Selling on Shopify but need help navigating the maze of sales tax? Unsure if you’re following the right protocols and staying compliant in every country? Well then it’s great you found this guide, which aims to answer all of your questions about sales tax.
From sales tax to VAT and GST, tax receipts to tax returns, this guide will ensure your Shopify store is on the ball. We’ve even included some tips and tricks that will keep you sane and your customers happy! Let’s get started.
Consumption Taxes (a.k.a. Sales Tax)
Consumption taxes apply to the purchase goods and services. There are different kinds of consumption taxes, depending on the country. Each type requires something different from you, the business owner.
But one element always stays the same. The end customer pays the tax, because they’re the one actually consuming the product.
Here are the three most common consumption taxes you’ll see while selling on Shopify:
Known as just “sales tax,” this is a simple, one-time tax charged at the point of purchase. The money goes from the consumer, to the vendor, to the government: the end. This form of sales tax exists throughout the United States, determined at the state and local levels. (There is no overarching national sales tax in the US.)
Because the states and local jurisdictions can all decide their various rules, sales tax in the US is notoriously complicated… To understand how the system works, check out our primer on US sales tax on digital products.
Value-added tax (VAT) is one where the consumption tax is charged at each stage of production. At each stage, the value of the good or service increases. That increase, the “value added,” is what’s being taxed. The cool thing is that, as a business owner, you’re refunded whatever VAT you pay in the production chain. Only the end consumer pays out of pocket.
Typically VAT works like so: you pay some amount of VAT to other businesses who help you make your product. These slivers of VAT are called “input taxes,” and you get a tax credit for each one.
With every sale you make on Shopify, you add the appropriate VAT rate to the transaction. The customer pays you the tax.
At the end of the season, once you’ve collected VAT from all your customers (“output taxes”), you prepare to send the VAT to the government. But first, you can discount all your input tax from the total, so that money goes back in your pocket.
Goods and Services Tax
A Goods and Services tax (GST) is also levied at every step of the supply chain. But unlike VAT, GST is charged regardless of what value is added; it’s usually just a flat-rate percentage of the transaction.
Typically GST works like so: the businesses are charged at each stage of the manufacturing process, and the end customer is charged at the point of sale. The GST is then refunded to everyone through tax credits, except the end consumer.
The first step to handling sales taxes is to know if your Shopify store is even liable for taxes somewhere! If you are, then you must register for taxes in that region.
Your tax liability generally comes down to two factors:
Are you selling taxable products?
Is there a tax registration threshold, and have you passed it?
Countries and states have their own rules when it comes to which goods and services are subject to sales tax. Once you’ve determined that what you’re selling is indeed taxable, then you need to turn your attention to how much of it you’re selling. It’s time to look at tax registration thresholds.
What is a tax threshold?
A tax threshold is a certain amount of sales that marks when you must start paying digital taxes. Once your total sales in a country reaches their tax threshold, be prepared to get your tax game on.
On the other hand, if your sales stay below the threshold, that usually means that you don’t need to register with the local tax authority, and you don’t need to worry about collecting or remitting taxes there.
Not every country has a tax threshold, though. In fact, many places don’t! That means that if you make even one sale — if you sell just one dollar or euro or rupee worth of product — then you must register for taxes in that country and comply with all the local tax standards.
Threshold Example: Economic Nexus in the United States
Many states in the US have a sales tax policy called “economic nexus.” If your business has economic nexus in a state, that means you earn enough money there to collect and pay sales tax. It’s all based on a threshold.
The common threshold is $100,000 in annual sales or 200 separate sales transactions, whichever your business reaches first. (However, exact numbers can vary by state, so it’s best to check each state individually.) Once you reach one of those markers, you must register for sales tax. For more detailed info, check out our guide to US Economic Nexus.
How to register for taxes
Most places allow you to register for taxes on your own. Rarely do countries require you to hire a local tax representative.
Furthermore, most places offer tax registration online! This may mean just submitting a form with specific information about yourself and your business, or it could involve creating an account in their online tax portal. Simply check the tax agency website.
Few places still require you to mail in your tax registration application. In this case, be prepared to wait! The wait time varies by country or region, but 2-4 weeks is a good general estimate.
