register with these state sales tax agencies and obtain sales tax IDs before setting up your Shopify store for taxes.
Thus, registration-based tax settings will apply if your Shopify store is based in the US, UK, European Union, Switzerland, Australia, Canada, Norway, New Zealand, and Singapore.
However, if you are a merchant selling to regions other than these and are required to collect tax from customers, location-based tax settings will apply.
I. Setting Up US Taxes (Registration-Based Settings)
The following steps need to be followed to set up US taxes in your Shopify store.
1. Determine If You’re Obligated To Charge Sales Tax
Before you can set up your Shopify store for US taxes, you first need to determine if you are obligated to charge sales tax from your customers in the US. Whether you are obligated to collect sales tax from customers in the US or not is based on several factors. These include:
- The location where your goods are shipped from
- The location where your goods are shipped to
- Buyer tax exemptions
- If items sold are taxable or not
- Location where you are registered to collect tax
Accordingly, you may be required to collect tax from customers if you have a nexus with the state. Similarly, many states may include marketplaces and digital products to determine whether you have an economic nexus with that state. Finally, if you are into the dropshipping business, charging sales tax would depend on your customer’s location and the states in which you and your dropshipping vendor have a nexus.
What is Nexus?
Nexus is the connection between a State and your Shopify store. If there is a connection, you are obligated to register with the state sales tax authority, obtain a sales tax ID, and collect sales tax on goods sold to customers in that state. Nexus can be of two types.
a. Physical Nexus
If you have a physical presence in a state, you have a Physical Nexus with that state. This typically means you have a store, warehouse, or employees working in that state.
However, the definition of Physical Nexus varies from state to state and is broadly defined by some and may even count solicitation of sales, fulfillment of services, and presence of inventory in the state as having a physical presence in the state. Therefore, you must contact the state sales tax authority and check if you are in a physical nexus with that state.
b. Economic Nexus
You are in an Economic Nexus with a state where you cross a certain threshold for sales to customers in that state. This means that you might not be physically present in the state but still be obligated to register with the state’s sales tax authority, obtain the sales tax ID, and collect sales tax from customers in that state once you breach the sales threshold set that triggers the economic nexus.
Therefore, you must check with the state’s sales tax authority and see if you are in an economic nexus with the state. If yes, you’ll need to register with the state’s sales tax agency, obtain the sales tax ID, and charge applicable sales tax rates on your sales.
To know if you have a nexus with any state in the US, check out the following table.
What Are Marketplaces?
A marketplace is an online platform where multiple sellers sell their goods to customers. Examples of marketplaces include Amazon, eBay, Etsy, etc. Many states include marketplaces while determining if you have economic nexus with them. Thus, you must check with the state’s sales tax rules or authority to see if sales on marketplaces are counted while determining economic nexus.
What Is A Digital Product?
A digital product is a downloadable item such as a book or document that is not physically shipped, etc. Many states include marketplaces while determining if you have economic nexus with them. Thus, if you are selling digital products, make sure you check with the state’s sales tax authority to know if you have an economic with the state.
What Is Dropshipping?
Dropshipping is a business model in which you buy goods from a supplier and sell those goods to customers. Charging sales tax in a dropshipping business may depend on your customer’s location and whether you and your supplier have a nexus with a state. There can be multiple scenarios under this:
|Your Dropshipping Vendor
|Nexus with customer’s state
|You charge sales tax from your customer
|Your vendor may ask you for a resale certificate or may charge you tax
|You will collect sales tax from customer and your vendor may ask you for a resale certificate or may charge you tax
|Your customer will pay use tax to the destination state for purchasing goods.
2. Register With States For Sales Tax
Once you determine your sales tax liability, you must register with the states where you are obligated to collect sales tax and obtain the sales tax ID. Please note that it’s not the federal government that is responsible for requiring sellers to charge tax on sales in the US.
Various states and counties are responsible for the sales tax. Accordingly, each state or county may have its own sales tax agency, laws, and regulations. Likewise, the process of sales tax registration too may vary with each state. Thus, make sure you connect with the respective state sales tax authorities to understand the sales tax rules and process of registration for sales tax with the state.
What is a Sales Tax ID?
A sales tax Identification Number (ID) is a number that is issued by a state’s sales tax authority once you register as a seller. If you have a liability to charge sales tax from customers in a particular state, you will need a sales tax ID to charge sales from customers.
3. Create Shopify Markets And Add Regions
If you are new to Shopify, you will first have to create your ‘Shopify Markets’ to be able to charge sales tax on your customer orders. This is because your customers will be able to order goods from your Shopify store only when the country or region they want to ship the goods to is included in one of your active Shopify Markets and Shipping Zones.
A Shopify Market is a tool that allows you to create customized experiences for customers by assigning specific settings to certain regions or countries.
For instance, if you have customers buying goods from Germany, Belgium, France, etc who pay the same shipping rates, you can create a Shopify Market by the name of ‘Euro Zone’ and include all these regions in this market. Likewise, if you have the majority of customers from Germany and want to create a customized experience for them in terms of pricing, domain settings, etc, you can simply have a Shopify Market by the name of ‘Germany’.
