Automatic Tax Calculations

Online businesses and business owners specializing in retail must be aware of Shopify's automatic tax calculation feature. For an ecommerce business, this feature is foundational for accurate and timely sales tax reporting. Some of the automatic features include:

·         Tracking United States economic thresholds

·         Alerts based on possible sales tax collection needs

·         Supporting merchants selling in countries such as Canada, Australia, the EU, UK, and more

·         Automatic internal sales tax updates as the ever-changing landscape of sales tax laws fluctuates throughout the United States.

More could be said about Shopify and taxes in this regard, but one thing is sure: opting for a Shopify subscription will alleviate many of your sales tax woes.

Manual Tax Settings

While automatic tax settings are extremely helpful, Shopify allows users to override or adjust its default sales tax rates manually. Setting up your online business with Shopify can be a bit tricky. If you need help, check out our comprehensive guide.

Regardless of how tricky it may be, the local tax authority and any other jurisdiction for which you have developed economic nexus will not relent on your requirement to collect tax when nexus has been established.

But there is more than collecting tax at stake. It is vital to stay compliant and remain compliant. This means there is a need to do it right.

Some common areas where manual tax settings can be helpful are:

·         Manually overriding automatic tax calculations (This can be helpful when encountering a delay between a tax rate adjustment by the state and Shopify’s response)

·         Applying custom rules, such as 0% tax rates on tax-exempt goods

·         Defining shipping charges, such as non-taxable shipping charges

Types of Taxes for Shopify Stores

For a small business to develop sales tax compliance, its owners will need to know about the various taxes they may encounter, such as sales tax, value-added tax, and goods and services tax.

Sales Tax

Sales tax is required in the United States, so you are likely the most familiar with it of the three taxes we previously mentioned. It is charged to the customer at the point of sale on taxable sales and collected only once.

Value-Added Tax (VAT)

Understanding value-added tax is essential if you are considering international business. Value-added tax is common in Europe and the UK. Unlike sales tax, which is applied only at the end of the supply chain (when the goods reach the customer), value-added tax is applied to every business within the supply chain. In other words, it is required from the beginning of the manufacturing process to the sale of goods to the customer.

Goods and Services Tax (GST)

Like value-added tax, goods and services tax is common outside the United States. Places like Canada, Australia, and India use goods and services tax; yet again, this tax is imposed on merchandise at every step in the supply chain.

How to Collect Sales Tax on Shopify

At this point, you may ask yourself, “How do I start collecting sales tax in Shopify?” If so, now is a good time to discuss enabling sales tax collection and managing tax overrides.

Enabling Sales Tax Collection

It is essential to realize that Shopify does not automatically start collecting sales tax. You must configure your Shopify store to stay compliant and charge tax when needed. As an important side note, Shopify will not apply for sales tax permits and licenses for your business. Instead, you must do this based on your physical presence and if you have developed economic nexus in a different state.

To enable sales tax collection:

1.      Login to your shopify admin account

2.      On the bottom left of the screen, select “Settings”

3.      Select “Taxes and duties”

4.      Find the region where you must collect sales tax and click “Set up”

5.      Look for any region where you have either physical nexus (e.g., office, employees, warehouse) or economic nexus (you have crossed the threshold set by the state)

Managing Tax Overrides

While enabling sales tax collection is a good first step, managing tax overrides follows right behind. Shopify is beneficial, but sometimes, the user must develop sales tax insights into their sales tax obligations rather than rely on Shopify to do all the work.

For instance, tax overrides are commonly used for:

·         Selling clothing to certain states, as low-priced clothing sales may be tax-exempt

·         Food or medical products that may be taxed at reduced rates

·         Selling to tax-exempt customers, such as nonprofits or the government

·         Wholesalers and B2B sales and the accompanying tax exemptions

Tax Reporting and Filing with Shopify

Collecting tax is only the beginning. Shopify sellers must learn how to analyze their sales data to determine proper tax deductions and sales tax filings.

