Shopify Taxes: An Ultimate Guide for Online Store Owners

Did you know that Shopify doesn’t automatically declare or remit sales tax for you? Yes, that’s the truth. However, the platform has built-in tools that help you streamline the tax process.

Just like any other online business, when selling on Shopify, you must pay taxes to the legal facility where you register your business. Our Shopify Tax Guide will help you answer any questions you have about calculating taxes for your Shopify store. Check now!

3 Types of Shopify taxes that sellers need to pay

Shopify vendors usually have to focus on three types of taxes: 

1. Income tax

This is the tax you pay on your business profits. As a Shopify seller, your income tax will be based on the net income (revenue minus expenses) of your business. You’ll need to file income tax returns with your federal and potentially state governments following their specific deadlines and guidelines..

2. Overseas tax

If you’re selling internationally, you might encounter additional tax considerations. These can vary depending on the destination country and the value of your goods. Here are two common scenarios:

• VAT (Value Added Tax): This is a tax assessed on the value added to goods and services at each stage of production and distribution. Some countries require VAT to be collected and remitted by the seller.
• Import duties and taxes: The destination country may impose duties and taxes on imported goods. These are typically paid by the customer upon receiving the shipment, but it’s important to be aware of them to avoid any surprises.

3. Sales tax

Sales tax is likely the most common tax you’ll deal with. It’s a tax levied on the sale of certain goods and services, and the responsibility to collect it typically falls on the seller. Whether you need to collect sales tax depends on two factors:

• Nexus: This refers to having a physical presence (like a warehouse) or economic presence (selling above a certain threshold) in a state. If you have nexus in a state, you’re generally required to collect sales tax from customers there.
• Product taxability: Different states tax different products at varying rates. For example, clothing might be taxable in one state but not another.

Shopify offers tools to automate sales tax calculations and collection based on your location and product categories. Within the scope of this article, we will talk mainly about Shopify sales tax

3 Steps to collect sales tax in Shopify

Phase 1:  Enable sale tax collection

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

Step 1: Access the Taxes and Duties section in your Shopify admin panel by navigating to Settings.

• 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.

Note: 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).

Phase 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.

• 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.

Phase 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.

Step 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 left side

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

Step 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

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.

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!