If you are selling outside the USA, please read the article Tax settings.
Your shop software automatically takes care of the basic tax settings if you are selling within the US. The settings are based on your shop’s location. For the customers of your shop, the sales tax is then calculated during the checkout process.
Since the tax settings are not trivial and you might need to adjust them, please read this article carefully.
What do I need to know about taxes within the US?
In the US, sales tax is not collected federally, but via states and other local authorities. US states, counties, cities and even some special communities can have their own tax rates, which are summed up to a combined tax rate. Some states do not have a sales tax at all. All these special cases make tax calculation more complex than in most other countries, which often have just one set of sales taxes nationwide.
What are destination based and origin based taxes?
Some states have a destination based tax model and others have an origin based one. For destination based states, the destination of the order is relevant for tax calculation. In origin based states, the taxes depend on the location where the shop resides.
What is a Nexus or physical presence?
As an online merchant who is selling within the US, you only have to collect sales tax in states where you have a so-called Nexus.
You have a Nexus in a certain state, if you have some kind of physical presence there:
- You automatically have a Nexus in the state where your business resides.
- Additionally, if you have for instance storing facilities or offices in other states, then you have a Nexus in each of these states.
An example: Your business resides in Florida, you have a second office in California and a storehouse in Texas. That means that you have a Nexus in the states Florida, California and Texas. Therefore, if you ship an order to a person or company in one of these three states, you have to collect sales tax there.
The percentage of sales tax you have to collect in your Nexus states depends on the state.
For more information on this topic and to find out what qualifies a Nexus for a certain state, please contact the Department of Revenue of this state.
How do I view and edit the tax settings?
When you enter your shop’s address during the setup and the address is located in the US, the correct tax matrix is automatically created for your shop – based on the state where your business resides. The tax matrix will also be updated if you change your shop’s location under Settings General.
To view and edit the tax settings in the administration area, select Settings in the main menu and then US tax calculation. On this page, you can see the tax matrix. It includes a row for the state your shop resides in and a row for the rest of the world. In the column Combined tax rate you can see the combined rate for the state, county and city of your shop. If your shop is residing in a state with destination based tax rates (see explanation above), the combined tax rate is not a simple percentage, but a range of taxes: the lowest to highest possible tax rates.
If necessary, you can edit the combined tax rate directly in the table and save the changes. In order to restore the default value, select the back-arrow button on the right side of a tax rate field and save the changes.
Which changes to the tax settings might be necessary?
There are some main cases when it is necessary for you to edit the tax matrix:
- You have another nexus in one or more US states (see explanation above)
- Some of your products fall under tax holiday regulations. This means, that different taxes apply to these products during certain tax holidays. An example: If you sell equipment for school children, there might be a tax holiday for these products before a new school year starts, and there are no taxes for these products during that time.
- Products that have differing tax rates (e.g. essentials)
How do I enter a new Nexus / physical presence?
1. In the administration area in the main menu, select Settings and then US tax calculation.
2. Under Add physical presence enter the zip code of the physical presence and select an entry from the drop-down menu.
3. Save the changes.
Your new physical presence has now been set up.
How do I handle tax holidays?
If tax holidays apply to some of your products, we suggest the following way of handling this. In our example we assume that you sell school supplies which have a tax rate of 0 % during a certain tax holiday.
1. In the administration area in the main menu, select Settings and then US tax calculation.
2. Select Tax class.
3. Select the button + Add.
4. Enter a Name for the tax class. In our example, we name the tax class “School supplies”.
5. Select Add.
6. Select Tax matrix.
7. In the table you can see the newly created tax class. In its column, you can enter the tax rate for it. Since the tax rate for school supplies during the tax holiday is 0 %, we enter a 0 for every tax area.
8. Save the changes. You successfully have set up the tax class for the tax holiday.
9. Now you need to determine, which products belong to this tax class. In the main menu, select Products and then View products.
10. The table displays all the products of your online shop. Select the product number of the product for which you want to update the tax class.
11. Under Price select the Tax class you just created.
12. Save the changes.
13. Repeat steps 9-12 for all products to which the tax holidays apply.
When the tax holidays are over, we suggest to just change the tax rate for the particular tax class to the standard one under Settings US tax calculation. That way you can change the tax rate again when the tax holidays are in effect again.
How does the tax calculation work in my shop?
The prices in your shop are displayed as net prices. When a customer goes through the checkout and enters his or her address, the correct taxes are calculated. In the last step of the order process (“Check & Order”) the tax rate is displayed then to the customer, as well as the final price the customer has to pay (including taxes).
You are responsible to take care of the correct tax rates of your shop. Even though we update the tax rates regularly, you should always check if everything is correct.
For any questions concerning taxes, please ask the Department of Revenue of your state for more information or consult a tax accountant.