From small-scale startup businesses to independent bands, Shopify has a strong base of over 500,000 businesses that use the platform every day. Providing businesses with an opportunity to scale their operations with reliable customer support and a wide variety of in-shop features, Shopify is the face of eCommerce businesses today.
Before 2018, e-vendors were required to charge & provide taxes, only to the state where it had its registration or physical presence. This way, many vendors were able to sell products at a lower price around multiple geographies, as they didn’t have to pay any tax.
However, the rules have changed now! eCommerce store owners now require to provide sales tax for the country in which they sell, aligning to the local jurisdictions.
Considering the recent turn of events, the feature of including tax around sales is new and is barely understood by many. This piece guides you through all the steps required to set up your Shopify Taxes. Let’s get started!
What are Shopify Taxes?
Let’s make it clear: Shopify taxes are not taxes that you need to pay to the platform. In fact, the term has nothing to do with the platform.
As a vendor, you need to align with the sales and file rules and report & remit taxes for every product you sell. While this can be a mammoth task if you try to keep an account of all your products manually, Shopify allows its users to automatically leverage sales tax calculations by aligning with the ever-changing tax laws and regulations.
The platform uses several default sales tax rates, updated regularly. When you use such default tax rates, you need to ensure that the suggested tax rates are current & correct. Lastly, Shopify also allows vendors to set up tax overrides that can be changed manually.
It sounds like a majority of your taxation is done, right?
However, the entire process isn’t automatic as Shopify doesn’t remit to file the sales taxes for your store. It is just a means to accumulate all the calculations and reports that come in handy while filing for taxes.
Now that you understand how taxes work over the Shopify platform, let’s look at the different ways you can automate tax calculations over the platform.
How to Setup Shopify Taxes?
Shopify provides its vendors with a number of ways to set up the different taxes on the platform. Listed below is a walkthrough of all the different phases of tax settings and the different options in which you can include or exclude multiple tax-oriented settings.
Location-based tax settings
Shopify allows users to set their taxes around tax registrations for the listed regions:
- United States
- United Kingdom
- New Zealand
- European Union
However, if you are a vendor that isn’t based out of these locations, you need to include taxes, based out of county or regional locations. Further, several countries charge taxes, based on an order’s destination, allowing you to levy taxes according to the area where your product is being delivered.
Now, before you begin your settings, ensure that your store address doesn’t align with the suggested regions that imply registration-based taxes. Once done, it’s time to set up a shopping zone for your desired destination country.
Here are the steps to charge your taxes, based on locations:
Step 1: Navigate to your Shopify admin store, move to Settings -> Taxes.
Step 2: Once you are in the Tax regions section, select the name of the country.
Step 3: Move to the base taxes area, input the given rates that fit around your country & locations.
Step 4: Save the settings.
Remember, while you set up your tax regions, you can select whether a tax in a region is calculated as compounded or added to the area’s federal tax.
The next step in the process requires you to include taxes around product prices as there are certain countries (like the UK) where the sales price includes the sales tax.
When you enable this feature over your Shopify store, the platform applies the formula Tax = (Tax Rate X Price) / (1 + Tax Rate) for calculation. Further, when you apply the formula, your customers and store visitors will be able to view the tax breakup as a different section around the checkout process. This way, the feature allows you to highlight the tax remitted per order.
Here are the steps to include tax breakup at checkout:
Step 1: Reach out for the ‘Settings’ menu from your Shopify admin site and select ‘Taxes.’
Step 2: Select the option ‘All prices include tax.’
Step 3: Save the settings.
Now that you have included taxes on every product in your store, check on the option that reads ‘Charge tax on this product’ on the product pages, to include taxes in the prices displayed.
Further, Shopify also allows you to include your customer’s local tax rates. You can easily include or exclude the taxes around your store visitor’s country in such a situation.
Now that we are done with the location-based tax settings, it’s time to include registration based tax-settings for your store.
