Shopify Taxes: An Ultimate Guide for Online Store Owners

Tax is one of the most complicated and confusing problems for most Shopify store owners. It can give store owners immense frustration and terrible headaches. 

Hence, we are here to help store owners overcome this issue. Today’s article will provide a Shopify tax guide for online store owners. Don’t skip this one if you want your problems to be solved!

What is Shopify tax and how does it work?

Shopify tax refers to the various taxes that may apply to transactions conducted on the Shopify platform. As a popular e-commerce platform, Shopify enables businesses to establish digital storefronts and engage in product or service sales.

Shopify offers merchants tools and features to assist them in managing and automating the calculation and collection of taxes. The way Shopify tax works involves several key elements:

• Tax settings configuration

Merchants need to configure their tax settings in the Shopify admin dashboard. This includes setting up the business location (where the business operates) and configuring tax rates for different regions or countries.

• Automatic tax calculation

Once the tax settings are configured, Shopify uses this information to automatically calculate the appropriate taxes for each order during the checkout process.

Shopify uses the customer’s shipping address to determine the applicable tax rates. The platform considers the tax rules and rates associated with both the business location and the customer’s location.

• Sales tax collection

Merchants can choose to collect sales tax from customers based on the calculated rates. The collected tax amount is then included in the total order value.

Shopify can also handle complex tax scenarios, such as situations where a single order involves items shipped to multiple locations with different tax rates.

• Tax reports

Shopify provides tax reports that merchants can use for record-keeping and compliance purposes. These reports detail the taxes collected for specific periods, making it easier for businesses to fulfill their tax obligations.

• Integration with external tax services

Merchants can integrate Shopify with external tax services for more advanced tax management. Additional features might be provided by these services, such as real-time tax rate updates, compliance with specific tax laws, and support for various tax types.

• Digital goods tax handling

For merchants selling digital goods or services, Shopify allows the application of taxes specific to digital products. This ensures compliance with tax regulations related to digital transactions.

• Customs duties and import taxes

Shopify allows merchants to specify customs duties and import taxes for international transactions. This information is communicated to customers during checkout, providing transparency about additional costs associated with cross-border sales.

It’s important for merchants to regularly review and update their tax settings based on changes in business operations or tax regulations. Additionally, seeking advice from tax professionals or

Importance of seamless tax management for Shopify stores

2 Types of Shopify taxes that sellers need to pay

Shopify vendors usually have to focus on two types of taxes: Sales tax and income tax.

Sale tax

• This is a tax on the sale of goods and services, and the rate varies depending on the location of the buyer.
• In the US, for example, sales tax rates are set by individual states and can range from 0% to 9.25%.
• Shopify has built-in tools to help you calculate and collect sales tax, but it’s important to understand your own tax obligations and consult with a tax advisor if necessary.

Income tax

• This is a tax on the profits of your business.
• The rate you pay will depend on your business structure and your taxable income.
• Shopify does not collect or remit income tax, so you will be responsible for filing your own tax return.

3 Steps to collect sales tax in Shopify

1. Enable sale tax collection

To begin, you must inform Shopify about the specific state from which it should gather sales tax from customers.

• Access the Taxes and Duties section in your Shopify admin panel by navigating to Settings.

• Within the Tax Region section, apart from the United States, click on the option labeled “Set up.”

• Subsequently, select “Collect sales tax,” and a pop-up window will emerge on your screen. In this window, you must enter your state name and sales tax ID.

• Ensure you have your sales tax ID ready for input in this menu. If you haven’t obtained that number yet, you can utilize your federal employer identification number (FEIN).

2. Manage Shopify tax calculations

• After completing the details in the Tax Region section, proceed to the next segment, which is Tax Calculations.

• There are four options available for selection, and you have the flexibility to check more than one box if applicable.
• If your business operates in a state with varying tax laws on shipping (e.g., California, Colorado, Florida, etc.), you have the choice to decide whether to impose tax on shipping.
• Alternatively, if you’re uncertain about whether to apply taxes to shipping, you can maintain the default setting and seek guidance from US state tax authorities or consult with a tax advisor.

3. Override taxes

On occasion, the default tax rates may not be relevant to certain products. For instance, specific types of children’s clothing might be exempt from tax or subject to a reduced tax rate. If the default rates are not applicable, it becomes necessary to generate an override for these particular products.

Establishing an override for products involves a two-step procedure. Initially, you form a collection encompassing the products with distinct tax rates. Subsequently, you define the region to which the override is relevant and indicate the specific tax rate to be applied.

Steps:

1. Create a collection

• In your Shopify administrator panel, navigate to Products > Collections. Then, select the option to create a collection by clicking on the green button situated on the right side

• Select “Create collection,” and proceed to input a name for the collection
• In the “Collection type” section, choose “Manual.”

• Select the “Save collection” option

2. Establish the override

• Go to the “Settings” menu and then navigate to “Taxes” and access the “Tax overrides” section. 
• Once there, click on “Add product override.”

• Following that, choose the collection you recently created and designate the region to which the override is applicable.

