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Shopify Tax Exemption: By Customer & By Product

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Managing tax exemptions on Shopify can be a tricky situation due to the complexities of tax regulations. However, the good news is that Shopify has streamlined much of the process through automation. This allows merchants to concentrate on selecting tax-exempt items in compliance with the relevant tax rules.

By leveraging Shopify’s automated tools, businesses can efficiently handle tax exemptions, reducing the risk of errors and potential legal issues. This enables entrepreneurs to focus on growing their e-commerce sites and providing a seamless shopping experience to their customers while remaining compliant with tax laws.

In this article, we’re going to look at Shopify tax exemptions by customers and products, allowing you to manage taxes effectively.

So, stay tuned because we have lots of information coming your way!

What Are Shopify Exempt Taxes?

In essence, Shopify exempt taxes refers to product and customer types free from tax collection. This situation means that your Shopify store may not be obligated to collect taxes on sales of such products or to sell to such customers. Nevertheless, you must be aware of which products and customers are tax-exempt to avoid legal consequences.

Tax exemptions vary by region, such as cities, states, or countries. You may also encounter tax-exempt customers overseas, such as in the European Union or South America. That is why understanding tax exemptions in these regions helps ensure compliance.

Here is a look at the specifics of Shopify exempt taxes:

#1: Tax exemption on specific products

In some jurisdictions, certain products might be eligible for tax exemptions. For example, some regions might exempt essential items like groceries or medical supplies from sales tax. To apply tax exemption to specific products on Shopify, the store owner needs to set up tax exemption categories and associate them with the eligible products.

#2: Tax exemption for specific customer types

In some cases, certain customer types might be eligible for tax exemptions (or you can remove all taxes). This could include non-profit organizations, government entities, or resellers with valid tax IDs. To accommodate this, Shopify allows store owners to create customer groups or tags identifying the specific customer types eligible for tax exemption. The tax exemption categories can be associated with these customer groups, so they are not charged tax on their purchases.

#3: Regional variations

Tax laws and regulations can vary significantly from one country or state to another. What may be tax-exempt in one location might not be in another. For instance, some regions may exempt clothing and footwear from sales tax during certain periods. Store owners using Shopify need to understand the specific tax laws and exemptions applicable to their business’s location.

It’s important to note that while Shopify provides tools and settings to manage taxes and tax exemptions, it is ultimately the responsibility of the store owner to correctly configure and comply with the tax regulations in their jurisdiction. Failure to comply with tax laws could result in penalties or legal consequences.

Since tax laws can change over time and differ by location, e-commerce sites must seek professional advice from accountants or tax experts familiar with e-commerce and tax regulations in their region. Accurate records of tax-exempt sales and customer exemptions are essential for tax reporting and compliance.

Shopify Tax Exemption
Source: https://www.unsplash.com/

Why Should You Set Up Tax Exempt Products and Customers in Shopify?

Setting tax-exempt products and customers in Shopify is essential for several reasons, mainly to ensure compliance with tax laws, improve customer experience, and manage accounting and reporting accurately. Here’s a detailed explanation of why it’s crucial to set tax exemptions:

#1: Legal Compliance

Tax laws and regulations can be complex and vary significantly based on location. By setting tax exemptions correctly, you ensure that your online store adheres to the tax rules applicable to your business. Failure to comply with tax laws could lead to penalties, fines, or legal consequences, which can be detrimental to your business’s reputation and finances.

#2: Avoid Overcharging Customers

Applying taxes to tax-exempt products or customers can lead to overcharging customers. This can result in unhappy customers and potential refund requests. Setting up tax exemptions in Shopify helps ensure that the correct taxes are applied to the appropriate products and customers, leading to a more transparent and accurate checkout process.

#3: Improve Customer Experience

Customers eligible for tax exemption (e.g., non-profits, government entities) expect to be treated appropriately during purchase. Recognizing their tax-exempt status enhances the customer experience. It demonstrates that your business understands and respects its unique tax situation.

