Recommended Tax Configuration for US Stores (Magento CE 1.8 and EE 1.13)

Table of Contents

Note: This article provides information about how to set up tax calculations in Magento Community Edition (CE) and Enterprise Edition (EE). The information is based on CE 1.8 and EE 1.13; some options here might not apply to earlier versions.

Important: No guarantee is offered with respect to any of the information given here. Please contact an expert before you take any decisions about tax matters.

Overview

This topic lists the general recommended tax configuration settings for US stores. Following the general recommendations is a specific example for Austin, TX. The example for Austin, TX shows how to configure store taxes to account for state taxes, city of Austin taxes, and special economic zone taxes. So for this example you create an effective tax rate for US/Texas/Austin at 8.25%, which includes 6.25% for the state of Texas, 1% for Austin, TX, and 1% for the Austin special economic zone.

Note: Current US law requires you to collect taxes where you have an interest/ongoing concern – that is, where you have physical stores, distribution centers, headquarters, and so on. For many online stores this is only one location. However if you have stores that operate in many states or countries, or if you have revenues exceeding approximately $2M per year, we recommend that you use a third-party tax provider because there can be a considerable number of tax rules and tax zones to manage.

This article assumes that you are familiar with general tax settings in Magento. For detailed instructions on how to set up general tax calculations, see Understanding How to Set Up Taxes in Magento CE 1.8 and EE 1.13 (Four-Part Series).

Note: If you have nexuses in several states and are shipping a large volume of product you should consider purchasing or using a freely available tax rate by zip code data set. Make sure that there's a unique rate by zip code and then flat file load those rates into the Tax/Rate-Zones settings. Then go back to your tax rule and select all the rate/zones.

The recommended settings are shown in the following tables.

System > Configuration > Sales > Tax

Tax Classes

Option Description
Tax Class for Shipping None
Tax Class for Gift Options Taxable Goods

Calculation Settings

Option Description
Tax Calculation Method Based On Total
Tax Calculation Based On Shipping Origin
Catalog Prices Excluding Tax
Shipping Prices Excluding Tax
Apply Customer Tax After Discount
Apply Discount on Prices Excluding Tax

Default Tax Destination Calculation

Option Description
Default Country United States
Default State Texas
Default Postal Code (Here you use the codes that correspond to your tax zones.)

Price Display Settings

Option Description
Display Product Prices in Catalog Excluding Tax
Display Shipping Prices Excluding Tax

Shopping Cart Display Settings

Option Description
Display Prices Excluding Tax
Display Subtotal Excluding Tax
Display Shipping Amount Excluding Tax
Display Gift Wrapping Prices Excluding Tax
Display Printed Card Prices Excluding Tax
Include Tax in Grand Total Yes
Display Full Tax Summary Yes
Display Zero Tax Subtotal Yes

Orders, Invoices, Credit Memos Display Settings

Option Description
Display Prices Excluding Tax
Display Subtotal Excluding Tax
Display Shipping Amount Excluding Tax
Display Gift Wrapping Prices Excluding Tax
Display Printed Card Prices Excluding Tax
Include Tax in Grand Total Yes
Display Full Tax Summary Yes
Display Zero Tax Subtotal Yes

Fixed Product Taxes

  • Enable FPT: No, except in CA. (Set to "No" for this example.)

Note: For more information about FPT, see Setting Up a Fixed Product Tax (FPT) in Magento CE 1.8 and EE 1.13.

Detailed US Example Configuration: Austin,TX

For this example you create a tax rate for US-TX-Austin at 8.25%, which includes 6.25% for the state of Texas, 1% for Austin, TX, and 1% for the Austin special economic zone.

Step 1: Configure Example General Tax Settings

System > Configuration > Sales > Tax

Example settings are shown in the following table.

Option Description
Tax Class for Shipping None
Tax Calculation Method Total
Tax Calculation Based On Shipping Origin
Catalog Prices Excluding Tax
Shipping Prices Excluding Tax
Apply Customer Tax After Discount
Apply Discount on Prices Excluding Tax
Apply Tax On Custom price if available
All price display settings Excluding Tax
Enable FPT No

Step 2: Create a New Example Tax Rate

Sales > Manage Tax Zones & Rates

Example settings are shown in the following table.

Option Description
Create a new rate US-TX-Austin
Country United States
State/Region Texas
Zip/Postal Code * (asterisk)
Rate 8.25

Step 3: Manage Tax Rules for the Example Rate

Sales > Tax > Manage Tax Rules

Example settings are shown in the following table.

Option Description
Create a new rate US-TX-Austin
Name VSpecify a tax rule title if needed.
Customer Tax Class Retail Customer
Product Tax Class Taxable Goods
Tax Rate US-TX-Austin
Priority 1
Sort Order 1
  • Click the Save Rule button to save your settings.

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