Ultimately, you will receive a tax registration number or tax ID (they go by many different names and acronyms!), which establishes you in that tax system as a legal business. This number tracks your business through the system: the taxes you pay, the tax credits you receive, plus the tax you charge from customers.
Once you’ve registered with the tax office, you must consider taxes every time you make a sale. Do you need to collect the tax yourself, or is there a reverse-charge mechanism at play? The answer usually depends if you are selling to a private citizen (B2C) or to a tax-registered business (B2B).
Essentially, you collect sales tax by adding it to the total of the transaction. When the customer pays you for your product — voila! Taxes collected.
With business-to-business sales, there are a couple more things to consider. The first is whether you, as the seller, are responsible for charging and collecting tax on the sale. Some places, including the EU and Japan, use the “reverse-charge mechanism.” The responsibility for sales tax reverses from the supplier back to the buyer, so that the tax money goes directly from buyer to the government. In these cases, you don’t actually add any tax to the total charge. Instead, you indicate on the receipt that you’re using the reverse-charge mechanism. (More on receipts later!)
If there’s no reverse-charge mechanism, then you add tax to the sale just like B2C.
Also important to note are business tax registration numbers, or Tax IDs. Tax IDs are key pieces of customer information. You should collect them at the point-of-sale and even verify that they’re valid tax numbers. If a business gives you a fraudulent tax ID, and you don’t collect the right amount of tax from them, then you will be on the hook for that money!
Which tax rate should you apply?
Perhaps the most obvious part about tax collection is applying the correct tax rate, and it’s also the trickiest! The trouble is that tax rates vary around the world for all kinds of products.
Some products have different rates within the same country, particularly when it comes to physical vs. digital products. A washing machine is taxed at a different rate than cloud-based software. It gets tedious when you realize a physical book might be taxed at 5%, while an e-Book is taxed at 9%.
Plus, the tax rate can depend on the precise location of the customer (destination-based tax) or the location of your business (origin-based tax). In the EU, the VAT rate is usually based on the location of the buyer. But in the US, there’s a mixture of destination-based and origin-based sales taxes, plus layered taxes at the state, city, and district levels. (There are literally thousands of different tax rates in the US. Using an automated tax calculation tool significantly relieves this burden.)
First and foremost: you should always issue a tax receipt to your buyer and keep a copy for your records.
A tax receipt is a legal document that records exactly how much consumption tax you’re charging and collecting from customers on each transaction. At the end of the tax season, these receipts inform how much sales tax you need to pay forward to the government.
A tax receipt is also used in filing returns if you made a purchase for your business and want to claim it as a tax deduction. Similarly, a tax receipt is what any of your B2B customers use to file their returns, if they want to claim your product as a deduction. So it’s important to get this right in Shopify, to make your life easier and to keep your customers happy.
Since they’re legal records, tax receipts must comply with the local tax policies, wherever your Shopify customer is based. For example, if you’re selling to customers in the EU, you must issue VAT invoices and tax receipts, which have their own quirks and requirements.
What to include in a tax receipt
Since requirements can vary from country to country, the easiest option may be to create a template that includes all the possible information.
A tax receipt should always include the following pieces of information:
The name and address of the company or customer
Your business name and address
Your tax number (VAT, GST, etc., if you or your business is registered in the customer’s country)
A unique invoice reference number that can only refer to the invoice in question
A date, usually the date the invoice was created
A list of the products and/or services you’ve provided. (List these line by line, with a quantity and separate cost for each)
The amount of sales tax (also known as VAT or GST) for each item — or the total tax amount for the whole invoice, if every item is subject to the same rate
The total amount of the invoice
The payment terms, such as how long a customer has to pay, the channel of payment, etc.
To include as much of the above information as possible, you can customize your Shopify receipts. But these receipts still won’t satisfy tax requirements. For a solution to this tedious problem, check out the last section about how Quaderno can help!
Digital taxes on Shopify: tips and tricks
What Shopify will handle:
Sales tax collection
Shopify will collect sales tax for you, but you must configure your store to do so. Thankfully, Shopify has easy steps for enabling all of EU VAT and all of US sales tax, so you can knock out 28 countries and 50 states with one setting.
