Shopify incorrectly calculating California sales tax: using destination when hybrid-origin select

[adrian_sd]

Since mid-December, Shopify has started to incorrectly calculate California sales tax on orders in California using destination tax sourcing when we have hybrid-origin configured. This means that it is including district tax for the all buyers, when it should only be included for buyers that are in the same district as the seller (us).

With hybrid-origin configured, it should include the base state 7.25%, and only include a district tax if the buyer and seller share the same district.

We have hybrid-origin configured for California in Settings > Taxes and duties > United States > California.

Has anyone seen this same problem?

[Kruger]

I am having the same issue.

[adrian_sd]

I've reported the issue to Shopify via their support system.

They asked their tax team, and that team pushed back saying it was correct.

From support: 

"Nothing to worry because I already checked this with our Tax support team and they mentioned that in California the city, state and county taxes are origin based but district taxes are destination based. The previous tax system was unable to calculate this as accurately as Shopify Tax does. They are seeing the district taxes calculating on orders which is expected with the new system. It is something you're used to seeing but the rooftop system is able to get more accurate rates."

I replied and pointed out that not all businesses are required to collect district taxes.

From California Department of Tax and Fee Administration: 

https://www.cdtfa.ca.gov/formspubs/pub177/#district

"However, if you are not engaged in business in a district, you are not required to report and pay district taxes imposed by that district, but you must still report and pay tax at the statewide rate."

They have followed up with the tax team, and I'm waiting for reply.

[gothic_sg]

Sounds like the same issue.  I'm still confused, either way.

https://community.shopify.com/c/accounting-and-taxes/shopify-charging-sales-tax-for-origin-and-shipp...

[adrian_sd]

I recently downgraded my tax settings from Shopify Tax to Basic Tax (free), and I've noticed the issue is resolved. I'm unsure if the issue is still in Shopify Tax.

I suspect the issue is part of Shopify Tax's "Rooftop accuracy" system to calculate tax, and they accidentally or deliberately switched to destination tax sourcing.

Also, Shopify upgraded my store (and maybe everyone else's?) to Shopify Tax (which costs money) without asking me. I recommend everyone look at their store's tax settings.

[dlevens]

When you downgrades is Shopify correctly collecting 7.25% now on all customers? Another issue I had when using their "Shopify Tax" was for many customers they collected a base rate of 6% plus district taxes. 

[matthew_mcglynn]

Yep, Shopify doesn't understand this issue. They massively over-collect sales tax, which makes the shop owner look bad, and forces customers to over-pay. Adding insult to injury, Shopify charges an extra fee for this so-called upgraded service.

Not sure about other states, but California businesses that see less than $500k in state revenues per year (and are therefore not required to collect district taxes for any district in which they don't have nexus) should absolutely OPT OUT of the "Shopify Tax" system, which is adding fees and reducing sales.

[dlevens]

Did you hear anything back on this? They totally screwed up my taxes, collected all this nonsense from all these districts even though I was set to hybrid-origin. I too was auto upgraded to their Shopify Tax system and even though it did not charge me fees since I do not do more than 100k in a year they collected tax they did not need to collect and they did it at the wrong rates. When you fill out the CA CDTFA forms and select the same county and district the rate does not match up. For now I too have switched back to their "Basic Tax" and am hoping this will fix it. Curious if this is what fixed it for you? 

[matthew_mcglynn]

I'm sticking with "Basic Tax," which seems less broken than the Shopify Tax system. But Basic Tax is broken too. It collects my district taxes on out-of-district sales, which seems to be incorrect. (We do report and pay those excess taxes, but it's really lame that Shopify's incompetence costs our customers excess tax, and it costs us excess time to reconcile CDTFA info.)

[dlevens]

Just out of curiosity, do you have your tax settings under Tax sourcing set to "Destination (default)" or "Hybrid-Origin"? I was under the impression on the basic tax it will only collect district taxes out of your district if you keep it on default and if you choose hybrid-origin it will only collect in your district?

you can find these settings here https://admin.shopify.com/store/bunbury-2/settings/taxes/US

[matthew_mcglynn]

We use "hybrid origin" on both sites. Shopify's basic tax still insists on collecting my district taxes on out-of-district purchases. Like I said, it's broken.

[dlevens]

I am still having this issue and Shopify support is a joke these days, none of the agents know what is going on and the copy paste answers they are giving do not address the issue. I am curious has anyone compared destination vs hybrid and see if that makes a difference? I have switched from "Shopify Tax" to "Basic Tax" but I am thinking might need to switch to "Manual Tax" and just set a rate of 7.25% to resolve this. Their software is just messing everything up and they won't even listen to the pub177 which clearly states ..."District taxes - sellers
If you are an Internet seller "engaged in business" in California and you are engaged in business in a district that imposes a transactions and use tax (district tax), you must report and pay district taxes to that district. Please see publication 44, District Taxes (Sales and Use Taxes). However, if you are not engaged in business in a district, you are not required to report and pay district taxes imposed by that district, but you must still report and pay tax at the statewide rate."

[dlevens]

Shopify support has not been much help or very clear on how this all works. So I am unfortunately having to test different settings.

When using "Basic Tax" and Tax Sourcing to "Destination (default)"

a customer who was outside of my county (I am in San Bernardino and they were in Orange County) the following taxes were collected. This was a fail as it collected district taxes and collected more than a total of 7.25%

When using "Basic Tax" and Tax Sourcing to "Hybrid-Origin"

a customer outside of my county was charged this. This does add up to 7.25% so for now I am going with this setting. If this ends up charging more than 7.25% for any customer outside of my district then I am considering switching to "Manual Tax" plan and setting it all at 7.25%.

[dlevens]

After doing more testing and flipping between hybrid-origin and destination default, the best choice seems to be hybrid-origin. When I went to destination default it started charging district taxes and based everything on the destination which is not correct. I won't rehash everything just read the above but if you are looking for simple and only collecting the state 7.25% tax you want hybrid-origin

destination-default

hybrid-origin

[ayellowgiraffe]

Thanks for the clarification! I was confused when I started noticing that my shop was starting to collect other districts' taxes all of a sudden. I've also downgraded back to Basic Tax and that worked. My gosh, now I'm assuming I need to report those taxes my Shopify collected for other districts in CA 😩 more work!