Earlier this month, Shopify announced Shopify Tax, a new product designed to assist Shopify users with identifying where they are liable for state sales tax, then calculate and collect those taxes at checkout. This product is a welcome addition to the Shopify platform; prior to this, most users needed to look to third party applications (such as Avalara) to assist with accurate tax calculations and collection was limited to the zip code level accuracy built into Shopify checkout. Today, we’re highlighting some of the robust features of Shopify Tax, and highlighting a few key questions you might have about transitioning to the new service.
Key Features of Shopify Tax
Comparatively, Shopify Tax offers several features you can find in third party solutions. We’ll just cover the highlights here. Check out this Shopify blog, and Help Center article to dive deeper.
Sales Tax Insights
It can be difficult to easily know where you are liable to collect taxes. Shopify Tax includes a reporting feature called Sales Tax Insights that will use your shop’s data to determine a state-by-state overview of your current sales tax obligations. The report also highlights states where you are approaching a tax threshold, allowing you to plan ahead.
As tax codes change, Shopify will automatically update Insights to accommodate any new or changing tax rates and thresholds.
All Shopify customers, regardless of subscription type, can access and use Sales Tax Insights as an added benefit.
Rooftop Precision Tax Rate Calculations
There are over 11,000 sales tax jurisdictions in the US. You have plenty of time to figure out which tax rate to apply to a customer’s order, right? For those of you who don’t, Shopify Tax will now use the buyer’s full address to calculate the applicable tax rate. Known as rooftop accuracy, this is the most precise way to calculate sales taxes. Before this, Shopify did not have the ability to calculate rooftop accuracy, so this feature should help with ensuring your customers are charged the correct rate at checkout.
How do Shopify Tax Calculations work?
In order to calculate taxes properly, Shopify Tax utilizes smart categorization. Every state has unique rules that dictate how much tax should be charged for various products. Shopify Tax will use your smart categorizations (along with rooftop accuracy) to calculate the appropriate rates.
When you create a product in Shopify, the platform will recommend a product category based on the description you enter. Once a category is selected, Shopify Tax will automatically assign the appropriate tax rate based on regulations for the customer.
What is the downside to Shopify Tax?
Customers who have traditionally relied on third party applications to create tax nexuses and/or file their taxes could find Shopify Tax disappointing. At this time, Shopify Tax will not assist with registering a nexus or filing taxes on your behalf. Rather, the platform will provide helpful links and FAQs to help you along the way.
Shopify Plus customers can utilize an integration with Avalara AvaTax that does offer this service.
How much does Shopify Tax cost?
For the remainder of 2022, Shopify Tax will be included in the current subscription cost for all platform users.
However, starting January 1, 2023, fees will be charged to qualifying US online sales over $100,000 in a calendar year.
Above that $100,000 sales threshold, a 0.35% fee will be charged for transactions where a tax nexus is established and tax collection is enabled. The fee is calculated based on the total transaction and includes shipping.
Shopify Plus customers will be charged a slightly lower fee of 0.25%. For all plans, the fee is capped at $0.99 per transaction and $5,000 per calendar year.
As before, there is no charge for sales tax collection on Shopify POS transactions.
What if I don’t want to use Shopify Tax?
Shopify users are able to opt out of Shopify Tax if they wish. Customers who already utilized a third party application may find their current solution sufficient, or perhaps less expensive. In that case, we recommend staying with your third party integration.
For users who do not use a third party application, opting out of Shopify Tax will revert to Shopify’s legacy tax features on January 1, 2023. These customers will not see Sales Tax Insights and rooftop accuracy will not be available. The legacy tax calculations will be free, but will not automatically update as tax regulations change.
So, should you use Shopify Tax?
We certainly aren’t tax professionals here at Sprucely Designed, so consult your tax advisor before making a decision. However, for Shopify users who sell less than $100,000 a calendar year, using Shopify Tax is a given. Rooftop accuracy alone will certainly make your tax calculations more accurate and require no maintenance.
However, if your sales exceed $100,000 per calendar year, we recommend researching third party applications, along with Shopify Tax, to determine which solution will meet your needs, while incurring the lowest fees. Are you a current Sprucely client and looking for assistance with utilizing Sales Tax Insights or product categorization? Schedule a call today! Are you new to Sprucely Designed? We can’t wait to meet you; get started here.