Registration-based tax settings
As mentioned earlier, Shopify allows vendors to avail Registration-based tax settings over the selected regions.
Unlike taxes based on locations, this setting requires you to submit a tax registration number, to be able to compute your taxes.
Let’s understand what is a tax registration number in detail:
A tax number acts as a code that helps Shopify identify the vendors and collect their sales tax. Issued by the local tax authority, this number might also be called a sales tax ID, VAT number, or tax number.
Listed below are the steps to enable the registration-based tax settings for your store:
Step 1: From your admin panel, navigate to ‘Settings,’ followed by ‘Taxes.’
Step 2: Once the Tax regions section is open, click the ‘Setup’ button beside your desired region.
Step 3: The Setup button takes you to the Sales tax section, from where you need to click on the ‘Collect sales tax’ button.
Step 4: Once you click the collect sales tax button, it opens a page where you need to input your ‘Tax number.’ However, if you haven’t applied or received your tax number yet, you can skip the process to update it later.
Step 5: Finalise the settings by clicking ‘Collect Tax.’
Now, if you want to include more account numbers and regions, click on ‘Collect sales tax’ and repeat the process.
This step concludes your registration-based settings over your Shopify store. The next stage requires you to set & activate taxes on digital products. Let’s have a look.
Digital product taxes
Digital goods are those products that have no physical existence. These goods can either be downloaded over a file format or supplied via electronic delivery (Gift cards, ebooks, for example).
When you are a vendor that deals with digital products around the European Union (EU), the platform demands you to pay Value Added Tax (VAT) to sell such digital goods.
Listed below are the steps required to enable taxes on digital products for your Shopify store.
Stage 1: Include different rates of VAT for different Digital Goods
To streamline accounting taxes around different digital products, ensure that you include different VAT rates automatically around individual EU countries. When you include different rates of VAT around various digital goods, the algorithm creates a collection of such products.
This way, it allows the platform to correct VAT rates according to the customer’s geo-location, whenever you sell a product.
Including different rates of VAT over different products curates a collection of different products where VAT is assigned automatically for individual EU countries. This collection stored by default is known as Digital Goods VAT Tax that can be edited to include various manual groups.
Listed below are the steps to enable VAT settings on your store:
- Navigate to the ‘Taxes’ menu from the ‘Settings’ of your Shopify admin page.
- Once you access the section under calculation of Tax, select the option that allows you to charge VAT over different digital goods.
- Save the settings.
- Now, move to the stored collections section and select VAT Tax on Digital Goods.
- Move to the ‘Products’ section & navigate for different items, or select the ‘Browse’ option to include digital products in your collection.
- Once you have included all the digital products in your collection, save the settings.
Stage 2: Include different VAT rates in a collection
Once you have created the collection over the first batch of Digital Goods, including the Tax VAT collection to apply similar rates to replicate it on different digital goods collections.
- Navigate to the ‘Taxes’ menu from the ‘Settings’ of the admin page of Shopify.
- Click on the change collection menu from the section under calculation of Tax.
- Once you have incorporated the changes, look for the collection you would like to use, or select any existing choice from the list.
- Save the settings.
Stage 3: Refer to the different rates of VAT, currently being used
You can access this setting only when you have enabled the VAT Rates around Digital Goods. Here are the steps to help you refer to the VAT rates that you are using:
- From your website, admin’s admin panel, move to ‘Settings,’ followed by a click on ‘Taxes.’
- Once you are inside the ‘Tax regions’ list, click on Edit or Set up that is present with the name of the suggested European country. Now you can easily view the VAT included over such digital goods.
Stage 4: Disable VAT around different digital goods
Shopify also allows the users to disable the VAT rates over sales of different digital goods, to re-enable it later.
In that case, you will be required to reassign the suggested selection as you had not used the default settings previously.
Here are the steps to disable VAT rates for different digital goods:
- Once you are inside the Shopify admin settings, navigate to Settings -> Taxes.
- Under the Tax calculations settings, uncheck the option that reads ‘Charge VAT on digital goods.’