#4: Attract and Retain Customers

Some customers may actively seek out tax-exempt sellers, especially if they are eligible for tax exemptions. By catering to these customers’ needs and providing a seamless tax-exempt purchasing process, you can attract and retain valuable customers, including non-profits and other tax-exempt organizations.

#5: Manage Accounting and Reporting

Properly setting up tax exemptions in Shopify helps simplify your accounting processes. You can generate accurate financial reports and statements by correctly categorizing tax-exempt sales and customers. This makes tax reporting more straightforward and less prone to errors.

#6: Avoid Tax Audit Issues

Incorrectly applying taxes or failing to recognize tax-exempt status can lead to discrepancies in your financial records, potentially triggering a tax audit. Tax audits can be time-consuming, costly, and stressful for businesses. Ensuring tax compliance through proper tax exemption setup minimizes the risk of facing audit-related issues.

#7: Streamline Operations

Tax exemptions that are properly configured in Shopify can streamline your sales process. The platform automatically calculates and applies the correct taxes based on the product and customer’s tax status, reducing the manual effort required to manage tax-related calculations.

As you can see, there are various reasons why you might consider including tax exemptions in your Shopify store. The key thing to consider is serving your customers so you remain compliant and deliver exceptional customer service.

Things to Consider Before Setting Up Tax-Exempt Products and Customers

To set tax exemptions in Shopify effectively, consider the following steps:

#1: Research Local Tax Regulations

Understand the tax laws and regulations in your business’s location, as tax exemptions can vary based on your jurisdiction.

#2: Identify Tax-Exempt Products and Customers

Determine which products are eligible for tax exemptions and identify customer types eligible for tax exemption status.

#3: Configure Tax Exemption Settings

Use the appropriate tax exemption settings in Shopify to mark products and customers as tax-exempt.

#4: Maintain Records

Keep accurate records of tax-exempt sales and customers for accounting and tax reporting purposes.

#5: Seek Professional Advice

Consult with tax experts or accountants familiar with e-commerce and your region’s tax laws to ensure proper setup and compliance.

Above all, seeking professional advice is a good idea when creating tax exemptions. Please remember that compliance is a significant issue. So, it’s always best to ensure you’re on the right side of the law to avoid needless legal issues.

What Are the Advantages of Setting Up Tax-Exempt Products and Customers?

Setting up tax-exempt products and customers in Shopify offers several advantages for both businesses and customers. These advantages include legal compliance, cost savings, improved customer experience, and streamlined operations. Let’s explore each advantage in detail:

#1: Legal Compliance

One of the primary benefits of setting up tax exemptions in Shopify is ensuring legal compliance with tax regulations. Tax laws can be complex and vary from one jurisdiction to another. By accurately applying tax exemptions to eligible products and customers, businesses avoid the risk of non-compliance, which could lead to penalties, fines, or legal issues.

#2: Cost Savings

For tax-exempt customers, the absence of taxes can lead to cost savings. Non-profit organizations, government entities, and other eligible customers are often exempt from paying sales tax. By offering tax-exempt purchasing options, businesses can attract these customers and potentially increase sales from this specific segment.

#3: Attracting Tax-Exempt Customers

By accommodating tax-exempt customers, businesses can attract organizations and individuals who actively seek out tax-exempt sellers. This includes non-profits and other tax-exempt entities. Attracting these customers can be valuable, as they might make significant purchases and become repeat buyers.

#4: Improved Customer Experience

Recognizing and honoring tax-exempt status enhances the customer experience. Eligible customers will appreciate the hassle-free checkout process and personalized treatment, which can lead to increased customer loyalty and positive word-of-mouth referrals.

#5: Simplified Checkout Process

When tax-exempt customers make a purchase on a tax-compliant Shopify store, they can complete their transactions without needing to navigate complicated tax calculations. This streamlined checkout process improves efficiency and reduces the risk of abandoned carts due to confusion over taxes.

#6: Compliance with Business Contracts

Some businesses have contracts or agreements with tax-exempt customers that require the tax exemption to be upheld during transactions. By implementing tax exemptions in Shopify, businesses can fulfill these contractual obligations accurately.

