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example-tax-setups.md

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Example tax setups

The examples in this article are for illustrative purposes only. Always defer to a tax professional before setting up taxation in a production environment.

Your store's tax setup may range from simple to complicated. This article provides simplified examples for typical stores that need to comply with value-added tax regulations, sales tax regulations, or both.

Sales tax

Your U.S.-based company has tax nexus in two states: New York and Pennsylvania. You do not ship outside of these two states. Because of this, you are required to charge different tax rates to anything shipped within those states:

  • You are required to charge 5% tax on any item shipped to New York.
  • You are required to charged 6% tax on any clothing item shipped to Pennsylvania and 5% tax on non-clothing items.

Zones

To simplify your taxation setup, you can create two zones:

  • New York (NY): A state-based zone that contains only the state of New York.
  • Pennsylvania (PA): A state-based zone that contains only the state of Pennsylvania.

Tax categories

In order to create your store's tax rates, you need to create two tax categories for your products:

  • Clothing: All the clothing items that you sell should have this tax category applied.
  • Other items: Every non-clothing product on your store should have this tax category applied.

Note that if one of your products does not have either the "Clothing" or the "Other items" tax category, any customer who buys that item would be charged no tax on it.

Tax rates

Now that you have your zones and tax categories set up, you can see what kind of meaningful tax rates you could create for both New York and Pennsylvania:

Zone Tax category Tax rate
New York (NY) Clothing 5%
Other items 5%
Pennsylvania (PA) Clothing 6%
Other items 5%

Because there are only two distinct tax rates required (5% and 6%) you only need to create two tax rates:

Tax rate Zones Tax categories Tax rate
PA Clothing PA Clothing 6%
NY and PA General NY, PA Clothing; Other items 5%

Provided your products have the correct tax categories added, your store now complies with the Pennsylvania and New York tax regulations for the products that you sell.