As an online merchant, you may need to collect taxes (sales taxes in the US, VAT in Europe and Japan, GST in Canada, etc) and then periodically forward the collected tax amounts to appropriate tax authorities.
Taxation rules differ depending on the country where the online business is based — tax rates can depend on types of products, your business location, consumers’ location, and more. For example, merchants that sell e-goods to customers in the EU, should charge taxes on digital products.
Check with your local tax experts whether you sell taxable goods and what are the tax rates associated with them before moving forward with online sales.
Once you know where your business is responsible for charging taxes, make sure to configure your store to meet your local tax laws.
There are two ways to set up taxes in a store:
- Automatic taxes. They are available for merchants in the USA, Europe, UK, Canada, Australia, New Zealand, India, South Africa, Taiwan, Singapore, Malaysia, Indonesia, Saudi Arabia, Canary Islands, Melilla, and Ceuta. Automatic taxes provide up-to-date rates across the store and can be enabled in one button click.
- Manual taxes. If automatic taxes are not available for your country or your business requires a specifically tailored taxation scheme, you can configure taxes manually.
To set up automatic taxes:
- Enter your actual company address in the store admin, Settings → General. This address is needed to calculate and apply the right tax rate to orders at checkout.
- Enable automatic taxes in Settings → Taxes:
Once enabled, the automatic taxes will determine a precise tax rate at checkout depending on where you and your customer are located and will apply tax to each order.
By default, the same standard tax rate of your store’s region applies to all the products. If some of your products are taxed differently (e.g., they are tax-exempt), you can change the tax rate for them.
You can manually configure your store to calculate tax rates for different regions, zones, countries. You should set up taxes manually if:
— automatic taxes are not available for your country (currently available for the US, Europe, UK, Canada, Australia, New Zealand, India, South Africa, and some other countries)
— you need a complex taxation scheme tailored to your business (e.g., you want to charge taxes when selling worldwide).
You can configure taxes manually in the store admin, Settings → Taxes. Below is the instruction on how to add a 10% tax for a state to illustrate the setup process:
Step 1 — Add a zone
Create a destination zone for the tax rate to apply. If the same tax rate applies to several different states, you can create one zone consisting of these states and set up a tax rate for this zone.
To add a zone for the tax:
- From your store admin, go to Settings → Taxes & Invoices.
- In the Manual section, click Manage Tax Rates.
- Click + Add New Tax.
- Click Save.
- Click Manage zones (global) to open the Destination zones page.
- Click + Add New Zone.
- Click Add State, Add Country, or Add Region and add the necessary state, country, or region.
- Set the name for the zone that is clear to you. For example, States with 10% tax rate. Tax zones and destinations zones are displayed on the same Zones page. So make sure to include the word "taxes" in the name of your tax zone to avoid confusing it with any other shipping zone you may create. Customers won't see the name you picked for the zone.
- Save the changes.
Step 2 — Add a tax rate for the zone
- From your store admin, go to Settings → Taxes & Invoices. If automatic taxes are enabled, make sure to disable them.
- In the Manual section click Manage Tax Rates.
- Click Add New Tax.
- Enter your tax name. For example, 10% Tax. Customers will see the name you picked for the tax at checkout.
- If the tax applies to all products, tick Enabled by default for all products option.
- Choose whether the tax applies only to the subtotal or to the subtotal and shipping.
- (optional, based on your country) Tick Include tax in product prices option if you'd like the price to include tax. Customers will see the tax-inclusive product prices in catalog as soon as your store detects their location. Otherwise, tax will be added at checkout once the buyer fills out the address form.
Click Manage tax displaying settings → Change Pricing Settings. This way, you can set whether you enter prices in your store with taxes included (gross prices) or without taxes (net prices). In case of net prices, the tax is added at checkout.
Your product prices will not be automatically updated if you switch the pricing scheme. You will need to check your product prices and update them manually after the switch to avoid unexpected price changes.
- Choose what defines the zone for a customer. It can be the shipping or billing address.
- Click Specify rates per zone. Select the zone you created in the Step 1 and enter the applicable tax rate.
- Make sure the tax is enabled and save the changes.
If you have several taxes and/or zones, repeat the steps above for each of them.
Different countries have unique tax reporting requirements. You should consult your local tax professionals on how and how often you should file and remit the collected taxes to government.
If you use an accounting software when working on tax reports, you can import there your store’s order data, including the collected taxes.
You can export the order data from your store to CSV file, then import the downloaded CSV file into your accounting software or send it to accountant that handles it for you. You can also open the file in a spreadsheet and summarize the numbers manually if you like.
If necessary, you can also print out invoices (and/or tax invoices) for your records or download them as a PDF file.