We use Avalara Avatax for tax calculations. 39 US states are set up, and freight (shipping) is also taxed. However, some Shopify orders do NOT include the tax on shipping, and come up short on the tax amount. When I contacted Shopify support, they pointed fingers at Avalara. Avalara's help page links right back to Shopify.
However, Avalara calculates the tax correctly with shipping included. Since I did not write the actual integration there is now way for me to see why Shopify is not getting the shipping portion of the tax.
Order subtotal: $12.50
Tax in Avalara: $1.72 (CORRRECT - tax rate applied to $19.50)
Tax in Shopify: $1.10 (INCORRECT - tax rate only applied to $12.50)
To avoid issues, our finance department have to manually enter a line item in AvaTax "Tax Discrepancy" (in this example -$0.62) to balance the transaction.
In Shopify, apply tax to shipping setting is turned on.
How can we fix this?
In tax settings, there is an option to charge tax on shipping rates.
That being said, I noticed that Shopify calculates taxes on products and rounds it up, then, taxes are calculated on shipping and rounded up.
The proper way to calculate would be to calculate taxes on the total (products+shipping) OR not to round up for each calculation.
The current result is that pretty much all tax calculations are off by a few cents. Not the end of the world, but annoying for accountants dealing with the paperwork at the end of the month! I contacted Shopify about this issue and hope they will fix the behavior.
It is incredibly annoying, and so frustrating that Shopify locks AvaTax integration behind the $2,000+ per month Plus tier. Plenty of small businesses use AvaTax to calculate taxes! We have to deal with similar small discrepancies between Shopify and our ERP system. There doesn't really seem to be an actual fix aside from switching to a car that allows AvaTax integration (seemingly every other cart out there).
Edited to add: it's also really irritating that, in my experience, Shopify indeed acts like Avalara is the problem/wrong. I can tell you which of these two companies I put my trust in when it comes to calculating sales tax...
We ran into the same issue and was able to get the support albeit it took us going directly to Avalara which was a nightmare. The solution is to remove FR0000000 from your tax codes and the freight will be taxed.