Tired of
lengthy page building?
Try GemPages to create pages faster and smarter with AI-powered feature.
Back to Blog List
A Comprehensive Guide to Shopify Sales Tax Management
Updated:
9
minutes read
Struggling with Shopify sales tax? Not sure how to file a tax report for your Shopify store?
Well, it is not just you. Instead, filing taxes is most Shopify owners’ nightmare when first opening the Shopify store as the process is complicated and time-consuming.
Let this article be the simplest explanation yet most precise step-by-step guide to your Shopify sales tax management. Read on!
What Is A Tax Report?
A tax report is an official document that individuals or businesses create to show their income and taxes. The main purpose of a tax report is to provide accurate financial information to tax authorities, ensuring the correct amount of tax is paid (the exact amount depends on regions). Simply put, it's a way to tell the government about money earned and spent during a specific period, usually a year.
The report includes details about various types of income, such as wages from a job or profits from a business, and also lists expenses and deductions, or non-wage payments, that can reduce the amount of tax owed.
A sales tax report generally includes two sections:
- Sales Tax Summary: This section overviews taxable sales, organized by tax rate or type.
An example of a tax summary report. Source: Manager.io
-
Sales Tax Audit: This part details all business tax transactions during a specific period, reflecting tax settings and rates applied.
An example of a tax audit report. (Source: Manager.io)
As previously mentioned, filing a tax report can be a daunting task. Here are key points to consider:
- Transaction Details: The report must include all financial exchanges the business makes, even wage and non-wage payments.
- Legal Requirements: Tax reports must meet the specific requirements set by the government of the store's operating country. Stay updated as regulations can change.
- Verification Process: The reports should be able to withstand cross-checking by tax authorities, allowing the authority to verify the accuracy of the business's tax forms.
- Online Business Considerations: Online businesses may need to charge additional amounts to cover tax, varying by region.
- Reporting Periods: Businesses must prepare these reports regularly and submit the collected taxes to the appropriate government agency.
Start selling on Shopify for $1
Start with free trial, then get your first month for $1
Shopify Sales Tax
Wondering if Shopify collects sales tax? Here is the official statement: Shopify doesn’t file or remit sales taxes for Shopify merchants.
Shopify doesn’t file taxes for their merchants. (Source: Shopify)
Shopify provides tools to help online sellers handle Shopify sales tax reports, even with manual support and an automatic AI bot system. The platform also allows custom tax setups for businesses with unique tax situations or that need to comply with specific local tax laws. However, be aware that Shopify doesn't cover everything related to taxes.
When you use Shopify, it comes with default sales tax rates that are regularly updated. As a seller, you must ensure these rates are correct for your specific situation. If they're not, the platform will require you to override these default rates to match your exact Shopify tax requirements.
Guide to Shopify Sales Tax Management
After all the definitions explained above, here comes the task that scares most Shopify owners the most is how to manage Shopify sales tax.
Sales Tax Obligations for Shopify Merchants
1. Shopify Sales Tax Pricing
Shopify offers a generous free tier for its tax calculation service for businesses selling to customers in the United States. Every Shopify store can use this service without any charge for their first $100,000 in U.S. sales each calendar year. This allowance applies separately to each store, so if you run multiple stores on Shopify, each one gets its own $100,000 free tier.
The exact fee you'll pay depends on which Shopify plan you're using:
- 0.35% of the order value is for Shopify Starter, Shopify Lite, Basic Shopify, Shopify, and Advanced Shopify, tax included. This means that for every $100 taxable sale, you'd pay 35 cents for the tax calculation service.
- 0.25% for Shopify Plus, a slightly better rate, where tax is calculated. This translates to 25 cents for every $100 of taxable sales.
