Shopify sales taxes: Everything to know on tax settings, international regulations and accounting
Kaci Carson
January 11, 2024
As an e-commerce business owner on a platform like Shopify, one of the most important considerations to make is sales tax. Knowing where to start when it comes to learning, understanding, and applying sales tax to your store item can be a tedious task. That’s why in this article, we’ll give you an overview of the different types of sales tax you’ll encounter for your business whether you’re selling in Australia, the US, Canada, the EU or all of the above. We’ll also take you through how to change your Shopify tax settings to make sure sales tax is applied correctly to your products.
Understanding different types of sales tax (GST, HST, nexus, and VAT)
For your e-commerce business, you’ll need to collect and remit sales tax appropriately to avoid fines, penalties, or other issues of compliance. When it comes to selling a product, you might be wondering if Shopify charges sales tax on a particular product automatically. Shopify’s automatic sales tax settings vary by region. As we take you through each type of sales tax, we’ll let you know how to apply these changes to your Shopify store and go through everything you need to know to set up for a win.
What is GST? Understanding Australian sales tax in Shopify
If you’re selling to Australian customers, you need to understand the Australian Goods and Services Tax (GST). The GST is a 10% tax on most goods and services that are sold or consumed in Australia. As a Shopify store owner, you need to register for GST if your business has an annual turnover of $75,000 AUD or more. Once you’ve registered, you’ll need to factor the GST into your prices, adding 10% to the price of your products or services. For sales made outside of Australia, you won’t need to include GST, but you’ll need to keep accurate records and report them correctly to the Australian Taxation Office.
It’s also important to note that certain types of goods and services are exempt from the GST. Some of these exemptions include basic food items, some medical products, and education services. However, if your business supplies a mix of taxable and non-taxable goods or services, you’ll need to calculate the GST for each item. To help with this, Shopify’s built-in tax settings can automatically apply the correct GST rate to your products based on their classification. By staying on top of your store’s GST, you can avoid potential fines and penalties from the ATO and keep your customers happy through providing clear and accurate pricing information.
How to set up Australian sales tax in Shopify:
To set up Australian sales tax in Shopify, go to Settings > Taxes > Tax Rates, and click “Add tax rate.” Enter the tax rate name, percentage, and tax number, and save.
What is nexus? Understanding Shopify sales tax for the US
If your Shopify store sells or operates in the US, you’ll need to know about nexus: the connection between your business to the states so you can collect and remit sales tax. Nexus laws and rates differ for each state, for example, California sales tax is around 7% whereas sales tax in Colorado is about 2.9%. There are also few states in the US that don’t have sales tax. These states are referred to as NOMAD states, an abbreviation for the states of New Hampshire, Oregon, Montana, Alaska, and Delaware.
Even though your business may not have a physical presence, there are certain activities that can trigger nexus. Some of these potential ‘triggers’ include having employees working remotely across different states, storing inventory or having a warehouse, or even event attendance by your business in a particular state. There are some states with more complex nexus laws, including “click-through” nexus, which is where having online advertising or having affiliates across different areas in the US can be what triggers nexus. As your business grows and expands, it is important to regularly reassess your nexus to ensure compliance with any new state laws or changes to existing ones.
How to set up US sales tax in Shopify:
To set up US sales tax in Shopify, go to Settings > Taxes > Tax Rates, and click “Add tax rate.” Enter the tax rate name, percentage, and state, and save.
What is GST/HST? Understanding Canadian sales tax
If you’re selling to Canadian customers, you need to understand the Canadian sales tax known as the GST/HST. The Canadian Sales Tax is approximately 5% tax on the majority goods and services sold or consumed in Canada. If your store is earning an annual income of $30,000 CAD or more, you’ll need to register for a GST/HST number.
In Canada, there are also sales taxes in certain provinces where you’re required to collect provincial sales taxes (PST) such as British Columbia, Saskatchewan, Manitoba, and Quebec. The PST rates in these provinces can vary from 6% to 10%.
If you’re a non Canadian business owner, hoping to expand your business, you may be required to register for a Non-Resident Importer (NRI) account with the Canada Border Services Agency (CBSA) to ensure you’re paying the correct duties and taxes on your products.To stay on top of your Canadian sales taxes, the Canada Revenue Agency (CRA) has created a variety of resources to help you with understanding the and provides information on any important changes or updates on PST.
How to set up Canadian sales tax in Shopify:
To set up Canadian sales tax in Shopify, go to Settings > Taxes > Tax Rates, and click “Add tax rate.” Enter the tax rate name, percentage, and tax number, and save.
What is VAT? Understanding European sales tax
If you sell to European customers through your Shopify store, it’s important to understand the Value-Added Tax (VAT) and how it applies to goods and services being sold in the EU. If your annual business revenue is €35,000 or greater, you’ll need to register for a VAT number. VAT rates can vary depending on the country, and there are three different types of VAT rates: standard rate, reduced rate, and zero rate.
Typically, the standard rate for most goods and services is between 15% to 25%. The reduced rate is applied to items such as books, food, and children’s clothing items. This rate is approximately 5%. The zero rate specifically applies to exports or medical equipment.
There are several VAT schemes available for businesses who sell in the EU. One of these schemes is the Mini One Stop Shop (MOSS) scheme, which simplifies the VAT requirements for businesses selling digital products or services. With this scheme, you will be able to register and pay VAT in just one EU member state where sales are being made.
For non-EU businesses, another requirement is appointing a VAT representative who is present in an EU member state where your business makes sales. This representative is then responsible for handling VAT registration and that the correct charges and requirements are complied to in that state.
How to set up European sales tax in Shopify:
To set up European sales tax in Shopify, go to Settings > Taxes > Tax Rates, and click “Add tax rate.” Enter the tax rate name, percentage, and VAT number, and save.
Getting ahead for tax time: How to account for Shopify sales taxes
When it comes to tax season, having to file taxes for the different regions you operate in can become a tedious tax. To access your Shopify taxes and prepare for tax time, you can access reports that show your sales tax collected and remitted. You can access these reports by going to Analytics > Reports > Taxes.
You can also get all your tax insights in reports all in one place through an accounting integration, such as Amaka. Use Shopify + Xero, Shopify + QuickBooks or Shopify + MYOB to sync all orders, Shopify fees, tax rates and other transactions. These integrations only take minutes to set up and automate manual data entry. Having Amaka’s integration tool paired with Shopify’s tax settings are the perfect match for an accurate and efficient tax season.
What are the benefits of a Shopify accounting integration?
- Sync Shopify orders to your accounting software on a free or premium plans
- Option to either create a separate invoice for each order or compile daily orders into a summarized invoice
- Customize your sales summary view with a variety of formats to choose from
- Include all payment transactions, taxes and fees such as gift cards, tips, sales taxes, and payment fees
- Transactions are automatically matched to your bank feed for lightning-fast bank reconciliation
How do I set up a Shopify accounting integration?
If you want guidance for setting up your Shopify accounting integration, you can book a free 30-minute support session and we can set it up for you! Otherwise, have a crack at it on your own. You can set up the integration in 2-minutes with default settings or spend time to customize advanced settings. Follow the relevant setup guide:
- How to connect Shopify to Xero
- How to connect Shopify to QuickBooks Online (QBO)
- How to connect Shopify to MYOB
Key takeaways on Shopify sales taxes
Managing sales tax on Shopify is essential for online businesses to continue to grow and expand. Having an understanding of how sales taxes differ for each region you operate in can help to collect and remit sales tax simply and on time. With the right approach and tools in place, you can focus on growing your business and achieving long-term success.
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