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You may find Setting up sales tax as one of the most daunting tasks while getting products up and ready for sale. But understanding how taxes work and how efficiently they can be managed through WooCommerce is a great way to clear the mist around taxes.
In this article, you will find useful tips on what to look for while setting up taxes, some common terminologies related to it, and further steps in automating taxes as well.
Defining sales tax for online stores
It’s easy to understand sales tax when it comes to stores that operate from a physical location. These are often called brick and mortar businesses and state tax laws are clearly defined for sales of their physical goods as well.
But things get a bit complicated when it comes to products that are bought from virtual shops and are shipped to customers all across the globe. While selling online, it is important to know the tax policies of the country your customers are in to avoid penalties and other shipping issues.
Sales tax for online stores selling in the U.S comes under the grip of their particular sales tax nexus. This is a type of bond that a business has to adhere to when selling to customers residing in particular states.
As the rules were only updated fairly recently(2018), they are quite different from state to state. Earlier, only brick and mortar businesses (physical stores) had to pay sales tax for products they sold. As per their new policy, all stores that have some connection with the state or the customers within the state are directed to collect sales tax from buyers without fail.
What’s a sales tax nexus?
This is a term that might be new to most of the first time store owners who sell products to customers in the U.S. It’s a tie-up that a business has with a state, especially in the U.S in the form of tax collection.
You business is said to have a sales tax nexus when it has any physical presence or economic connection with any state in the U.S. This can happen in many ways, some of which are:
- having an office or workers in a state
- maintaining a warehouse in any state
- setting up of affiliate sales
- inventory in any state
- economic transactions with customers in a state that exceeds a minimum dollar amount.
- conducting trade shows or fairs in a state
You may have to consult your state’s taxing authority to know more about whether you have a sales tax nexus with any of the states in the U.S.
The next step after finding out if you have sales tax nexus in the U.S is to collect appropriate taxes from the buyers from those states. Note that tax rates in such nexus differ from state to state, so use adequate tax management software to automate tax collection from customers within these states. More on this later.
What are the questions that a store owner needs to know about sales taxes?
Managing taxes can be a rough job if you are not aware of your state or country laws on online sales. It is important to have a word with an experienced accountant before you file and pay your tax returns.
Thankfully, WooCommerce has specialized plugins to automate sales tax as well. We’ll cover more about these and other plugins in a following section.
Here are some of the common questions that you may encounter while starting your first WooCommerce store.
1. In what states should I collect sales tax from my customers?
You may not have noticed, but online shopping laws have been subjected to strenuous scrutiny by countries in recent years.
During the initial years of the dot com era, much of the product sales/services through the internet were tax-free. This soon changed as states, especially in the U.S realized that selling products online must come under their tax policies.
Fast forward to 2020, and states are still unclear on how to to levy taxes on online goods. Through sales tax nexus, most of the states require online stores to levy taxes on products that are bought by customers who live in those state.
This means that products will be taxed differently based on the state in which the customer resides. Note that only those customers who reside on states that have their sales tax nexus require to pay taxes on online products. There are states that give full tax exemption for some categories of products.
2. Are my products tax-exempt?
Products that can be considered ‘tangible personal property’ are taxed in the U.S, with exceptions. This includes the sale of everything from coffee mugs to huge wardrobes to require sales tax to be paid by the customers.
But groceries and other basic commodities are tax exempt in most the states in the U.S except for states like Illinois where they charge a marginal tax on them as well. Prescription drugs is another example of tax-exempt products.
Some states even follow a price limit for products above which states can levy taxes on them. In the state of New York, any individual garment that costs less than $110 is tax-exempt.
In contrast, intangible products like software, apps, videos, and music are somewhat tax exempt. By ‘somewhat’, we mean that most of the states are only warming up towards the latest policies and tax laws to get a grip on digital goods.
So while some states have tax laws that specify some products, other states might have a different set of laws for the product category.
As sales tax laws are only catching up with the pace of software development, states still have a long way to fully understand and articulate laws to properly levy taxes on digital goods.
The above shown infographic from Avalara shows how some states require software to be taxed while some remain exempt.
Some of the categories in which digital products are classified are as follows:
- Canned software delivered on tangible personal property
- Software as a service (SaaS)
- Customization of canned software
- Canned software download
- Custom software download
3. Am I selling to tax-exempt customers?
Based on the size and type of your business, customers can range from occasional buyers to government entities or resellers.
- Institutions like schools, non-profits, and other similar organizations can actually buy products tax-free. The same rule applies to retailers that purchase products in bulk to resell them.
While the majority of your customers pay taxes for your product, it is necessary to identify tax-exempt customers and refrain from collecting sales tax from them.
