Need help understanding the sales tax implications of selling on Shopify? Are you unsure if your country is following the correct protocols? This guide will answer all your questions regarding sales tax.
This guide covers everything you need to know about Shopify, from sales tax to VAT to GST, tax receipts and tax returns. These tips and tricks will make you and your customers happy. Let’s get started.
Consumption taxes (a.k.a. Sales Tax)
Consumption taxes are applicable to purchases of goods and services. There are many types of consumption taxes depending on where you live. Each type of consumption tax requires different business owners.
One thing remains constant. Because they are the customer who actually consumes the product, the end customer must pay the tax.
These are the most common consumption taxes that you will see when selling on Shopify
This is also known as “sales tax”, and it is a one-time tax that is charged at the point where the purchase occurs. The money is transferred from the purchaser to the vendor to the government at the end. This sales tax is applicable throughout the United States. It is determined at both the state and local level. There is no national sales tax that applies across the US.
Sales tax in the USA is notoriously complex because states and local jurisdictions have the ability to decide their own rules. For more information, see our guide on US sales taxes on digital products.
Value-added taxes (VAT) are those where the consumption tax is added at each stage of production. Each stage sees the service or good’s value increase. This value increase, or “value added,” is what is being taxed. Cool thing about being a business owner is that you get refunded any VAT you have paid in the production chain. Only the end consumer is responsible for paying out of pocket.
The way VAT works is that you pay some VAT to other businesses who help make your product. These “input taxes” are what you receive a tax credit for.
Shopify adds the applicable VAT rate to every transaction. Tax is paid by the customer.
Once you have collected all the VAT from your customers (“output tax”) at the end of the season you can prepare to send the VAT back to the government. First, you must reduce all input taxes from the total so that your money stays in your pocket.
Goods and Services Tax
At every stage of the supply chain, a Goods and Services Tax (GST), is also charged. However, unlike VAT, GST does not apply to any additional value. It is usually a flat-rate percentage.
GST is usually charged at every stage of manufacturing, while the final customer is charged at the point where they are sold. Tax credits are used to refund GST, but not the end consumers.
Registration of taxes
To manage sales taxes, the first step is to determine if your Shopify store may be subject to taxes. Register for taxes in the region if you are.
Two factors generally affect your tax liability:
- Are you selling products that are taxable?
- Are you above a certain threshold for tax registration?
Each country and state has its own rules regarding the sales tax on goods and services. After you have determined that the item you are selling is taxable, you can then focus on how much. Now it’s time for you to examine tax registration thresholds.
What is a tax threshold
A tax threshold is an amount of sales that determines when you have to start paying digital taxes. When your sales total in a country exceeds their tax threshold, you can start tax preparations.
However, if you have sales below the threshold, you won’t need to register with the local tax authority and don’t need any taxes to collect or remit.
However, not all countries have a threshold for tax. Many countries don’t have a tax threshold. This means that you need to register in the country where you are selling products worth less than one dollar, euro, or rupee.
Threshold example: Economic Nexus in America
The US has many states that have a sales tax policy known as “economic nexus”. This means your business is able to collect and pay sales taxes in that state. The threshold is what makes it all work.
Common threshold 100,000 in annual sales or 200 separate transactions, depending on which your business reaches first. However, the exact numbers may vary from one state to another, so make sure you check each state separately. You must register for sales taxes once you have reached one of these markers. You can find more information in our guide to US Economic Nexus.
How to Register for Taxes
You can register for taxes in most places on your own. You will rarely need to hire a local representative for tax purposes.
Many places also offer online tax registration! You can submit a form detailing your company and personal information, or you could create an account through their online tax portal. You can check the tax agency website.
Only a few places require that you mail your tax registration application. Be prepared to wait in this instance. Although wait times vary by country and region, a general guideline is that it will take between 2-4 weeks.
You will eventually receive a tax registration number, or tax ID. They can go by many names and acronyms. This number is used to identify you as a legal entity in the tax system. This number tracks your business’ progress through the system. It includes the taxes you pay, tax credits you receive and the tax you collect from customers.
Collection of Taxes
After you have registered with the tax department, taxes must be considered every time you make sales. Is it possible to reverse-charge the tax or collect the tax yourself? It depends on whether you are selling to a private citizen or to a tax-registered company (B2C).
You simply add sales tax to the total transaction. Voila! All taxes collected.
There are two more things you need to be aware of when selling business-to-business. First, you must decide whether the seller is responsible for collecting and charging tax. Some countries, such as Japan and the EU, use the reverse-charge mechanism. The seller is responsible for collecting sales tax , but the responsibility goes back to the buyer. This means that the tax money flows directly to the government. These cases don’t add tax to the total cost. You indicate that you are using the reverse-charge method on the receipt. (More to come on receipts!
If there is no reverse-charge mechanism you will add tax to the sale, just like B2C.
Important to remember are tax registration numbers or Tax IDs. Tax IDs are crucial pieces of customer information. These numbers should be collected at the point of sale and verified to ensure that they are valid tax numbers. If you are given a false tax ID by a company and don’t collect the correct amount of tax, you’ll be responsible!
Which tax rate should I apply?
The most important part of tax collection is applying the right tax rate. It’s also the most difficult! Problem is, tax rates for all types of products can vary widely around the globe.
There are some products that have different rates in the same country. This is especially true for digital and physical products. Washing machines are subject to a different tax rate than cloud-based software. It becomes tedious when you consider that a physical book may be subject to a 5% tax, but an e-Book might be subject to a 9% tax.
