In this article, you will learn:
As a Shopify merchant, you need to charge taxes on the sales you make through your Shopify store, and then report and remit those taxes to the government. That’s because, unlike other platforms like Amazon, Shopify doesn’t file or remit sales tax on behalf of the merchants. This means Shopify merchants are responsible for registering their businesses with the local or federal tax authority to handle sales tax.
Shopify simply calculates the amount of sales tax merchants need to pay to the local or federal tax authority. The automatic sales tax calculations and sales tax reports that Shopify generates make it a lot easier for Shopify merchants to file and pay their taxes.
Apart from automatically calculating sales tax and generating sales tax reports, one of the other features that Shopify provides to merchants is the ability to set up tax overrides and exemptions.
In this article, we are going to walk you through in detail what are tax overrides and exemptions and how to set up tax exemptions and tax override Shopify.
Tax Override Meaning
The term override means to prevail over. Thus, tax override means using customized tax rates in place of the default or the standard rates in order to adhere to federal, state, or local tax calculations.
Note that Shopify uses many default sales tax rates. Further, it updates these sales tax rates regularly. Merchants need to ensure that these default sales tax rates are the current tax rates and are the ones that are appropriate to their particular circumstances if they choose to use the default sales tax rates.
Shopify merchants also have the option to override the default or the standard tax rates within Shopify. That is, they have the option to use customized tax rates applicable as per their location and circumstances in place of the standard sales tax rates within Shopify.
For instance, Alaska, Delaware, Montana, New Hampshire, and Oregon are the states in the USA that impose zero sales tax. Therefore, if you are making sales in any of the aforementioned states in the US, you can manually specify overrides for state tax exemptions in the United States within Shopify.
Likewise, you can manually specify provincial tax exemptions in Canada, or VAT exemptions in the European Union or the United Kingdom.
Tax Override Shopify Example
To help you understand better, let’s consider an example.
Say, you have a Shopify store that sells certain types of children’s clothing on which the default tax rates within Shopify do not apply.
In fact, the children’s clothing that you sell on your Shopify store is either exempt from tax or may be eligible for a tax rate that is lower than the standard sales tax rate in Shopify.
This means that none of the default sales tax rates within Shopify apply to the children’s clothing you sell in your store. In such a case, you need to create a tax override for the children’s products within your Shopify store.
To create tax override in Shopify, you need to create a collection including products that have a different tax rate, that is, a rate other than the default or the standard tax rates within Shopify. After creating such a product collection, you need to specify the region to which the tax override applies along with the applicable tax rate.
Note that Shopify uses product categories for calculating sales taxes. The product categories are nothing but labels assigned to products and are selected in Shopify from a predefined and standardized list called Shopify Product Taxonomy.
If you use a product category to calculate taxes in Shopify, then you need to verify that your sales to customers in the US are calculated using product categories. Such a product category will automatically determine your tax obligations when selling such products in a particular state.
Say, for instance, you sold a t-shirt in the USA for $80. As per laws, clothing and footwear under $110 USD are exempt from New York City and New York State sales tax. If you have selected the correct product category for your products in your Shopify store, you will not have to charge any of these taxes for selling t-shirts in New York.
Even if the rules governing these products change over time, your default sales tax rates will automatically update in Shopify. There is no need for you as a merchant to manually make changes to the sales tax rates in Shopify.
However, if your product is set to a product category that has a tax override, then you must use a tax override in place of the product category tax. For this, you need to create product collections having a sales tax rate separate from the default rates of the product categories within Shopify.
One thing that Shopify merchants need to keep in mind is that they must remove any product tax overrides that conflict with their default product categories. They must keep their product tax overrides only when they have knowledge of tax rules that do not use product categories to calculate sales taxes.
When Should You Use Shopify Tax Overrides and Exemptions
As a Shopify merchant, you can use tax overrides and exemptions if you want to:
- Control the amount of tax you charge for a particular product
- Manage tax exceptions and exemptions
- Specify different tax rates for shipping destinations
- Specify different tax rates for tax-exempt customers
For example, you can specify tax overrides for state tax exemptions in the United States. If you are a seller in Canada, you can specify provincial tax exemptions in Canada. In the European Union or the United Kingdom, you can specify VAT exemptions.
How Do I Add Tax Override in Shopify?
As a Shopify merchant, you may encounter different scenarios when setting up tax overrides for the products. In the section below, we explain in detail how you can add tax override in Shopify in different situations.
I. Setting Up Product(s) Exempt From Sales Tax
The first scenario can be that you have products that are exempt from tax and you want to set up those products as tax-exempt in Shopify. For this, you need to apply tax exemption for each of the products manually in Shopify by following the steps below.
- Go to your Shopify Admin.
- Then select ‘Products’ from the menu on the left side of your Admin Page.
- Once you click on ‘Products’, you will see the list of products that you sell on your Shopify store. From this list, select the name of the product that qualifies for tax-exempt status.
- Once you select the ‘Product’, you will see various attributes of the product like Product Description, Image, Pricing, Inventory, and Shipping. In the Pricing section, you will notice a check box that says ‘Charge tax on this product’. Uncheck this box and save the changes by clicking on the ‘Save’ button in the top right corner. This is how you will set up a product or products as tax-exempt.
II. Setting Up Collection of Products For Tax Override
The second scenario can be that you have a group of products that qualify for the same tax override. In such a case, you must create a ‘Product Collection’ in Shopify that contains the products with the same tax override and then apply the tax override to the collection.