Accessing Tax Reports

To access reports to file your sales tax returns, you will want to

1.      Log in to your Shopify account

2.      On the left-hand side of the screen, select “Analytics” then “Reports”

3.      Often, the most helpful report for filing sales tax returns is the “United States sales tax” report

Filing Your Taxes

After applying for a sales tax permit and license for a required state, you must create an online account with the state's Department of Revenue or Tax Commission. You will then log in to the account and file your return using the United States Sales tax report.

On the United States sales tax report, you will often notice that multiple tax jurisdictions are listed. For some states, such as Illinois, you will only want to file for the city even though the counties are listed, and when you make sales into a city that does not require sales tax collection, you will need to remit the sales tax at the county level. On the other hand, Virginia has cities and counties where you will need to remit sales tax.

Simply put, you will want to know your state's specific guidelines for filing sales tax returns. Instructions for filing state sales tax returns can often be found within the online sales tax return platform (links embedded in the return). Furthermore, depending on the state, a virtual help center assistant may be available to assist you with the tax forms.

Tax Software Integration with Shopify

If you are a little intimidated at this point, have no fear. There are options for integrating sales tax filing software.

Popular Tax Software Options

Three of the most popular software integrations are:

1.      Avalara (Avatax)

2.      TaxJar

3.      Quaderno (used for VAT, GST, and global taxes)

Benefits of Integration

Some of the benefits of integrating sales tax software include:

·         Monitoring of sales volume and number of transactions for tax threshold purposes

·         Monitoring of how much sales revenue has accumulated for tax threshold purposes

·         Auto-filing in most states, including local sales tax filing

·         International filing options for different countries (European Union, United Kingdom) and updated VAT rates

Common Tax Mistakes to Avoid

Unfortunately, many Shopify store owners have encountered challenges as they seek to understand Shopify and taxes. Learning from their mistakes can be helpful.

Misclassifying Products

One of the most common mistakes is misclassifying products. After you enable sales tax collection in Shopify, Shopify will determine if it should collect sales tax based on

·         Your store's settings

·         The customer’s location

·         The product's taxable status

For help setting up your Shopify store properly, see our Ultimate Guide. Shopify also offers a helpful support team that you can use after logging into your account.

Ignoring Nexus Laws

When you started your business as a retailer you established a physical presence in your state, county, and city. This automatically creates sales tax nexus and requires you to collect and remit sales tax to local jurisdictions.

However, as an online seller, you have much more to consider. Many states adhere to a destination-based sales tax policy, which means that sales tax must be collected based on the buyer's location, not the seller's.

For instance, a business in Utah must collect sales tax based on the location of its customers in Utah when shipping products.

While that may sound easy enough, you must monitor sales tax threshold amounts by state because it is also possible to create an economic presence. Many states adhere to a $100,000 in sales or 200+ transactions amount in the current or previous calendar year to establish economic nexus in their state.

Nevertheless, you will want to research particular state requirements as your online sales volume increases.

Failing to Update Tax Rates

Finally, it is also common for Shopify sellers to fail to update their tax rates. One of the most common occurrences is when physical nexus is established by traveling into a state. It is essential to turn on sales tax collection in that state during this time. However, when you leave, you will want to ensure that you turn off sales tax collection, as you will be required to either refund the sales tax to your customers or remit the sales tax.

Conclusion

Hopefully, you are well on your way to collecting and remitting sales tax to the proper authorities.

Recap of Key Points

Be sure to remember that…

·         Shopify can automatically calculate most of your sales tax

·         There are times when you will need to adjust default rates manually

·         You still need to apply for permits and licenses and acquire tax registration numbers

·         While Shopify can and will collect sales tax for you, you also need to enable Shopify to collect sales tax where you have nexus

·         The “United States sales tax” report is often a very helpful report in filing your sales tax

·         If you are unsure of your ability to file and pay sales tax on your own, there are helpful integration options available

·         There are common mistakes you will want to know of and avoid

Next Steps for Shopify Merchants

As a Shopify merchant, you have already established your online presence. But making sales is only a part of keeping your doors open. If you need help staying compliant and would benefit from having a tax professional manage your sales tax matters for you, please let us know. We would be happy to help!