In this article, you will learn:
One of the major challenges faced by the majority of online retailers is handling their Shopify partial refunds with TaxJar. As a result, they want to know how does TaxJar handle partial refunds in Shopify? Returns and refunds are one of the integral aspects of the e-Commerce process.
Though returning items bought online by customers is quite a pain for e-Commerce businesses, it is an essential part that can’t be overlooked.
As per research, out of online sales of $1.3 trillion registered in the US in 2022, 16.5% ended up as returns. This is a huge amount that makes it more than necessary for online merchants to offer a satisfactory return experience to their customers for reducing returns and loss of sales from such returns.
Issuing refunds for Shopify orders returned by customers is fairly simple. When issuing a refund, you as a Shopify store owner are required to not only refund the price paid by the customer for the returned item but also the sales tax you collected on it.
At the time of sale of such an item, you must have collected the applicable sales tax which too must be refunded along with the price if such an item is returned by the customer.
Shopify store owners are easily able to issue refunds for orders returned by the customer via their Shopify Admin. However, they face the challenge of allocating the refund amount between the item refund, sales tax refund, and shipping refund with TaxJar. Let’s understand why such an issue arises for Shopify store owners using TaxJar for their sales tax management and how does TaxJar handle partial refunds?
What is the Issue With TaxJar Handling Shopify Partial Refunds?
As discussed above, when a customer returns items, you as a Shopify store owner need to refund both the item price and the sales tax collected on the item to the customer.
Say a customer bought 2 items worth $20 each from your Shopify Store and requests a return of one of the items worth $20. Let’s first have a look at how you can create a partial refund of the item from your Shopify admin.
How to Issue Partial Refund On Shopify?
Following are the steps involved in creating a partial refund on Shopify:
1. Go to the admin and click ‘Orders’.
2. Click on the order you want to issue a partial refund on.
3. Click on ‘Refund’ on the top right.
4. Select the number of items you want to refund from the selected order.
If you want to issue a customized return, you have the option of putting an amount manually in the space provided under the ‘Manual’ section.
5. Click on ‘Refund’ and check the box ‘Send a notification to the customer’ to notify the customer about the refund issued.
Issue With TaxJar Handling Shopify Partial Refund
As can be seen, creating a partial refund on Shopify is simple. But, how is this partial refund understood by TaxJar? You must note here that when a partial refund is issued via Shopify, the information about where such a refund is applied is not indicated by Shopify to TaxJar.
In other words, Shopify does not indicate TaxJar if such a refund is a sales tax refund, shipping refund, or item refund. Let’s continue with the above example to understand the issue in greater detail.
As discussed earlier, the customer raised a return request for one of the two items bought for $20 each. Say out of the total refund amount of $20, $18 was collected as the item price and $2 as sales tax at the time the item was purchased by the customer.
When you issue a refund of $20 via your Shopify store, Shopify does not bifurcate the $20 as $18 for the price item refund and $2 for the sales tax refund. In other words, Shopify refunds the complete $20 as the item refund and does not allocate the amounts between the item refund and the sales tax refund.
Accordingly, TaxJar treats the complete $20 refund as the item refund and keeps $2 outstanding towards sales tax for you to be collected and paid to the tax authorities.
But in reality, you had already collected $2 from the customer as sales tax at the time of purchase and paid the same to the sales tax authority. In short, you are liable to pay more sales tax as per the TaxJar sales tax calculation because partial refunds do not reflect in your TaxJar data.
How Does TaxJar Handle Partial Refund in Shopify?
Since Shopify does not indicate TaxJar where the refund amount is applied (that is it does not bifurcate between sales tax refund, shipping refund, and item refund), TaxJar also treats it as a complete refund towards the item price.
To overcome this issue and correct such refunds, you can import a CSV file to TaxJar. Importing the CSV containing corrected partial refund transactions will update the refund transactions and correct those sale transactions in TaxJar.