You can hide the Product Collections with tax override so that your customers are not able to see these collections. So once you apply a tax override to a Product Collection, any products that you include in the Collection will become tax-exempt everywhere in your Shopify Store, whether the collection is hidden or not.
Remember, you can only set up tax override for the Product collections that you have created manually. You cannot set up tax overrides for Automatic Collection in Shopify.
To set up tax override for a product collection you have manually created, follow the steps below.
Steps To Create A Product Collection
1. Go to your Shopify Admin.
2. Then select ‘Products’ from the menu on the left side of your Admin Page.
3. Once you click on ‘Products’, you will see a drop-down menu that includes options including inventory, transfers, collections, and gift cards. Select the option ‘Collections’ from the drop-down.
4. Once you select ‘Collections’, you will see the page you have your existing product collections. In case you don’t have any, click on the ‘Create Collection’ button on the extreme right corner of the ‘Collections’ page in Shopify.
5. On clicking ‘Create Collection, you will see various attributes of the product collection that you intend to create in Shopify. These include Title and Description, Collection Type, Search Engine listing Preview, and Collection Image. Enter the name of the Product Collection you want to create.
6. Then under the ‘Collection Type’ section, select Manual.
7. In case you want to hide the product collection from any of your active sales channels, then select ‘Manage’ in the ‘Collection Availability’ section on the right side of your ‘Collections’ page. Then deselect the check box beside the name of the sales channel for which you want to hide your product collection.
8. Once this is done, click ‘Save’ in the upper right corner.
9. Then, go to the Product section again by clicking on the ‘Products’ option on the left bar menu. Under ‘All Products’, browse for the products you want to add to the Product Collection.
10. Finally, select the product that you want to add to the collection by clicking on the product and then clicking ‘Done’.
11. Once you include all the products that require a tax override to the product collection, you can apply a tax override to the collection.
In the next section (Section III), we will explain how you can apply tax override to a product collection.
III. Setting Up Tax Override For Product Collection
Once you create a ‘Product Collection’, you can now apply the same tax override to the entire collection by following the steps below.
1. Go to Settings and then select ‘Taxes and Duties’.
2. Then, select the country for which you want to add the tax override.
3. Once you click on the specific country, you will see the taxes page of the specific country that you have chosen. On this page, there are various sections like Current Tax Service, Manage Tax Collection, Regions You Are Collecting Tax In, Tax Rates and Exemptions, Shipping Overrides, Product Overrides, and Tax Reporting. Go to the ‘Product Overrides’ section.
4. To add a tax override for products, click ‘Add Product Override’.
5. Once you click on ‘Add Product Override’, a dialog box will open. Browse for the Product Collection that you have created manually. Then select the Product Collection for which you want to apply the tax override.
6. Then, under State or Location, select where you want the tax override to apply.
7. Further, under the Tax Rate dialog box, enter the rate of tax that you want to charge for the product collection.
8. Once you add all the above details, click ‘Add Override’ to create a tax override for a product collection.
Note that the percentage tax rate that you enter is the rate of tax that you will collect. It’s not the tax rate that will be exempted.
How Do I Add Tax Override On Shipping Charges in Shopify?
To add an override to shipping charges, follow the steps below.
1. Go to Settings and then select ‘Taxes and Duties’.
2. Then, select the country for which you want to add the tax override.
3. Once you click on the specific country, you will see the taxes page of the specific country that you have chosen. On this page, there are various sections like Current Tax Service, Manage Tax Collection, Regions You Are Collecting Tax In, Tax Rates and Exemptions, Shipping Overrides, Product Overrides, and Tax Reporting. Go to the ‘Shipping Overrides’ section under tax rates and exemptions.
4. Then click on ‘Add Shipping Override’. The shipping override dialog box will open.
5. In the dialog box, under Location or State, select the State or Location where you want the shipping override to apply.
6. Then, under Tax Rate within the Shipping Override dialog box, enter the tax rate that you want to apply to the shipping charge.
7. Finally, to create a Shipping Override, click ‘Add Override’. Then click ‘Save’ on the top right corner to create a shipping override in Shopify.
Tax Override Shopify Not Working
As a Shopify merchant, if your Shopify Tax Override does not work, you need to check for the following before contacting the Shopify support team.
1. Check Your Tax Settings
The first thing that you need to do is to check whether your tax settings are configured correctly. To ensure that the tax settings are correct, go to your Shopify Admin and click on “Settings”. Then from the options select “Taxes”. Under the ‘Taxes’ section, ensure that the tax rates you have set up are correct for your state or location. Also, check that the tax exemptions are applied correctly.
2. Verify Your Product Tax Settings
After verifying your tax settings, the next thing that you need to do is to ensure that your products are set up correctly for tax exemptions. To do this, go to the products section and uncheck the “Charge taxes” checkbox for those products that should be exempt from taxes. Look for the instructions under ‘Setting Up Product(s) Exempt From Sales Tax’ in this article to verify your product tax settings.
3. Contact the Shopify Support Team
If your tax overrides do not work even after following the instructions to set up tax overrides and exemptions in Shopify, then you must contact Shopify support to get further assistance for the tax overrides issue. The support team at Shopify will help you solve the issue. Further, the team will also provide you with guidelines on how to configure your tax settings correctly.
4. Try Using A Third-Party Tax App
Shopify offers a host of third-party applications to help Shopify merchants manage their tax settings. You can use one of those applications to troubleshoot your tax override issue.
