Setting Up Taxes

For many people new to selling online, configuring taxes for their online store can be a challenge. Tax requirements can differ on many variables, especially when you are selling internationally!

In this guide, we will explain to you how different types of taxes are calculated and how you could easily configure them for your various customers.

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Types of Taxes

Percentage Value or Fixed Value

When setting taxes for products in your store, you can set them with a percentage value or a fixed value.

For example, if a product worth €150 is taxed at 14%, the tax can be set to “14%” or “€21” (14% of €150).

Difference by Country and Region

Taxes can be different from country to country, so if you plan to sell your products in multiple countries and regions, you can set taxes with respect to that particular country and region.

For example, in some countries in Europe, it is mandatory to display the VAT (Value Added Tax) price on each order.

You can read more about Basic VAT Rules for Europe.

Shipping or Billing Address

When selling internationally, different countries can often have different requirements with tax percentages. You have the option to apply taxes based on the country of the shipping address or the country of the billing address.

Difference by Product Category

A scenario may arise where different products have different taxes, so you have the options to set a tax per product category. Alternatively, you can also set a generic tax to “All Products”, however this tax will be cumulated with any other tax specified for different categories.

For example, in Portugal, VAT on wine is 13%, while books have 6% VAT.

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Tax Application

Product Price Already Includes Tax

This is when you want to include the tax in the selling price of the product, which is generally the most popular methodology to apply when pricing products. In this way, the indicated price is the final price of the product with taxes included.

Note: Once you have configured a product tax this option will become available for selection.

Tax is calculated using the formula Tax = (Tax Rate X Price) / (1 + Tax Rate).

For example:

1 product: €100 (price indicated on the product)

Tax 23% (Included in the quoted price of the product): €18.69918699187

Subtotal: €100

Total (Price at checkout): €100

Show Product Prices with Taxes Included Based on User Location

When this option is checked the tax will be calculated based on the client location and added to the product prices at the store.

The customer location is calculated based on (following this order of priorities):

1. Address on the current order
2. Address of the checkout estimates
3. Address of the current customer
4. Customer IP address

Shipping Already Includes Tax

With this opiton, you can include shipping tax in the displayed shipping prices.

Note: Once you have configured a shipping tax this option will become available for selection.

For example:

1 product: €100 (price indicated on the product)

Product Tax 10%: €10

Subtotal: €100

Shipping: €10 [€8 shipping + €2 shipping tax (not shown separately)]

Total: €120

If this option is not selected:

1 product costs: €100 (price indicated on the product)

Product Tax 10%: €10

Subtotal: €100

Shipping: €8

Shipping Tax: €2

Total: €120

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How to set up taxes

To set up taxes for your store:

1. Go to your store admin panel, from the sidebar go to Settings and click on Taxes.

   

2. In the “Tax based on” section, define which address you want to base your tax on; it can be the shipping address or the billing address (each address can be in different countries).

   

   • For example: John, who lives in Portugal, wants to buy wine online at a Portuguese store but does not have a credit card. So he asks a friend in the US to pay for the order with his credit card. In this case, the shipping address will be Portugal, while the billing address will be the USA. It is likely that the taxes in both countries will differ on the purchase of wine. Therefore, the seller must define whether the buyer must pay taxes based on Portugal or the United States.*

3. You can add taxes directly on the Product prices displayed on your store. This option becomes available if there is at least one product tax set.

   For example:

   

   

4. As the option described above, when you select this option the product prices will have taxes included. The taxes will depend on the user address or on the user location (if address is not available). If the option is disabled, product prices are shown without taxes and taxes are only added in cart and checkout.

   This will only have any effect when the option “Product Price already includes Tax” is disabled:

   

5. You can then choose whether or not to apply taxes to the shipping price. If you check the box, taxes will be included in the shipping price. This option becomes available if there is at least one shipping tax set.