While some jurisdictions make it necessary for you to charge VAT on digital goods, others don’t. Therefore, ensure that you refer your local tax expert to understand the requirements in your region.
Tax overrides and exemptions
While Shopify calculates taxes automatically, the platform allows store owners to override these settings for improved control around the charged taxes.
You can opt for tax overrides & exemptions if you need changes around any of the following:
- Control the amount of tax you charge for a product.
- Handly tax exemptions & exceptions effectively.
- Specify different rates of taxes for individual shipping destinations.
- Specify different rates of tax for tax-exempt customers.
Interestingly, you can only apply these tax overrides settings around online sales and the sales concluded via Shopify POS. To begin the process, you need to set a tax override, allowing you to create a manual collection for products that are exempted under taxes. Later, you can apply them to the override of a collection.
However, in a situation where you don’t need to charge sales tax, you can set your override tax rates at 0%.
Let’s understand the complete process over different phases.
Phase 1: Setting a product that needs to be exempted from sales tax.
If your list comprises a few products that need to be exempted from taxes, you can prevent the suggested form of taxes by applying for such exemptions individually.
Here are the steps to exempt your products from sales tax:
Step 1: From the Shopify admin section, click on ‘Products,’ followed by a click on the given product’s name.
Step 2: Once you are inside the pricing section, uncheck the ‘Charge taxes’ boxes beside the desired product.
Step 3: Confirm the settings by clicking ‘Save.’
Phase 2: Creating manual collection for different products that need a tax override.
You need to select this option when you decide to include tax override over a manual collection. This step allows you to first group the different products that need tax-modified into an individual collection and exempt tax on it.
Further, you can also use hidden collections to override the taxes.
Here are the steps to override a collection of products:
Step 1: Navigate through the Shopify admin, followed by ‘Products’ & a click on ‘Collections’.
Step 2: Now, select the create a collection option and enter a name to it.
Step 3: Select ‘Manual’ under the Collection type.
Step 4: Now, if you want to keep the collection hidden from any of the active sales channels, select the option ‘Manage’ present in the Collection availability section. Now, you need to remove the check from the channel’s name by clicking it.
Step 5: The last step requires you to save the settings.
Phase 3: Setting up your tax-exempt customers.
Shopify allows you to set customers that can be fully tax-exempt. These customers aren’t charged tax in any manner while checking out of your store. However, to ensure the tax-exemption, they need to ensure that they log in using similar emails as listed on the customer account.
Steps to conclude such settings:
Step 1: Curate a list of the desired ‘Customers’
Step 2: Find the customer you want to exempt from all taxes, and then click their name.
Step 3: Under the tax settings, select ‘Manage’.
Step 4: Uncheck the option that reads ‘Collect tax’.
Step 5: Now save the settings.
Frequently Asked Questions about Shopify Taxes
Do I have to pay taxes on Shopify?
Similar to every other eCommerce platform that you use, you need to pay taxes to be able to sell your products over Shopify. However, you should understand that this is not the commission that you generally pay to the platform on a successful sale. These taxes are accumulated in the form of sales tax and are accounted for by the local government.
Does Shopify automatically collect sales tax?
Fortunately, Shopify helps its vendors in collecting sales tax for them. You can easily automate the process of collecting sales tax, even when you don’t have a physical location (sales nexus). The steps suggested above will help you with a complete walkthrough of the process.
Do I need a business license to sell on Shopify?
No, you don’t necessarily require a license to conclude business on Shopify and we have a similar situation across multiple eCommerce platforms. However, you need to ensure that you align with the local tax authorities to charge tax on sales.
While it might take some time for you to master the settings of your Shopify taxes properly, we hope that you will be able to execute the settings properly.
Remember, Sales Tax is an integral part of your eCommerce store, therefore, we suggest you take out some time to understand & execute the operations on your Shopify store.
Further, make sure that you align with the tax policies of local regions to ensure that you execute operations successfully. All the best!