Some merchants are required by law to charge customers an excise tax on specific products. These taxes must often appear as a separate line item on receipts. Shopify doesn’t have great solutions to add fees as a separate line item, so using an app like Magical Product Fees is the best way to add them to your store.
In this article, I’ll explain what excise taxes are, the benefits of displaying them as a line item, and how you can easily add and manage them with an app. Let’s dive in!
What Are Excise Taxes?
Excise taxes are imposed by the government on specific goods and services. These taxes are usually meant to generate revenue, promote certain policies, or discourage the consumption of products that are considered harmful due to their social or environmental costs.
There are many different types of excise taxes. Sin taxes on alcohol, tobacco, drugs, and soft drinks are well-known, however there are also other types of regulatory fees such as environmental levies, fuel taxes, licensing fees, and more.
How Do Excise Taxes Differ from Sales Taxes?
Regular sales taxes are generally percentage-based and are applied at the point of sale. For example, I live in Ontario where sales tax is 13% on most items in retail. This tax is displayed separately on my receipt so it’s clear to me how much sales tax I paid. Shopify provides comprehensive features that make it easy to collect and remit sales taxes.
Excise taxes can either be percentage-based or flat fees added to each unit sold. For example in Ontario:
- Cigars have a percentage-based excise tax, where cigar tax = taxable price of cigar X 56.6%
- Wine has two fixed excise tax rates, where the provincial tax is 29¢ per litre and the federal tax rate ranges from 39.6¢ to 68.9¢ per litre, depending on the alcohol content.
Excise taxes are sometimes applied earlier in the supply chain, at the manufacturing and distribution level, so in some cases merchants only have to worry about paying them when they order products. Some merchants may choose to pass on these fees to the customers if they’re allowed to do so.
However for some excise taxes, laws mandate that merchants charge these fees directly to consumers as a separate line item. For example in California, merchants must collect a 15% excise tax when selling cannabis or cannabis products. Each customer must be provided with an invoice, receipt, or other document that separately states the cannabis excise tax. This creates a need for Shopify users to add fees to customers’ orders as separate line items.
Depending on the excise tax, merchants will often need a solution that charges both fixed and percentage-based fees. Some Shopify solutions may only offer fixed fees as a feature, however apps like Magical Product Fees make it easy to add any type of excise tax to your store.
Merchants can face huge fines and penalties for failing to charge excise taxes.
In California, retailers who sell cannabis and cannabis products must charge their customers a 15% excise tax and are responsible for remitting it to the California Department of Tax and Fee Administration.
If the merchant underpays, the penalty for underpayment can be up to 50%, so for example $100,000 worth of eligible product was sold, and the merchant failed to charge excise taxes, the penalty could be $7,500 on top of the $15,000 owed for a total liability of $22,500!
This is just one example of what penalties for failing to charge excise taxes could look like for retailers. These types of penalties are staggering and can be avoided with a good store setup. Fees should be automatically captured with each order for 100% accuracy. You’ll also want to have a good method for tracking fees so you can easily report and remit them. And you’ll want to display fees clearly to customers so there’s no confusion.
Why Add Excise Taxes as Separate Fees?
Some excise taxes have to be separately stated on receipts or invoices for customers. One such example of this is the sale of tires in California, which are subject to an excise tax of $1.75.
As outlined in Section 42885 of the California Public Resources Code: “The California tire fee imposed…shall be separately stated by the retail seller on the invoice given to the customer at the time of sale.”
For these retailers, there is no option. If they are selling these items they absolutely must display these fees separately as a line item. Failure to do so could result in non-compliance which can lead to fines and penalties.
If you are selling a product that does not require the excise fee to be itemized, you could still benefit from itemizing excise taxes rather than building them into product prices. Benefits include:
- Building transparency with customers by informing them of what they’re paying for, therefore building trust with customers.
- Simplifying reporting and remittance. Retailers are often responsible for remitting excise taxes accurately and on time, so tracking these fees separately will allow you to generate reports that make it easier to remit them in Shopify.
How to Add Excise and Regulatory Taxes to Your Shopify Store
If you’re simply building excise taxes into the price of a product, then updating the price from your Products menu in Shopify is all you need to do. You may want to consider updating the product page to let customers know an excise tax is built into the price.
If you’re looking to add excise taxes as a separate fee on customer orders, then using an app is much better than any native options that are available.
In the Shopify Community forums, a Shopify employee goes over how you can set up a tax override that charges customers an additional tax, however this method will not itemize the excise tax and therefore will appear as one aggregate tax at checkout. This lack of transparency could lead to customer confusion. It could also create a reporting nightmare.
Using an app that is designed to collect these types of fees from customers simplifies the process of adding and managing fees.
Apps also usually come with a quick-and-easy setup that requires no coding experience, and dedicated support to assist with the setup and troubleshooting as well.
Apps also provide you with better reporting methods so you can easily track your fees. Some merchants can be penalized if these fees are not properly reported.
We’ve compared some of the top Fees apps for Shopify and found Magical Product Fees was the best app for charging excise taxes on your Shopify store.
The app allows you to set up fixed or percentage-based fees which will then apply to the order subtotal regardless of the Shopify Plan you’re on. You can also set it to apply to the order total if you’re on Shopify Plus.
Tips for Displaying Excise Taxes and Regulatory Fees
When you set up excise taxes on your Shopify store, you’ll want to make sure that these are displayed clearly throughout the buyer’s shopping journey as this ensures fee transparency with your customers. This includes the product page, the cart, and checkout.
Here are some tips for displaying fees on your store:
- Include fees on product pages so customers see them before adding items to their cart. For example “This cart includes products which require excise tax. These taxes will be calculated at checkout.”
- Clearly label fees, such as ‘Ontario Excise Tax’.
- Provide an itemized breakdown of fees at checkout so that customers aren’t surprised by additional costs.
Below is an example of a checkout screen showing the Ontario Excise tax being added to a nicotine product. You can see the “Ontario Excise” tax is clearly labelled and itemized.
Conclusion
Staying compliant with excise tax regulations is a must if you want to steer clear of large fines. It also avoids heavy scrutiny from regulatory bodies which can cost you a ton of time.
When setting up fees on your store, you may be legally required to itemize them. This builds customer trust with fee transparency, and makes it easier to report your fees, however Shopify doesn’t have great ways to do this natively. Magical Product Fees is the best solution to handle excise taxes, giving you options to add both fixed and percentage-based fees to your store.
Further Reading
Shopify – Charging Different Excise Taxes Based on the Province of the Customer
Government of Canada – Excise Taxes
California Department of Tax and Fee Administration – Cannabis Retailers with Cannabis Businesses.
California Department of Tax and Fee Administration – Tax Rates — Special Taxes and Fees
Navigating the New Excise Tax Rules for California Retailers
Magical Product Fees
The Magical Product Fees app is a fast and easy way to build, customize, and attach fees to products or entire orders.