*Note: these fees only apply once a store's sales exceed this $100,000 threshold and are capped at $5,000 annually. (Read this guide to know more about the Shopify Tax fee threshold)
An example of tax deductions based on U.S. states on your Shopify store. (Source: Sellbrite)
However, be aware that Shopify owners in these countries must also be responsible for an additional shipping tax, where tax is not automatically calculated:
- Australia
- Canada
- the European Union
- New Zealand
- Norway
- Switzerland
- the United Kingdom (also requires Digital Product tax)
- the United States
2. Where To Collect Shopify Sales Tax
If you're a United States merchant, find a nexus. It is a business presence that makes an out-of-state seller liable to collect sales tax there once a set level of transactions or sales activity is met. In simple terms, it connects your business and a state requiring you to collect and remit sales tax. You typically have nexus in your home state, but you may also have nexus in other states where you have:
- A physical presence (store, office, warehouse)
- Employees or sales representatives
- Significant sales volume (economic nexus)
Not ready to commit but still want to kick the tires?
No problem! Get started with GemPages' free plan. Explore wonderful features that can do wonders for your store.
Setting Up Sales Tax in Shopify
How To Configuring Sales Tax Settings In Shopify
There are 3 types of Shopify sales tax setup
1. General tax set-upStep 1 - Set Up Shipping Countries: In your Shopify Admin setting, choose the countries you will ship products to in your Shopify store.
Step 2 - Configure POS Tax Rates: If selling in person, set tax rates based on your store geographic locations.
Step 3 - Set Up Tax Rates:
- For countries with registration-based taxes (e.g., U.S., Canada), enter your tax registration details.
- For others, use default or custom rates for location-based tax regions. Then, decide whether to charge shipping taxes, as mentioned above.
[Optional] Step 4 - Configure Digital Product Taxes: If your merchant sell digital goods, ensure the digital product taxes are set up.
Step 5 - Override or Exempt Taxes: Modify tax rates or exempt certain products where necessary, consider both online and POS sales.
[Optional] Step 6 - Include Taxes in Product Prices: Do this if you want taxes included in product prices, avoiding additional charges at checkout.
2. Location-based tax settingsCountries like the United States, Canada, the European Union, the United Kingdom, Norway, Switzerland, Australia, New Zealand, and Singapore (as of September 8, 2023) charge taxes based on the order's destination. This means you'll need to apply tax rates specific to where your product is being delivered. Here are some notices you must follow before setting up a location-based tax:
- Verify your obligation to charge sales taxes.
- Confirm if your products are taxable.
- Ensure your store address isn't in a registration-based tax region.
- Check that you've set up a shipping zone for the destination country.
Now, let’s get started with the location-based Shopify sales tax setup
Step 1 - Access Tax Settings: Go to your Shopify admin > Navigate to Settings > Taxes and duties.
Shopify Duties and Taxes. Source: Easyship Support
Step 2 - Select Tax Region: In the "Tax regions" section, click on your country name.
Choose your country in the “Tax regions" section. Source: Ecomclips
Step 3 - Configure Base Taxes: In the “Base Taxes” section, enter applicable rates for the country and your regions. You can choose whether a tax in a region is used instead of a federal tax, is added to a federal tax, or is compounded with a federal tax.
Insert your country’s tax rate on Base Taxes. Source: Mipler
Step 4 - Save Your Settings: Click "Save" to apply your tax configuration.
3. Registration-based tax settingsFor registration-based taxes, you need to enter a tax registration number from your local tax authority to calculate taxes. When you update your tax settings with this number, the tax rates for the regions where you're registered will be automatically adjusted (also applicable for countries like the United States, Canada, the European Union, the United Kingdom, Norway, Switzerland, Australia, New Zealand, and Singapore)
Shopify Built-In Tax Tool
Shopify Tax is a comprehensive paid tax solution that simplifies sales tax management for e-commerce businesses. It's an integrated tool within the Shopify platform that helps merchants navigate the complex world of sales tax compliance across various jurisdictions.
By automating many aspects of tax calculation and reporting, Shopify Tax aims to reduce the burden on business owners, allowing them to focus more on growing their businesses and less on tax technicalities.
Shopfiy built-in tax tool
Its highlighted features include:
- Automatic Tax Calculations: Accurately calculates sales tax rates based on product type and customer location.
- Multi-Jurisdiction Compliance: Supports tax rules for multiple states and countries.
- Real-Time Tax Rate Updates: Keeps tax rates current with changing regulations.
- Product-Specific Tax Rules: Applies appropriate tax rates for different product categories.
- Tax Reporting Tools: Generates detailed reports to assist with tax filing.