Don’t worry though, WooCommerce already comes with plugins that allow you to edit customer roles and set users as sales tax exempt. PublishPress Capabilities is one such plugin that you could rely on for such edits.
4. Should I care about the shipping address and billing address?
If you are in the U.S, it may be interesting to know that different states have different state sales tax policies.
The difference in collecting taxes based on your customer’s shipping address or billing address is solely based on the tax laws of individual states.
- For the most part, states often ignore the ‘ship from’ address in their laws. This means that tax can be levied based on the destination of shipped products or the ‘ship to’ address.
But, this is not the case for all of the states though. Some states are called ‘origin based’ states and sales taxes apply on products based on the origination point of the order. This can be their home, office, warehouse and so on. In this case, it is important to calculate your customer’s taxes based on their billing address.
Some of the tax extensions in WooCommerce comes with the data of sales tax nexus of states in the U.S. They can be enabled to automatically apply sales tax on your customer’s product after they enter their shipping or billing address.
Set up WooCommerce taxes the right way
By default, the settings for taxes will be turned off in your WooCommerce store during initial set up. Go to WooCommerce > Settings > General and check on the box that says ‘Enable taxes‘. This will open up a wide list of settings under ‘Tax‘ once you save the changes.
Click on WooCommerce > Settings > Tax.
If you look closely, you will find that there are provisions to enlist the countries to which you are shipping your products to from the above image. Here’s what the settings page for taxes looks like:
First, define what prices would you like to show your customers – prices before taxes or inclusive of taxes. This choice of pricing will greatly affect how your products are shown on your WooCommerce store.
- If you choose to show prices inclusive of tax, then products will be shown at different prices to customers based on the country they are in. For example, a product that is entered at a price of $9.99 and has a 20% tax in the U.S and zero taxes elsewhere, will be listed at $8.32 for all customers other than that from the U.S.
- For products that are priced exclusive of all taxes, your website will show a constant price on the product page and an added tax will be shown at the time of checkout.
Next comes the option for choosing the address based on which tax rates will be added to products in your customer’s cart. You can choose one of three options: customer’s shipping address, customer’s billing address or your store base address. This decision is mostly based on whether you have any sales tax nexus in the state of your customer’s residence.
How to set up shipping tax classes
While adding products to a WooCommerce store, you get the option to assign a shipping class for each product as well. For the most part, shipping tax class is inherited from the value assigned at the time of product addition.
For example, a reduced shipping tax rate will be assigned to a reduced rate item on your store. If not, you can always choose a different tax class for the products being shipped.
- From the Standard tax rates menu, you can add the country code, state code, postcode, city, and the percentage tax you want to charge for the product.
Note that these rates will be applied to products that are being sent to countries or places where you have set up their relevant tax classes.
- You can add additional tax classes with different rates and can be applied to products accordingly. The settings will look similar to that of the standard tax rates.
After you have set up tax classes for shipping, you can choose to display prices on your shop based on your liking. Under ‘Price display suffix‘ under tax options, you can even add provisions to show “Prices include __%tax/VAT” to help your customer see exactly how much are they paying.
How to view tax reports
It’s a basic setting you’ll find under WooCommerce > Reports > Taxes. It is important that you have a record of the taxes collected for proper filing of taxes.
The page will show you a detailed list of the number of orders, the total tax amount, shipping tax amount and the total tax collected via transactions in your WooCommerce store.
The fully detailed tax report could be downloaded into a CSV file for tax filing applications. It is possible to pull tax reports within a given time frame as well.
How easy is it to file taxes anyway?
The answer to this rests on the size of your business. For large businesses where it is possible to hire an accounting team to manage taxes, it’s better to take that route.
This will also take away the burden of calculating and filing sales tax on a timely basis. One thing to keep in mind is that the chosen software for calculating taxes must go well with the store as well.
For businesses that crave simplicity in transactions and flexibility in filing taxes, we suggest you look into appropriate tax management software to ease your tensions. There is a list of plugins, both free and paid, that could be easily integrated with your WooCommerce store to add automatic tax data for products based on numerous factors.
How to automate taxes
Automating WooCommerce taxes is a great way to take away much of the burden in setting up tax classes and other core steps that we discussed so far.
WooCommerce Shipping and Tax is a great plugin for you to get started. It helps you with automatically adding taxes, print shipping labels, and even has Stripe payments enabled by default.
For more wider services, there’s TaxJar – a plugin that automatically submits your returns to the states where you are registered. It also maintains a return-ready report at all times.
Honestly, taxes can be a bit difficult still, with new laws sprouting up from all across the world. But adjusting them from time to time can easily keep you away from hefty fines and penalties that haunt businesses who take a backseat while reviewing taxes. As a final word of advise, please consult a tax lawyer or consultant to get an overall idea on how your store fares in it’t tax position.