tax-calculation

Tax Calculation

Overview

Accurate tax calculation at checkout is a legal requirement, not an optimization. In the United States, there are over 13,000 taxing jurisdictions. EU VAT rules require charging the customer's local VAT rate. Getting it wrong leads to under-collection (a liability you must cover) or over-collection (refunds and customer complaints). All major platforms have built-in tax calculation or direct integrations with TaxJar and Avalara that handle this correctly without custom code.

When to Use This Skill

• When expanding sales to states or countries where you have tax nexus obligations
• When manual tax rates are causing compliance issues or needing constant updates
• When implementing EU VAT compliance (OSS/IOSS registration)
• When displaying accurate tax before the customer confirms payment

Core Instructions

Step 1: Understand nexus before configuring tax

You only need to collect tax in jurisdictions where you have nexus (a tax obligation).

US Sales Tax nexus:

• Physical nexus: you have employees, warehouses, or offices in a state
• Economic nexus: most states trigger at $100,000/year in sales OR 200 transactions to customers in that state (California and Texas use $500,000)
• Check each state's current threshold before configuring — thresholds change

EU VAT:

• EU-based sellers must charge VAT at the customer's country rate for all EU sales
• Non-EU sellers must register for EU VAT (via OSS scheme) once annual EU B2C sales exceed €10,000
• B2B sales within the EU: reverse charge applies — the buyer handles VAT via self-assessment

Step 2: Set up tax calculation on your platform

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Shopify

Option A: Shopify's built-in tax (recommended for US stores)

1. Go to Settings → Taxes and duties
2. Under Tax regions, select the regions where you have nexus
3. For US: Shopify calculates taxes automatically at the correct state + county + city rate based on the customer's shipping address — no third-party service needed for basic US compliance
4. Enable Charge tax on shipping if your state requires it (varies by state)
5. For product-level exemptions (e.g., clothing exempt in PA): go to Products → [Product] → Tax and set the appropriate tax category or create a custom tax override