#7: Efficient Accounting and Reporting

Properly setting up tax-exempt products and customers in Shopify simplifies accounting and financial reporting. The platform can automatically generate accurate reports, segregating taxable and tax-exempt sales. This reduces the risk of errors during tax reporting and eases the burden on accounting teams.

#8: Minimized Risk of Audits

An accurate tax exemption setup reduces the likelihood of discrepancies in financial records. It minimizes the risk of facing tax audits. A well-organized and compliant tax structure demonstrates a business’s commitment to proper tax management.

#9: Positive Brand Image

Running a tax-compliant and customer-friendly business can contribute to a positive brand image. Customers may perceive the business as responsible, transparent, and trustworthy, which can foster long-term relationships and brand loyalty.

#10: Avoiding Overcharging and Refunds

Incorrectly charging taxes to tax-exempt customers can lead to overcharging and subsequent refund requests. Proper tax exemption setup helps avoid these issues, reducing the administrative burden associated with managing refunds.

On the whole, setting up tax-exempt products and customers in Shopify provides several benefits, including legal compliance, cost savings for eligible customers, improved customer experience, and streamlined operations. By accurately applying tax exemptions, businesses can foster a positive brand image, attract tax-exempt customers, and efficiently manage their tax-related processes.

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How to Set Shopify Tax Exemptions

Setting up tax exemptions in Shopify involves configuring tax settings in the admin dashboard to apply tax exemptions to specific products and customers. Here’s a detailed step-by-step guide on how to set up tax exemptions:

#1: Research Tax Laws

Before setting up tax exemptions in Shopify, familiarize yourself with the tax laws and regulations in your business’s location. Tax laws can vary depending on your country, state, or region. Understand which products and customer types are eligible for tax exemption. For instance, B2B transactions in the European Union are VAT-exempt when the seller is overseas, such as in the United States or another EU country. The same goes for B2C customers who buy from countries outside the EU. So, if you’re based in the US, you should consider making EU customers (B2C and B2B) tax-exempt.

#2: Access Shopify Admin

Log in to your Shopify admin account. If you don’t have one, sign up for a Shopify account and set up your online store.

#3: Navigate to Settings

In the Shopify admin dashboard, click “Settings” in the bottom left corner of the page.

#4: Select Taxes

Under the “Settings” menu, choose “Taxes” to access the tax settings section.

#5: Enable Taxes

Ensure that the taxes are enabled for your store. If taxes are not enabled, toggle the “Automatically calculate taxes” option to activate it.

#6: Create Tax Exemption Category

In the “Tax exemptions” section, click on “Add tax exemption” to create a new tax exemption category.

#7: Name the Category

Give your tax exemption category a descriptive name, such as “Tax-Exempt Products” or “Non-Profit Customers.”

#8: Set Conditions

In the “Condition” section, choose whether the tax exemption applies to specific products or customers. You can select “Based on products” to apply the exemption to specific products or “Based on customers” to apply it to specific customer groups or tags.

#9: Select Products or Customers

If you chose “Based on products,” select the products that should be tax-exempt. If you chose “Based on customers,” create customer groups or tags for the eligible customers and associate them with the tax exemption category.

#10: Save Changes

Click on the “Save” button to save the tax exemption category settings.

#11: Verify Settings

Double-check your tax exemption settings to ensure they are accurate and reflect the eligible products and customers you want to exempt from taxes.

#12: Test Tax Exemption

Place a test order on your store using a tax-exempt customer account or a tax-exempt product to verify that the tax exemption is correctly applied during checkout.

#13: Maintain Records

Keep detailed records of tax-exempt sales and customers, including any necessary documentation or certificates required by tax authorities.

#14: Stay Updated

Regularly review your tax exemption settings to ensure they align with any tax laws or regulations changes.