Accordingly, Shopify Markets can be of many types. These include:
- Primary Market: your main market/region where you sell goods. This typically includes your domestic or home country.
- International Market: includes the regions that other sellers like you are selling goods into
- Countries you don’t sell to: includes countries or regions that you are not selling to and are not included in any of your Shopify markets. People from such regions can’t check out from your store.
- Single-Country Market: containing one region/country you are selling to.
- Multiple-Country Market: a group of regions/countries that are assigned the same settings such as shipping rates, domain, etc.
Also Read: To learn more about adding Markets in your Shopify store, read our article on How to add Shopify Markets in your Shopify store.
4. Create Shipping Zones
Once you set up Shopify Markets, the next step is to create ‘Shipping Zones’. A Shipping Zone is nothing but a collection of countries or regions that have the same shipping rates.
Let’s say you have a warehouse in Spain from where you ship goods in the entire Euro Zone on the same flat shipping rate, you can create a shipping zone by the name of ‘Euro Zone’, add all the eurozone countries you ship to in this zone, and assign the same flat shipping rate to this zone.
Remember, your customers won’t be able to buy goods from your store if the counties/regions they want their goods shipped to are not included in the Shipping Zone. To be able to create shipping zones in your Shopify store, you’ll first have to include countries/regions in active Shopify Markets.
Also Read: To learn more about setting up shipping for your Shopify stores, read the following articles:
5. Add Sales Tax ID On The ‘Taxes And Duties’ Page
Once you have registered with the states and have sales tax IDs, the next step is to add these sales tax numbers on the ‘Taxes and Duties’ page. Follow the below-mentioned steps to do so.
a. In your Shopify admin, go to Settings>Taxes and Duties page
b. Click ‘United States’ in the ‘Manage Sales Tax Collection’ section.
c. Click ‘Collect Sales Tax’ in the ‘Regions You Are Collecting In’ section.
d. Select the region/state where you are registered for sales tax.
e. Add your state sales tax ID in the ‘Sales ID’ section.
f. Optional step – you can choose to charge tax on shipping if your business is located in a state where shipping laws are different.
- Click on ‘Advanced Options’.
- Under the section ‘Shipping Tax’, choose if you want to charge tax on shipping
g. Click on ‘Collect Sales Tax
h. Optional Step: If you want to add more regions where you want to sell and have obtained sales IDs, simply click on ‘Collect Sales Tax’. You can also edit sales tax details for each region by clicking on ‘…’ button next to each region under the ‘Regions You’re Collecting In’ section.
6. Create Tax Override
Shopify uses default sales tax rates that are applied to goods sold to customers across various regions. At times, these sales tax rates do not apply to products, given unique sales tax situations. In such cases, you can create tax overrides by adding the appropriate sales tax rate manually.
Read: To learn how to create tax overrides in Shopify read our in-depth article:
Shopify Tax Override: All You Need to Know
II. Location-Based Settings
Location-based settings apply to you if you are a merchant not selling to or selling outside the US, UK, European Union, Switzerland, Australia, Canada, Norway, New Zealand, and Singapore.
If you are not located in one of these regions and need to charge tax on sales, taxes will apply as per the local sales tax laws. Therefore, you must connect with the regional sales tax authorities to know the correct rates to charge your customers on sales.
Many countries charge taxes based on the order’s destination country. That is, sales tax is charged at the rates as defined by the region where your products are delivered.
Before you charge tax on sales at rates based on the order’s destination, make sure you determine the following:
- Whether you are obligated to charge tax on your customer orders
- Whether the products you sell are taxable
- If the region you are selling goods to does not use registration-based taxes
- If you have created a shipping zone for the destination country
Add Tax Rates For Destination Countries
Follow the below-mentioned steps to add tax rates for the destination countries:
1. In your Shopify admin, go to ‘Settings’ and then the ‘Taxes and Duties’ page.
2. Click the name of the country in the ‘Tax Regions’ section
3. Locate the ‘Base Taxes’ section and enter the sales tax rates that apply to the regions you sell goods to. You can choose between the following three settings. If you are not clear about what setting to choose, you may get in touch with your tax expert.
Let’s take an example to understand the following settings. Say you sold an item in a country where both regional and country taxes are applicable. Assume the price of the item sold was $1000 with the regional tax rate being 5% and the country tax rate being 10%.
a. Added To
If you choose this setting, the regional tax will be added to the country tax and both will be charged. In our example here, the regional tax is $50 and the country tax is $100. Thus, the total price of the product after taxes being added will be $1150.
b. Instead Of
Under this setting, regional tax is added instead of the country tax. That is, only regional tax will be charged. In our example, regional tax is $50, which will be added to the price so that the total price is $1050.
c. Compounded on Top Of
In this, the country tax is first determined and added to the product price. The regional tax is then charged on this sub-total, to arrive at the final price. In our example, the country tax of $100 is added to $1000 to arrive at a sub-total of $1100. The regional tax is then calculated at $1100 so that the final price is $1100 + 5% x $1100 = $1155.
4. Then, click ‘Save’.