What is Shopify Tax?

Shopify Tax is functionality in the Shopify platform that allows merchants to charge sales tax at checkout when they sell in or into the United States.

Calculating how much tax to add to your sales price is based on where your customers are based and the products you sell. Shopify Tax will use your buyer’s address information and your product codes to determine an accurate tax rate to apply at checkout.

What does it cost?

It’s free to use sales tax collection at checkout for your first $100,000 in US sales each calendar year. Merchants whose stores don’t exceed this amount will never pay to collect tax.

Once a store surpasses $100,000 in US sales in a calendar year, a 0.35% fee (0.25% for Plus merchants) will apply for subsequent orders that calculate sales tax in the United States.

It is not possible to opt-out of this fee if you have to charge sales tax at checkout on your Shopify store.

What does Shopify Tax do?

Besides calculating the accurate tax at checkout, not very much.

They claim to provide ‘Sales tax insights’, but this simply shows where you might be liable for taxes and what your current sales tax liabilities might be. It also shows you where you are ‘approaching thresholds’, but most Shopify merchants don’t know what any of this means! Without context and explanation, Shopify Tax is not insightful at all.

It does allow you to categorise the products you sell to ensure you are collecting the right amount of tax – but it is very complex to set up correctly.

What DOESN’T Shopify Tax do?

  • Explain to you what sales tax obligations mean for your business
  • Identify where you should be registered
  • Register for sales tax permits in the states where you have obligations
  • Prepare and file the tax returns every month for you
  • Help you pay the taxes you have collected to the relevant tax office
  • Deal with tax offices if they have any questions or audit you
  • Help you collect and report sales tax on your US sales via other channels

What are product categories and why are they important?

Shopify product categories are labels that are assigned to products or to collections of products that you sell. They are used to indicate the tax obligations and exemptions that customers have when they purchase those particular products from your Shopify site.

Sales tax is calculated based on the address of your buyer and the specific product you sell. You could deliver 2 different products to the same customer and have to charge 2 different rates, or you could deliver the same product to 2 different customers and have to charge 2 different rates.

If you don’t set up Shopify Tax correctly, it will apply the incorrect tax rates to your sales. If you collect and report the wrong amount of tax, tax offices can penalise you and charge you interest on underpaid taxes.

Therefore, it is crucial that you set up your product codes correctly in Shopify Tax. Whilst they do have automatic product code suggestions – it is not wise to trust a bot to do this when the non-compliance risks are so high. It is safer to get a sales tax expert to help you set up your product categories.

Get help from Yonda today and ensure your tax setup is correct and compliant.