Tax exemption in shopify
Source: https://www.pexels.com/

Using a Third-Party App to Manage Shopify Tax Exemptions

Using a third-party app to manage Shopify tax exemptions can provide additional features and flexibility beyond the built-in tax settings. These apps are designed to streamline the process of applying tax exemptions, automating calculations, and ensuring compliance with tax regulations. Here’s a detailed explanation of how to use a third-party app to manage tax exemptions in Shopify:

#1: Research and Choose the App

Start by researching and choosing a third-party app from the Shopify App Store that specifically handles tax exemptions. Look for apps with good reviews and ratings, and ensure they are compatible with your region’s tax laws.

#2: Install the App

Once you’ve selected the app, click on the “Add app” button to install it in your Shopify store. Follow the on-screen instructions to complete the installation process.

#3: Configure the App

Access the app’s settings or dashboard within your Shopify admin after installation. Depending on the app, you may need to set up some initial configurations to match your tax exemption requirements.

#4: Create Tax Exemption Rules

Using the app, create tax exemption rules based on your specific needs. You can set rules for tax-exempt products, customers, or specific tax categories.

#5: Define Tax-Exempt Products

Select the products that should be tax-exempt by choosing specific products individually or using product tags or categories to define the tax-exempt items.

#6: Set Tax-Exempt Customers

Determine the customer groups or tags eligible for tax exemption, such as non-profit organizations or government entities.

#7: Configure Tax Exemption Conditions

Set conditions for the tax exemption rules, such as the geographic locations where tax exemptions apply, minimum order amounts, or time periods for tax exemption validity.

#8: Test Tax Exemptions

Perform test orders using tax-exempt customer accounts or tax-exempt products to ensure the app correctly applies for tax exemptions during the checkout process.

#9: Enable Automatic Calculations

Most tax exemption apps automatically calculate and apply tax exemptions based on your configured rules. Ensure the app is set up to automate the tax exemption process.

#10: Monitor Compliance

Regularly review the app’s settings and configurations to ensure they remain compliant with any tax laws or regulations changes.

#11: Maintain Records

Keep detailed records of tax-exempt sales and customers, including any necessary documentation or certificates required by tax authorities. Some apps may provide features for generating reports related to tax exemptions.

#12: Customer Communication

If the app offers customization options, consider setting up automated communication with tax-exempt customers during checkout to inform them about their tax-exempt status.

#13: Support and Updates

Stay in touch with the app’s support team to seek assistance, if needed, and keep the app updated with the latest features and bug fixes.

By using a third-party app to manage tax exemptions in Shopify, you can simplify the tax exemption process, automate calculations, and enhance the customer experience. These apps are designed to handle the complexities of tax regulations and ensure your store remains compliant while providing a seamless and efficient checkout experience for tax-exempt customers.

Managing Shopify Tax Exemptions

When managing Shopify tax exemptions, it’s worth looking at how to enable and disable tax calculations. So, let’s take a closer look:

taxes
Source: https://community.shopify.com/c/accounting-and-taxes/vat-included-excluded/td-p/468560

In this first image, we can see how you can automatically adjust the settings to include taxes in prices. This setting allows you to include relevant taxes such as VAT in the European Union or GST/PST in Canada. When selecting this setting, your online store will display something like this:

taxes
Source: https://community.shopify.com/c/accounting-and-taxes/vat-included-excluded/td-p/468560

As you can see, your product prices now include taxes at checkout. Consequently, your customers will see the total amount to pay with a breakdown of the relevant taxes included in the price. This feature helps boost transparency so customers are aware of how much the product costs and the applicable taxes included in the total amount paid.

The setting above creates a blanket calculation for all products. But what if you need to differentiate tax calculations based on separate products? For instance, you might be dealing with some tax-exempt products, but you may need to include taxes for others. The following steps illustrate how to do this.

taxes
Source: https://community.shopify.com/c/accounting-and-taxes/vat-included-excluded/td-p/468560

First, go to your Shopify admin and look for the Products section. There, you will find the Edit Products tab on the sidebar. Clicking on this feature allows you to toggle the settings for individual items. Now, you can move on to the Charge Taxes setting. This setting allows you to determine which items you can charge taxes on.

taxes
Source: https://community.shopify.com/c/accounting-and-taxes/vat-included-excluded/td-p/468560

As you can see, this setting enables charging taxes on specific products. The next step enables you to select the individual items you can collect taxes on.

taxes
Source: https://community.shopify.com/c/accounting-and-taxes/vat-included-excluded/td-p/468560

Here, you can click on the items you can collect taxes on by checking the box. Leaving a box unchecked means your store will not collect taxes on those items. Be sure to double-check tax-exempt items to avoid possible compliance issues.

