If you’re running an online store on Shopify, understanding and managing sales tax and VAT (Value Added Tax) is crucial to ensure compliance and avoid legal issues. This article provides an in-depth guide on how to set up taxes on Shopify, covering everything you need to know about handling sales tax and VAT for your online business.
Understanding Sales Tax and VAT
SALES TAX
Sales tax is a consumption tax imposed by the government on the sale of goods and services. In the United States, sales tax is collected at the state level, and the rate varies depending on the location of the seller and the buyer. If you sell products online, you may be required to collect sales tax in the states where you have a sales tax nexus—a significant presence in a state, which can include physical locations, employees, or a certain amount of sales revenue.
VAT (Value Added Tax)
VAT is a consumption tax used in many countries outside the United States, particularly in Europe. Unlike sales tax, which is added at the point of sale, VAT is applied at every stage of the supply chain, from production to the final sale to the consumer. As a Shopify store owner, if you’re selling products internationally, especially to customers in the European Union (EU), you may need to collect and remit VAT.
How to Set Up Sales Tax on Shopify
1. Determine Where You Need to Collect Sales Tax
The first step in setting up sales tax on Shopify is determining where you need to collect it. This depends on where you have a sales tax nexus. Here’s how you can determine this:
- Physical Presence: If you have a warehouse, office, or employees in a state, you have a sales tax nexus in that state.
- Economic Nexus: Some states have implemented economic nexus laws, which require you to collect sales tax if you exceed a certain amount of sales or transactions in that state, even if you don’t have a physical presence there.
2. Register for a Sales Tax Permit
Before you can collect sales tax, you need to register for a sales tax permit in the states where you have a nexus. This process involves applying with the state’s tax authority, which typically can be done online.
3. Set Up Sales Tax in Shopify
Once you have determined where you need to collect sales tax and obtained the necessary permits, you can set up sales tax in Shopify:
- Access the Tax Settings: In your Shopify admin, go to Settings > Taxes and duties.
- Set Up Tax Regions: Shopify automatically determines the sales tax rates based on the customer’s location. You can enable tax collection for specific regions by selecting the countries or states where you need to collect tax.
- Configure Tax Overrides: If your products are subject to different tax rates, such as exempt items or special rates, you can set up tax overrides in Shopify.
4. Automate Tax Calculations
Shopify allows you to automate tax calculations based on your customer’s location. This feature ensures that the correct tax rate is applied at checkout, reducing the risk of errors.
- Enable Automatic Tax Calculation: Shopify provides automatic tax calculation for the U.S., Canada, and EU countries. To enable this, go to Settings > Taxes and duties and check the option to calculate taxes automatically.
- Consider Using a Tax App: For more complex tax situations, such as managing multiple tax jurisdictions or handling international taxes, you can integrate a third-party tax app like Avalara or TaxJar with your Shopify store.
5. Remit Sales Tax
After collecting sales tax, it’s important to remit it to the appropriate tax authorities. This involves filing sales tax returns and paying the taxes collected. Be sure to keep accurate records of your sales and taxes collected to ensure compliance.
How to Set Up VAT on Shopify1. Determine Your VAT Obligations
If you’re selling to customers in the EU, you need to determine whether you’re required to charge VAT. This typically depends on where your business is located and the countries to which you sell.
- EU VAT Thresholds: If you sell products to customers in the EU, you may need to register for VAT in the EU countries where your sales exceed certain thresholds. Alternatively, you can use the One-Stop Shop (OSS) scheme to simplify VAT registration and reporting across multiple EU countries.
- Non-EU Businesses: If you’re based outside the EU but sell to EU customers, you may still need to register for VAT and comply with EU VAT regulations.
2. Register for a VAT Number
To collect VAT, you need to register for a VAT number with the tax authorities in the relevant countries. This number must be included on your invoices and used when reporting and remitting VAT.
3. Set Up VAT in Shopify
Once you have your VAT number, you can set up VAT collection in Shopify:
- Access the Tax Settings: Go to Settings > Taxes and duties in your Shopify admin.
- Enable VAT Collection: Select the countries where you need to collect VAT and enter your VAT number.
- Include VAT in Prices: In many countries, it’s common to include VAT in the product prices. Shopify allows you to set your prices as VAT-inclusive, which means the tax is already included in the price displayed to customers.
4. Automate VAT Collection
Similar to sales tax, Shopify offers automatic VAT calculation based on your customer’s location. Ensure that you enable this feature to apply the correct VAT rates at checkout.
- Manage VAT Rates: Shopify automatically applies the standard VAT rates for each EU country, but you can also set up custom rates if necessary.
- Use the Shopify EU VAT Compliance App: This app helps ensure that your store complies with EU VAT regulations, including VAT invoicing and reporting.
5. Remit VAT
After collecting VAT, you must remit it to the appropriate tax authorities. This involves filing VAT returns and paying the collected VAT. Be sure to keep detailed records of all VAT collected and paid.
Conclusion
Setting up taxes on Shopify, whether it’s sales tax or VAT, is an essential task for any online store owner. By following the steps outlined in this guide, you can ensure that your Shopify store is compliant with tax regulations, minimizing the risk of legal issues and ensuring a smooth experience for your customers.