Tax compliance is one of the most daunting aspects of running an e-commerce business. Shopify has built-in tax calculation that handles most scenarios automatically. Here’s how to configure it correctly for your region.
How Shopify Handles Taxes
Shopify automatically calculates taxes for orders based on your store’s location and your customers’ shipping addresses. It uses your tax settings configuration to determine rates. In most cases, Shopify’s automatic tax calculation is accurate for US sales tax and basic VAT scenarios.
US Sales Tax Configuration
US merchants need to collect sales tax in states where they have “nexus” (physical presence or economic nexus based on sales volume — typically $100,000 or 200 transactions per year).
- Go to Settings → Taxes and duties → United States
- Enable “Collect tax” for states where you have nexus
- Shopify automatically applies the correct state and county rates
UK VAT Configuration
If you’re VAT registered in the UK:
- Go to Settings → Taxes and duties → United Kingdom
- Enter your VAT registration number
- Set your default VAT rate (20% standard, 5% reduced, 0% zero-rated)
- Apply correct rates per product category
EU VAT and IOSS
For EU sales after Brexit and the 2021 OSS reforms:
- Orders under EUR 150 to EU consumers require VAT at destination country rate
- Register for EU One Stop Shop (OSS) to file one VAT return for all EU sales
- Or use Import One Stop Shop (IOSS) for cross-border goods under EUR 150
Apps like Avalara, TaxJar, or Shopify Tax handle OSS/IOSS compliance automatically.
Australian GST
Australian merchants with over AUD 75,000 annual turnover must register for GST. In Shopify Settings → Taxes, enable GST at 10% for Australia. Overseas sellers must also charge GST on digital products sold to Australians.
Exclude Tax from Prices vs Include Tax
In Settings → Taxes, choose whether your listed prices include or exclude tax. B2B stores often show prices excluding VAT. B2C stores in countries with VAT typically show tax-inclusive prices.