Conclusion for Shopify Tax Exemption: By Customer & By Product

Managing Shopify tax exemptions is a breeze with its great tools and user-friendly features. Shopify simplifies the process, allowing merchants to set up and apply tax exemptions where needed easily. However, it’s crucial to remember that tax laws can be complex and ever-changing.

To ensure full compliance and avoid potential consequences, e-commerce sites must diligently follow applicable tax rules. Staying informed and keeping accurate records will help merchants confidently navigate tax exemption management, guaranteeing a smooth shopping experience for customers and peace of mind for entrepreneurs.

Disclaimer: The information provided in this blog post about taxes is for general informational purposes only. It should not be considered as professional tax advice. For personalized tax guidance, please consult a qualified tax professional or financial advisor. We do not assume any responsibility for the accuracy or completeness of the information presented herein. Tax laws and regulations may vary, and individual circumstances can impact tax situations.

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  • Simplified customer experience - saves time and effort for customers by offering relevant product recommendations, enhancing satisfaction and loyalty
  • Cross-selling opportunities: "Frequently Bought Together" creates opportunities for cross-selling, allowing brands to introduce shoppers to a wider range of products

How By Benson uses Frequently Bought Together

By Benson never misses an opportunity to offer more options to its customers. While shoppers visit their product pages, they constantly offer to extend or upgrade the targeted product, resulting in better service and larger orders.

www.bybenson.com

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Build Your Own Bundle

Offer shoppers the ability to create their own bundle of products by selecting from a range of available options

What is Build Your Own Bundle?

Build Your Own Bundle scenario provides shoppers with the flexibility to select specific items or features that best meet their individual needs and preferences. The selection is based on a pre-curated set of products by the merchant.

Why are brands using it?

  • Increase AOV - encourage higher spending with customizable bundles, raising average order values and revenue
  • Personalize purchases - tailor products to customer preferences, potentially increasing Average Order Value (AOV) and overall revenue
  • Stand out competitively - offer a unique option, attracting customers looking for customized solutions

How By Benson uses Build Your Own Bundle

As a professional destination for home gardeners, By Benson understands that it might be tricky to select all the necessary tools to make your garden shine. That's why By Benson helps its shoppers choose bundles of tools with a single click, while boosting their Average Order Value (AOV).

www.bybenson.com

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Build Your Own Bundle

Offer shoppers the ability to create their own bundle of products by selecting from a range of available options

What is Build Your Own Bundle?

Build Your Own Bundle scenario provides shoppers with the flexibility to select specific items or features that best meet their individual needs and preferences. The selection is based on a pre-curated set of products by the merchant.

Why are brands using it?

  • Increase AOV - encourage higher spending with customizable bundles, raising average order values and revenue
  • Personalize purchases - tailor products to customer preferences, potentially increasing Average Order Value (AOV) and overall revenue
  • Stand out competitively - offer a unique option, attracting customers looking for customized solutions

How Good Store uses Build Your Own Bundle

Good Store encourages its shoppers to build their own custom bundles of soaps. They provide a variety of soaps to choose from and leave the selection itself to the shopper. This is fun, rewarding, and makes both sides happy.

www.good.store

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Bundle as Product

Combine multiple individual products into a bundle and sell them as a single unit

What is Bundle as Product?

Bundle as Product scenario involves bundling multiple individual products together and selling them as a single unit. This strategy offers shoppers a curated selection of items that work together or complement each other.

Why are brands using it?

  • Increase sales and revenue. Bundling leads to higher sales volumes and greater revenue due to the perceived cost-effectiveness.
  • Highlight the value and convenience of purchasing a set of items together, enticing them with an irresistible offer
  • Enhance value perception. Bundles create the perception of added value, making them more appealing to customers.