The tax rate may also depend on where the customer is located (destination-based taxes) or your business’s location (origin based taxes). The EU’s VAT rate is usually determined by the buyer’s location. In the US, however, the VAT rate is based on the buyer’s location. There are literally thousands tax rates in the US. This burden can be significantly reduced by using an automated tax calculation tool.
Receipts for taxes
You should always give a tax receipt to your purchaser and keep a copy of it for your records
Tax receipts are legal documents that record exactly how much consumption tax your company is charging customers for each transaction. These receipts are used to determine how much sales tax to pay to the government at the end of tax season.
If you are filing tax returns and made a purchase for your company, a tax receipt can also be used. A tax receipt can also be used by your customers in B2B to file their taxes if they wish to claim your product for a deduction. This is why Shopify makes it so easy for you to do things right and keep your customers happy.
Tax receipts are legal records and must be in compliance with local tax policies. If you sell to EU customers, for example, you will need to issue tax invoices. Each country has its own requirements and quirks.
What should you include in your tax receipt?
Because requirements may vary from one country to the next, it might be easier to create a template that contains all information.
These pieces of information should be included in a tax receipt:
- Name and address of the customer or company
- Your business name and address
- If you or your company is registered in the country of the customer, your tax number (VAT/GST, etc.)
- Unique invoice reference number that only refers to the specific invoice
- A date is usually the date that the invoice was created.
- A list of all the services and products you have provided. List these line-by-line, along with the quantity and cost for each.
- If each item is subjected to the same sales tax, the amount of the sales tax (also known by VAT or GST) per item or the total tax amount on the entire invoice.
- The invoice’s total value
- Payment terms include the length of time a customer must pay and the payment channel.
You can personalize Shopify receipts to include the above information. These receipts won’t meet tax requirements. This is where Quaderno comes in!
Shopify tips and tricks: Digital taxes
What Shopify will do:
Sales tax collection
Shopify will collect the sales tax on your behalf, but you need to configure your store in order for this to happen. Shopify makes it easy to enable all EU VAT and all US sales tax. This allows you to easily remove 28 countries from your list and make 50 purchases in one place.
These are the steps to enable sales tax in the United States, Canada and elsewhere around the globe.
This can be tedious and a little tricky. But, if Shopify doesn’t have an automated tax plug-in, these steps will help.
Add taxes to the product price
You can choose to include consumption tax in your product’s price or to list it separately at check out. Make wise choices. If you don’t choose wisely, both of them risk losing customers.
This could make your products appear more expensive than those of your competitors. Your customer could be surprised by an unexpected price increase right before they make their purchase. This can cause conversions to drop at the shopping cart. People simply click away from the checkout page.
Our solution? Our solution? Let’s say the price is $9.99 plus sales tax at checkout.
This will let the customer know about any possible price increases before she adds it to her shopping cart. The upside is that your products can be listed at their original prices!
It won’t do:
No tax receipts from the native country
Although Shopify allows you to customize receipts for your store with your logo or other information, it doesn’t allow you to include tax receipt information. This could prove to be problematic if your business sells to many B2B customers.
A Shopify plug-in to automatically receive tax receipts from a third party would be the best way forward. Although we may be biased, we believe Quaderno’s Shopify plug in provides the best solution. 🙂
If you have exceeded a threshold tax, there are no notifications
Shopify won’t let you know if your business is subject to taxes in another country. You won’t be notified if your sales increase in a particular country or state. You will need to keep track of the threshold amount for each tax area and monitor your sales.
This is a complete waste of time. A tax alert system that automatically detects and notifies you of any tax changes would be a great solution!
No tax reports are required to assist you in filing your returns
Shopify does not offer tax reports that provide all the information you need to quickly and confidently file your returns. To find tax information and to calculate the VAT that you have collected, you will need to go through your Shopify sales data.
It sounds complicated, and it often is. But, there’s a great solution. Continue reading to learn how to simplify tax returns.
Shopify instantly sends tax notifications and reports
Automatic tax receipts sent all over the globe
Quaderno automatically sends tax receipts to customers for every sale. These receipts can be customized to reflect your brand and sent in multiple currencies or languages.
Notifications when you reach a threshold
Quaderno keeps you informed about tax thresholds. Quaderno monitors your sales and alerts you if you exceed the limit. This allows you to prepare your tax registration. The app will also alert you to register taxes in the event that you make a taxable sales in a country without a threshold.
Instant tax reports
Instant Tax Reports is what we mean! All you need to file a tax return is available at your fingertips with a click. Quaderno gathers all information necessary to file US sales tax, VAT and GST returns and presents it in a manner you can understand. These instant tax reports will provide you with accurate and current information. Quaderno adheres to every tax rule in the world, including those from the United States, Canada and Australia, New Zealand, Singapore, the EU, and New Zealand.
The Quaderno plug in will solve the problems Shopify can’t. We’ll even close the gap to solve your tax-filing problems, beyond Shopify.
You likely use other online selling channels. You would need to combine Shopify data with all the information you have gathered from Amazon, PayPal, or other sources.
Quaderno’s beauty is its integration with Shopify. This allows you to easily access all your tax information from one location. All of this information can be delivered in a simple tax report with just a click.
How to integrate Quaderno into your Shopify store
1) From your Quaderno dashboard, go to Integrations > Shopify.
2) Enter the Shopify store name in the box provided and then click Connect account.
3) Next, verify with Shopify that Quaderno is installed with your store. Click Install app to confirm that your account is connected.
4) You’ll find CONNECTED on the integrations page. This will let you know that the process is completed!