TaxJar will overwrite the current data for sales with the data you corrected once you upload the CSV to TaxJar and attribute sales properly. Let’s see how you can edit transactions via CSV in TaxJar.
How to Edit Transactions via CSV in TaxJar?
You can edit partial refund transactions which were inappropriately allocated between sales refund and tax refund by correcting the data and overwriting the current data with the corrected data by uploading a CSV in TaxJar.
The following are the steps you can follow to edit sales transactions in TaxJar.
1. Export Data to be Corrected From TaxJar
You need to first export the transaction data that needs to be corrected or updated from TaxJar. Here are the steps you can follow to export transaction data from TaxJar.
a. Login to your TaxJar account and click on the ‘Transactions’ tab at the top of your dashboard in the Navigation Bar.
b. Then, at the top right, click on ‘Actions’. From the dropdown, select ‘Export CSV’.
c. Once TaxJar compiles your export file, it sends you an email with a link to download your transactions. Click on the link to export transactions.
2. Use Recommended Templates to Edit Transaction Data
TaxJar offers ‘Order Template’ and ‘Line Order Template’ to help you edit transactions in the formats acceptable by TaxJar.
Remember, transactions not updated following any of these two templates will show you an error message that TaxJar is unable to import rows in your spreadsheet. Therefore, make sure you follow the “Line Order Template” guidelines and “Order Template” guidelines carefully before uploading the corrected spreadsheet.
Further, TaxJar recommends using the “Line Order Template” to ensure that your TaxJar reports reflect the data accurately. It clearly states that using the ‘Orders Template’ for editing sales transactions will not record important product tax code information which will further impact your sales tax reports.
3. Import Amended Data into TaxJar
The following are the steps to upload or import the updated CSV file into your TaxJar account.
a. Click on the ‘Account’ tab on the upper right hand of your dashboard and select ‘Linked Accounts’ from the dropdown.
b. Click on the ‘Upload a CSV’ link given on the ‘Linked Accounts’ page. Now, click ‘Choose File’ to select the file with corrected data and ‘Upload Spreadsheet’ to upload the file.
- Remember, the TaxJar system will show an error stating its inability to upload the file if the format of the corrected data doesn’t match the one accepted by TaxJar.
- Make sure you’re using the above-mentioned templates carefully to correct the partial refund data before importing the CSV into TaxJar.
- Also, uploading the updated CSV will make TaxJar overwrite your current transaction data with corrected data as provided in the uploaded CSV.
- Additionally, don’t forget to check the file you import into TaxJar for header names. Make sure they are in proper order to avoid errors.
- Finally, remove any extra columns from the file your receive when you export CSV from TaxJar.
How Do States Handle Refunded Sales?
Say you issued a refund to a customer for an item returned on which you collected both the item price and applicable sales tax at the time of the original transaction.
The original sales took place in the previous taxable period and, thus, the amount refunded as sales tax to the customer was collected and paid by you to the state in the previous taxable period.
Ideally, you would want to claim the sales tax refunded to the customer back from the state in your upcoming sales tax filing as you no longer owe this amount to the state (as both the item price and the applicable sales tax are refunded to the customer). But this is not how states deal with refunded sales.
Most states require you to file an amended sales tax return for the previous taxable period instead of simply taking credit for the sales tax refund in your upcoming sales tax return. This is in case you refund sales tax to a customer for the previous taxable period.
You may wonder why states require you to file an amended return for the previous taxable period instead of simply claiming the credit for sales tax refunded to the customer for this period. Well, this is to avoid the incorrect amount being credited to you.
For instance, let’s assume that the sales tax rate increased by 0.5% from the time when you charged and collected sales tax to the time you claimed credit for the same.
This would mean you claiming a 0.5% extra sales tax credit in the amended return than what you charged from the customer. To avoid such situations that may arise due to changes in sales tax rates, most state governments require you to file an amended sales tax return for the previous taxable period.
You may claim the sales tax credit in the amended return and the state may, then, put this amount as a credit in your upcoming sales tax return.
Want Help With Shopify Sales Tax?