How Westman Atelier uses Bundle as Product

Westman Atelier understands that the attention span of the average shopper is quite short. Furthermore, with numerous options available, it's often easier to opt for a suggested bundle that's already curated for you.

www.westman-atelier.com

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Frequently Bought Together

Present bundles of products that are frequently purchased together, simplifying the decision-making process for your customers

What is Frequently Bought Together?

It is a recommendation scenario that suggests additional products to the shopper, which are often purchased by other customers in conjunction with the item they are currently viewing or considering purchasing.

Why are brands using it?

  • Boosted sales and revenue - increases average order value by suggesting complementary products, leading to higher sales
  • Simplified customer experience - saves time and effort for customers by offering relevant product recommendations, enhancing satisfaction and loyalty
  • Cross-selling opportunities: "Frequently Bought Together" creates opportunities for cross-selling, allowing brands to introduce shoppers to a wider range of products

How Aim’n uses Frequently Bought Together

Aim'n never misses a shopper when it comes to its product pages. It utilizes the 'Frequently Bought Together' feature to suggest additional sizes to product viewers, ensuring that no shopper is left without a solution while keeping its main sizes as the default option.

www.aimn.se

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Bundle as Product

Combine multiple individual products into a bundle and sell them as a single unit

What is Bundle as Product?

Bundle as Product scenario involves bundling multiple individual products together and selling them as a single unit. This strategy offers shoppers a curated selection of items that work together or complement each other.

Why are brands using it?

  • Increase sales and revenue. Bundling leads to higher sales volumes and greater revenue due to the perceived cost-effectiveness.
  • Highlight the value and convenience of purchasing a set of items together, enticing them with an irresistible offer
  • Enhance value perception. Bundles create the perception of added value, making them more appealing to customers.

How BLANQI uses Bundle as Product

BLANQI make it easy for their shoppers to find complete maternity sets. While shoppers receive a fast, single-click shopping experience, BLANQI enjoys higher order amounts without investing any additional resources.

www.blanqi.com

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Build Your Own Bundle

Offer shoppers the ability to create their own bundle of products by selecting from a range of available options

What is Build Your Own Bundle?

Build Your Own Bundle scenario provides shoppers with the flexibility to select specific items or features that best meet their individual needs and preferences. The selection is based on a pre-curated set of products by the merchant.

Why are brands using it?

  • Increase AOV - encourage higher spending with customizable bundles, raising average order values and revenue
  • Personalize purchases - tailor products to customer preferences, potentially increasing Average Order Value (AOV) and overall revenue
  • Stand out competitively - offer a unique option, attracting customers looking for customized solutions

How Carly Jean uses Build Your Own Bundle

Carly Jean offers its shoppers the opportunity to build their own custom looks by selecting the individual items that comprise their desired outfit. 'Build Your Own Bundle' enables Carly Jean to easily provide a personalized experience that shoppers love and want to return to again and again.

www.carlyjeanlosangeles.com

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Spend X Get Y

Encourage shoppers to spend a certain amount of money (X) in order to receive a specific benefit or reward (Y)

What is Spend X Get Y?

"Spend X, Get Y" promotions are designed to motivate shoppers to spend more money with the promise of receiving something valuable in return. It's a win-win situation where customers get a benefit, and the store increases its sales.

Why are brands using it?

  • Promotes larger purchases - motivates shoppers to spend more to qualify for the promotion, potentially leading to bigger transactions
  • Increases Average Order Value (AOV) - encourages higher spending, leading to a higher average transaction value
  • Enhances customer loyalty - provides added value, improving customer satisfaction and fostering loyalty

How Proclamation Jewelry uses Spend X Get Y

Proclamation Jewelry encourages its shoppers to spend at least $500 on jewelry in-store to receive free shipping. This is a win-win for both the shoppers, who get free shipping (which can be expensive at times), and the brand, which maintains a higher average order value.

www.proclamationjewelry.com

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