Calculating and setting up your tax system isn’t maybe the first thing you would think of when starting your online store. But it is a very important step to take and the best time to do it is right now, before you set up your product catalog. Magento offers an extended system of tax calculations, making almost anything possible. On the other hand, there is unfortunately no ”one size fits all” approach. Tax laws and calculations simply differ in each country and region.
So, the bad news is, we cannot give you an example for every single country here. So we have to stick with describing what Magento can do in terms of tax calculations. We are neither tax experts, so please always refer to your local tax laws to make sure that you apply to them.
If for instance, you’d like to know more about the United States sales taxes, Wikipedia is a good starting point:
Your taxes setup will contain the following elements. The majority of the needed functions can be found in the Sales menu as follows:
General taxation settings: Navigate to System | Configuration | Sales | Tax
Product Tax classes: Navigate to Sales | Tax | Product Tax Class
Customer Tax classes: Navigate to Sales | Tax | Customer Tax Class
Customer groups: Navigate to Customers | Customer groups
Tax zones and rates: Navigate to Sales | Tax | Manage Tax zones and rates
Tax rules: Navigate to Sales | Tax | Manage Tax rules
And finally also your products, where you’ll connect your product to a Product Tax Class, followed by customers, who will be part of a specific Customer group. In most cases, you’ll need a combination of all of these settings, which can be quite overwhelming.
Since Version 1.7 of the Magento Community edition (and also starting from Version 1.12 of the Enterprise edition), Magento offers some specific tax functions for European Union business to business sales. More on this topic will follow at the end of this chapter.
General taxation settings
At the beginning, let’s start by making some general settings that will affect our tax calculations. Navigate to System | Configuration | Sales and click on the Tax section:
In here you’ll find the following settings:
Tax Class for Shipping: Set the Product Tax Class that is applicable for your shipping cost. By setting a separate (by default for each available) shipping class you have the possibility to use a different rate for shipping if you need to.
Following that, click on the Calculation Settings area:
- In the Tax Calculation Method Based On field, select whether the tax is based on the price of each single unit, or on the row total, which is the total for a line item in the order.
- In the Tax Calculation Based On field, select whether the tax is calculated based on the customer’s shipping address, billing address, or on your store’s shipping origin.
- For the Catalog Prices field, enter whether the catalog prices you’ll enter for your products include or exclude tax.
- At the Shipping Prices field, select whether the shipping amount that you’ll set later on will include or exclude tax.
- In the Apply Customer Tax field, enter whether tax is applicable on the original price or (if available) on the discounted price for a product.
- For the Apply Discount on Prices field, set if discounts applied include or exclude the tax.
- In the Apply Tax On field, enter if tax is applied to a custom price or to the original price.
If you aren’t sure about the effect of a setting, it’s fine to come back here once you have entered some products to see the result of applied settings before bringing your store live.
Note that all the mentioned settings can be set on Website level, so everything you set here will have the same behavior for all Stores and Store views within that particular Website.
Scroll down a bit and click on the Default Tax Destination Calculation, Price Display Settings, and on the Shopping Cart Display Settings area:
Here, begin with selecting the correct country (and state if applicable). There are only a couple of countries for which a state is available. Otherwise just leave the * mark. Next, you should set how your sales prices are to be displayed. Do you want your products and shipping costs to appear including or excluding tax in the frontend? The same questions appear for the cart display. On top of that you can also specify how to show totals and if a zero tax amount should be visible or hidden.
Underneath this section, exactly the same questions need to be answered for orders, invoices, and credit notes. It makes sense to keep all settings the same, so that your customers constantly see the same display of calculated taxes.
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