I am very confused and am hoping someone can explain the logic behind this ...
On the tax settings screen in the admin area, it says that it calculates tax using the formula:
"Tax = (Tax Rate * Price) / (1 + Tax Rate). Example £1.00 at 20% VAT will be £0.17 (rounded)." See screen below.
How can 20% of $1.00 be $0.17??? What is the logic behind this? I am trying to apply VAT (UK sales tax) to our site but the tax is calculated sing this formula and split out on the invoice but it is incorrect because it is calculating VAT at a lower rate than the actual 20% that is being charged!
If there's anyone who can shed some light on this it would be great!
Hi, no, the screen is from the Shopify Supoprt manual. Thanks for the reply but I've resolved this with Shopify Support who had to make some changes behind the scenes to make it work out in the end.
The point I was making is that the actual formula they use for the tax calculation is bizarre:
If you set tax at 20%, Shopify calculates it so that on a sale of $1.00 the tax is stated $0.17. 20% of $1.00 is not $0.17. 20% of $1.00 is $0.20. That was my problem.
Thanks for taking the time to reply.
If taxes are included in your product's price, you're effectively setting the product cost lower than $1. In actuality, the product cost would be 83¢ and then taxing it at 20% to bring it to $1 tax included.
The math looks like this: Tax = (Tax Rate * Price) / (1 + Tax Rate).
Hope that helps :)