   For example:

   

   

6. If you exclude taxes from the shipping price (leave the box unchecked), you have the option to add different tax percentages or flat tax amounts as well. When taxes are excluded from the sale price, the customer would get an overview of the Subtotal, Shipping Price and Taxes, all calculated separately. This is what the payment would look like:

   

7. Taxes can be added as follows:

   • Country (All Regions)
     • Product Categories
     • Shipping
   • Country (Selective Regions)
     • Product Categories
     • Shipping

   For example: We add a 13% tax on wine, for the country “Portugal” and, more specifically, for the region “Porto”.

   

Taxes in the EU

• Automatically apply standard tax rates for EU countries: This option will automatically apply the standard tax rate for buyers from an EU country based on the address. Option available if shipping to at least one European country is configured in the Shipping Menu (please check the image below) and if the option automatically apply standard tax rates for EU countries is activated.

• VAT exemption for EU companies: select this option to apply 0% VAT to EU companies with a valid VAT number (validated by VIES), excluding the store’s country. Your company must be registered for VAT. Option available if shipping to at least one European country is configured.
  • The VAT exemption is only applied to the automatic EU VAT. If the store has taxes configured that overlap with the automatic EU VAT, the exemption will not work.
  • When taxes are included in the price, the price does not change with the VAT exemption. In this case, the price rate of the product that corresponds to VAT is 0%.
  • If taxes are not included in the price and the customer is VAT exempt, the VAT amount is not added.

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Example Cases

Use Case #1: Pisco Bottle (Chile)

Product price: 5,000 CLP

Tax 1 (19%) - 950 CLP (normal VAT)

Tax 2 (31.5%) - 1,575 CLP (alcoholic beverage)

Total - 7,525 CLP

This can be configured as:

• 1 general tax applied to all categories, which will accumulate with any other tax configured (19%)
• 1 specific tax applied to the alcohol category (31.5%)

Use case #2: Products with lower taxes (or even 0%)

In Portugal, almost everything has a 23% VAT, but some products only have a 6% tax.

In Chile, coffee is not subject to taxes. That would be configured as:

• All categories would need to have their tax specified
• The “Coffee” category would be set to 0%

Use Case #3: Schnapps Bottle (Colombia)

In Colombia, in addition to the normal VAT tax, alcohol has 2 more taxes: 1 applies to hard alcoholic beverages in general, while the last one is calculated based on the amount of alcohol in the drink. This value can be perceived as a fixed number since the amount of alcohol in a drink does not change.

Price of the product 20,000 COP

Tax 1 (5%) - 1,000 COP (normal VAT)

Tax 2 (31.5%) - 6,300 CLP (alcoholic beverage)

Tax 3 (fixed value, not %) - 5,800 COP (200 COP x 29 degrees of alcohol)

Total price: 33,100 COP

This can be configured as:

• 1 general tax applied to all products, which will be accumulated with any other configured tax (5%)
• 1 specific tax for this category of alcohol (31.5%)
• 1 specific tax for the same category, but with a fixed value that reflects an amount charged per amount of alcohol in the drink (5,800 COP)

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Rounding of Taxes

We round taxes at the line-item level. We calculate the total tax value by applying the tax rate to each line in the order, rounding the result to the second decimal, and then adding these subtotals together to arrive at the total value of the order.

This rounding strategy improves the overall calculation of taxes, however it generates an error that can be a maximum of 0.01 units of currency per item; in other words, for 100 product units, you can expect an error between 0 and 1 unit of your store’s currency.

Example

Your store sells a shirt that costs 1.5 EUR; these products don’t have taxes included so each item will have an added tax; in this example, it will be 23%.

The tax for each item will be 1.5 EUR * 0.23 = 0.345 EUR, which is rounded to 0.35 EUR. If a customer decides to buy 100 units, the not rounded tax total vs. the rounded tax total will be:

Rounded Tax Total = 1000.35 = 35
Not Rounded Tax Total = 100*0.345 = 34.5

Result: We are generating a difference of 0.5 EUR total on this order of 100 items.

If you have any questions about all this, you can contact us at any time and we will be happy to help you.