• Finally, input the tax rate for the specified collection within that region to complete the override.
• Complete the process by clicking on “Add override.”

6 Best Shopify Tax Apps in 2023

1. Quaderno

Quaderno is a tax automation and compliance solution designed to help businesses manage their tax obligations, particularly in the realm of e-commerce. Quaderno aims to simplify the complex task of calculating and managing taxes for online businesses. 

Key features:

• Automated Tax Calculations
• Global Tax Compliance
• Invoicing
• Integration with E-commerce Platforms
• Reporting and Analytics

Pricing: 49$/month for startup level, 99$/month for business level, 149$/month for grow level

Rating: 5 stars based on 4 reviews

2. Exemptify

Exemptify is a tax exemption management app designed for Shopify merchants. It addresses the needs of businesses that deal with tax-exempt customers, such as wholesalers, non-profit organizations, or government entities. 

Key features:

• Automated Exemption Handling
• Exemption Certificate Management
• Integration with Shopify
• User-Friendly Interface
• Compliance with Tax Regulations

Pricing: 4.99$/ month

Rating: 4.4 stars based on 47 reviews

3. Tax Exempt Manager

Tax Exempt Manager is a popular Shopify app tailored specifically for businesses engaged in selling to other businesses (B2B), particularly within the European Union (EU). Its focus lies on streamlining tax-exempt transactions and ensuring compliance with VAT regulations.

Key features:

• Automatic VAT ID Verification
• Automatic Tax Exemption
• VAT ID Display on Orders and Invoices
• Customizable Order and Customer Tagging
• Discount Code and Text Management
• Easy Installation and Use

Pricing: 9.99$/ month

Rating: 3.3 stars based on 28 reviews

4. Dual Price Display PRO

Dual Price Display PRO is a Shopify app designed to help businesses cater to both B2B (business-to-business) and B2C (business-to-consumer) customers by displaying separate prices for each group. This can prove especially valuable for businesses that offer wholesale pricing to businesses or want to show prices with and without taxes included.

Key features:

• Dual Price Display
• Automatic Tax Switching
• Customer Group Targeting
• Product-Level Customization
• Currency Handling

Pricing: 14.99$/ month for base plan, 29.99$/ month for pro plan

Rating: 4.8 stars based on 178 reviews

5. Zonos Duty and Tax 

Zonos Duty and Tax is a powerful Shopify app designed to streamline cross-border selling by automating duty and tax calculations, collection, and remittance. It tackles the complexities of international trade, allowing you to focus on growing your firm without worrying about compliance headaches.

Key features:

• Guaranteed Landed Cost Calculations
• Automated Duty and Tax Collection
• Global Tax Compliance
• Real-Time Monitoring and Reporting
• Prepaid Duty and Tax Option
• Carrier Management
• World-Class Support

Pricing: 208.33$ /month for standard level, 333.33$/ month for premium level

Rating: 4.9 stars based on 150 reviews

6. TaxJar

TaxJar is a dedicated tax management solution designed to seamlessly integrate with Shopify, providing businesses with comprehensive tools to handle their tax-related tasks efficiently. The app automates various aspects of tax management, making it easier for Shopify users to navigate complex tax regulations and compliance requirements. 

Key features:

• Automated Sales Tax Calculations
• Product Classification
• Multi-State Filing
• Modern Architecture
• Scalability

Price: 19$/ month for starter 200 pack, 29$/ month for starter 500 pack, 49$/ month for starter 1k pack, and 99$/ month for starter 2.5k pack

Rating: 2.8 stars based on 115 reviews

Best practices for Shopify tax management

Effective tax management is crucial for running a successful e-commerce business on Shopify. Here are some best practices for Shopify tax management:

• Understand your tax obligations: Be aware of the tax laws and regulations that apply to your business, both domestically and internationally if you sell globally. Regularly check for updates or changes in tax laws that may impact your business.
• Configure tax settings in Shopify: Set up your tax settings in Shopify accurately, including your business location, nexus locations (where you have a significant presence), and product tax codes.
• Use an automated tax solution: Consider integrating with tax automation apps like TaxJar, Quaderno, or other reputable tax management tools. These apps can automate tax calculations, saving time and reducing the risk of errors.
• Product classification: Properly classify your products based on their taxability. Some products or services may be exempt from certain taxes, so accurate classification is essential.
• Handle tax-exempt customers: If you have tax-exempt customers, implement a system for verifying and managing tax exemptions. This ensures that you apply the correct tax treatment during transactions.
• Provide clear product prices: Display product prices to customers, including any applicable taxes. Transparency helps build trust and reduces the likelihood of surprises during the checkout process.
• Multi-currency considerations: If you sell internationally, be aware of currency exchange rates as well as how they may impact tax calculations. Use a tax solution that can handle multi-currency transactions.
• Regularly review and update settings: Periodically review and update your tax settings, especially if your business expands into new locations or if there are changes in tax laws.
• Keep detailed records: Keep thorough records of your transactions, tax calculations, and any exemption certificates. This documentation is crucial for audits and compliance.
• Educate customer support teams: Ensure that your customer support teams are well-informed about your tax policies. They should be able to address customer inquiries related to taxes accurately.
• Consult with tax professionals: Seek advice from tax professionals or accountants who specialize in e-commerce to ensure that your business is compliant with relevant tax laws.
• Stay informed about nexus rules: Understand the concept of tax nexus, which refers to the connection between a business and a taxing jurisdiction. If your business has a nexus in a location, you may be required to collect and remit taxes in that jurisdiction.