It’s a bit tricky and tedious… But if you aren’t using an automated tax plug-in for Shopify, then these little steps are necessary.
List taxes separately from product price
You have the choice of including consumption tax in the price of your product, or listing it separately at checkout. Choose wisely. Both risk losing customers if not done correctly.
The first option could make your products seem more expensive than a competitor’s. The second option could surprise your customer with an unexpected cost increase, right before the point of purchase. This unpleasant surprise kills conversion rates at the shopping cart; people just click away from the checkout page.
Our solution? If you need to charge VAT, GST, or some other sales tax on your digital products, a good practice is to give a heads-up on the product page that tax will be added later. For example, say that the price is $9.99 + sales taxes at checkout.
This way the customer knows about a possible cost increase, before she even gets to her cart. And the upside for you is that you can still list your products at their original price!
What it won’t handle:
No native tax receipts
Though Shopify does let you customize your store’s receipts with your logo and other information, it does not go all the way with tax receipt information. This limitation could be a hassle for you, especially if you sell to a lot of B2B customers.
The easiest way forward would be to use a Shopify plug-in for automatic tax receipts, offered by a third party. We may be biased, but we think Quaderno’s Shopify plug-in is the perfect solution. :)
No notifications if you’ve surpassed a tax threshold
Shopify doesn’t notify you when your business becomes liable for taxes in a new place. If your sales take off in a certain state or country, and you pass the tax registration threshold there, you probably won’t know it! So you will need to remember the threshold amount in each tax region and manually monitor your sales there.
That’s really a waste of your time. An automated tax alert system would do the trick!
No tax reports to help you file your returns
Shopify doesn’t offer tax reports that include all the accurate information you need to file returns quickly and confidently. When tax season comes around, you have to rifle through your Shopify sales data to get tax information, to total the output VAT you’ve collected, etc.
If that sounds like a headache, that’s because it usually is… But again, we know of a pretty great solution. Read on to figure out how to simplify your tax returns in one click.
Instant tax notifications & reports in Shopify
Automatic tax receipts sent around the world
With every sale, Quaderno sends a legally-compliant tax receipt to your customer automatically. These receipts are 100% customizable to reflect your brand, and they can be sent in multiple languages or currencies.
Notifications when you pass a threshold
Quaderno stays on top of tax thresholds for you. The app monitors your sales in each region and notifies you before you hit the limit, so you can prepare your tax registration. Or, if you make a taxable sale in a brand new country that doesn’t have a threshold, the app will alert you to register for taxes there ASAP.
Instant tax reports
We mean it when we say instant tax reports! With the click of a button, you can have everything you need for filing a tax return, at a glance. Quaderno collects all the necessary information for filing US sales tax, VAT, and GST — and displays it in a way you can actually understand. You can rest easy knowing that these instant tax reports are accurate and up-to-date. Quaderno complies with every little tax rule worldwide, including the United States, Canada, Australia, New Zealand, Singapore, and the EU.
In a nutshell, the Quaderno plug-in will cover the issues that Shopify cannot. In fact, we’ll close the gap and solve all your tax-filing woes, even beyond Shopify.
More than likely, you also use other channels for online selling, right? So you would have to combine the Shopify data with everything you’ve culled from Amazon, PayPal, and others.
The beauty of Quaderno is that once you’re using it with Shopify, you can easily integrate it with these other channels — so that all of your tax information in one place! And all of it can be delivered in an easy tax report, with the click of a button.
How to integrate Quaderno with your Shopify store
1) From your Quaderno dashboard, go to Integrations > Shopify.
2) Simply enter the name of your Shopify store in the space provided, then click Connect account.
3) The next screen is a verification with Shopify that you want to install Quaderno with your store. Simply click Install app, and then you’ll see a confirmation page that the account is connected.
4) Back on the integrations page, you’ll see CONNECTED listed over Shopify -- and you’ll know the process is complete!
The integration is equally as simple for the other channels and platforms you see listed above. Our goal is to save you time and stress, so that you can focus on growing your Shopify store and keeping your customers happy. Sign up for Quaderno’s free trial and see what business is like when we handle the taxes.
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* At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.
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