- Integration with Shopify POS: Ensures consistent tax application across online and in-person sales.
- Tax Exemption Management: Easily handle tax-exempt customers and transactions
- International Tax Support: Assists with VAT and GST calculations for global sales.
- User-Friendly Interface: Simplifies tax setup and management within the Shopify platform.
- Scalability: Grows with your business, supporting tax compliance as you expand to new markets.
How To Generate Tax Reports In Shopify
Shopify provides a straightforward process for generating tax reports, which can be crucial for your business's tax compliance and financial management. Here's how to do it:
Step 1 - Access Shopify Admin: Log in to your Shopify admin panel
Step 2 - Navigate to Reports: Go to "Analytics" > "Reports"
Step 3 - Find Tax Reports: Look for "Taxes" in the search bar
Step 4 - Select Report Type: Choose between "Tax sales summary" or "Tax transactions"
Step 5 - Set Date Range: Select the time period for your report
Step 6 - Generate Report: Click "Run report" or "Create report"
Step 7 - View or Download: Once generated, you can view the report online or download it
Filing Sales Tax Returns
While Shopify provides powerful tools for collecting and calculating sales tax, note that the platform doesn't file your sales tax returns for you. Here's a general guide on how to use Shopify's data to file your sales tax returns yourself effectively:
Step 1 - Generate Tax Reports: Go to Shopify admin > Analytics > Reports. Then, select the appropriate tax report for your filing period.
Step 2 - Review Your Data: Examine the tax collected for each jurisdiction and ensure all relevant sales are included.
Step 3 - Determine Filing Frequency: Check with your local tax authority for required filing intervals (monthly, quarterly, annually). Make sure to gather required information like total sales, taxable sales, tax collected per jurisdiction, and any exemptions or adjustments.
Step 4 - Access Your Tax Authority's Website: Login to your account on the relevant tax authority's website.
Step 5 - Input Data: Enter the information from your Shopify tax report into the tax authority's form.
Step 6 - Submit and Pay: Follow the tax authority's process for submitting your return and paying any taxes due.
Conclusion
Navigating Shopify sales tax can seem like a daunting task, but with the right approach, it becomes much more manageable. This guide has provided a broad overview of the key aspects involved in managing sales tax for your Shopify store. While the process of filing and handling sales tax may initially appear complex—with numerous legal documents, frequent updates to tax laws, and regular reporting requirements—remember that you don’t have to go through it alone.
Take advantage of Shopify’s robust tools and resources, and don’t hesitate to seek help from experts if needed. With patience and the right information, you’ll be well-equipped to handle sales tax efficiently and focus on what you do best: growing your business.
Start selling on Shopify for $1
Start with free trial, then get your first month for $1
FAQs about Shopify Sales Tax
Does Shopify's net sales include tax?
Shopify's net sales typically do not include tax. Net sales represent the total revenue from sales after deducting returns, discounts, and allowances but before subtracting expenses. Taxes collected are a liability, not revenue, as they are collected on behalf of the government and must be remitted.
Are Shopify fees GST free?
Shopify fees are not necessarily GST-free. Whether you have to pay GST (Goods and Services Tax) on Shopify fees depends on where your business is located. For example:In Australia, if your business is registered for GST, Shopify fees will include GST. In other countries, the treatment of GST or VAT on Shopify fees may vary. You should check with Shopify's billing details or your local tax authority to understand the specific tax implications for your situation.
Does Shopify take a percentage of your sales?
Yes, Shopify takes a percentage of your sales through its payment processing fees. If you are a U.S. Shopify merchant using Shopify Payments, the fee is around 2.9% 30¢ per transaction for online sales. For other payment gateways, there’s an additional fee of 0.5% to 2%.
Do Shopify fees include VAT?
Shopify fees generally do not include VAT. If your business is in a VAT-inclusive country, you'll need to pay VAT on top of Shopify’s fees. The VAT amount depends on your country’s VAT rate, which varies by location. In the U.S., VAT is not applied. Instead, Shopify charges sales tax, where applicable, based on your location and the tax laws in your state. You'll need to handle any applicable sales tax separately from Shopify's fees.