Tax laws can be complicated and vary, so it’s crucial to stay informed, leverage technology, and seek professional advice to ensure that your Shopify store remains compliant with tax regulations.

10 Common FAQs about Shopify taxes

1. Do I need to charge sales tax on my Shopify store?

It depends on your location and sales activity. You likely need to charge sales tax if you have an economic nexus in a particular state or country, meaning you have enough physical or virtual presence there (e.g., inventory storage, employee location, or sales volume). Consult your local tax authority or a tax professional for definitive guidance.

2. Who collects and remits sales tax?

Shopify collects sales tax based on your settings and the customer’s location. However, you’re responsible for filing and remitting sales tax returns to the appropriate authorities. Shopify generates reports to help you with this, but consulting a tax professional is recommended for complex situations.

3. What products are taxable?

Taxability varies depending on your location and the product type. Some common exceptions include food, medicine, and agricultural products. Check your local tax regulations or consult a tax professional for specific guidance.

4. What happens if I don’t charge or collect sales tax?

Failing to charge or collect sales tax may result in penalties and fines imposed by tax authorities. It’s essential to comply with tax regulations to avoid legal and financial repercussions.

5. I sell internationally, how do I handle taxes?

Cross-border taxes can be complex. Consider apps like Zonos Duty and Tax to automate duty and tax calculations, collection, and remittance for international sales. Research destination country tax regulations and consult a tax professional for specific advice.

6. How can I save time and simplify tax management?

Utilize tax apps like TaxJar or Tax Exempt Manager for automated calculations, filing, and compliance tools. Keep accurate records and organize your finances with bookkeeping software. Consider seeking professional help for complex tax situations.

7. Where can I find more information about Shopify taxes?

Shopify’s tax resource center is a good starting point. Consult your local tax authority or tax professional for specific guidance.

8. Should I use the Basic Tax or the Manual Tax option in Shopify?

Basic Tax is pre-built with default rates and works well for simple stores. Manual Tax offers more customization and control over rates and rules but requires manual setup and maintenance. Choose the option that best suits your store’s size and complexity.

9. Can I automatically calculate sales tax on Shopify?

Yes, you can automatically calculate sales tax on Shopify by using tax automation apps available on the Shopify App Store, such as TaxJar or Quaderno.

10. How often do I need to file sales tax returns?

The frequency of submitting sales tax returns is contingent on the tax laws in each jurisdiction. Some states require monthly filing, while others may have quarterly or annual filing requirements.

Mageplaza’s solutions for Shopify tax integration

In case you still struggling with manually integrating Shopify tax by yourself, you can seek help from an expert team to make the process much faster and easier. You can consider choosing Mageplaza as they have a team of experts who excel in Shopify integration development, especially Shopify tax integration.

Some advantages you can gain from choosing Shopify Integration services from Mageplaza: 

• Integration experts: Mageplaza boasts extensive eCommerce and API integration expertise. They have a team of specialists who’ve assisted countless businesses in connecting their Shopify stores with a range of platforms and systems over the years.
• Quality: Mageplaza takes pride in delivering top-notch integration services to its clients. Their team adheres to industry standards, utilizes cutting-edge technologies, and guarantees the resilience and dependability of their solutions.
• Quick turnaround time: Mageplaza recognizes the value of time and has optimized its solutions for swift and efficient delivery. They collaborate closely with clients to meet timelines and deadlines, ensuring rapid realization of the advantages offered by their Shopify API integration services.
• Security: Mageplaza prioritizes security and guarantees that its solutions meet industry standards for safety. They are willing to sign NDA contracts, adhering to stringent protocols to safeguard client data and systems.
• Support: Mageplaza offers complimentary two months of post-integration support. Their support team is accessible around the clock to respond to inquiries, resolve issues, and offer technical aid.
• Cost-effective plans: Mageplaza provides budget-friendly plans to deliver exceptional value to clients. Their pricing is transparent, with no concealed fees, ensuring clients receive a competitive and fair price for their services.
• Free 1:1 consultation: You can have a direct interaction with a Shopify expert or developer from Mageplaza, who can provide personalized assistance tailored to your specific business needs
• 30-day all-app free trial: Mageplaza provides businesses with 1 month to test their functionalities and benefits before committing to a subscription. View all their Shopify apps here. 

START YOUR SHOPIFY TAX INTEGRATION NOW!

The bottom line

In conclusion, navigating the landscape of taxes as an online store owner on Shopify can be intricate, but with meticulous planning and the appropriate tools, you can streamline the process and ensure compliance.

By taking the time to understand and manage taxes effectively, you can focus more on what matters most—building and expanding your business in the dynamic world of e-commerce. Happy selling!