Understanding zero tax amounts

Taxing authorities require businesses to obtain a license or otherwise register before starting to collect tax in their jurisdiction. Each jurisdiction has their own rules regarding when you’re obligated to register and begin collecting and remitting tax. Obligations can arise from, but are not limited to, a physical presence in the jurisdiction or from reaching a threshold of sales into a jurisdiction. For example, as of February 2021, for businesses based outside of California (for example, no physical presence), you only need to register when you surpass 500,000 USD in sales.

Stripe automatically aggregates and analyzes your transactions and compares them to local thresholds. You can see these and add your registrations in your Tax settings.

Products may be exempt or nontaxable in some jurisdictions. For example, as of February 2021, the state of California considers software as a service to be a nontaxable service. The buyer pays no tax and the seller usually can’t reclaim any credits from costs associated with producing the product.

Products can also be zero-rated, meaning while they’re technically taxable, the applied rate is 0%. For example, as of February 2021, children’s clothing is zero-rated in Ireland. The buyer pays no tax, however the seller may be able to reclaim credits from costs associated with producing the product.

The tax treatment of products not only varies by jurisdiction but is subject to change. If you don’t want to collect tax on a given product, you can assign the product tax category Nontaxable (txcd_00000000) to it, to make sure Stripe Tax treats it as a nontaxable product. Otherwise, Stripe Tax automatically determines when a product is exempt or zero rated.

While in most cases it’s the seller’s responsibility to determine and calculate the tax owed by the buyer, the buyer may be required to account for the VAT under a reverse charge. With a reverse charge,sellers provide invoices detailing the purchase such that the buyer can account for the tax. A reverse charge is common in cross-border B2B supply of services. For example, for businesses with an origin address in the European Union, the following logic applies:

Stripe Tax automatically applies the right logic depending on the presence of a tax ID and the jurisdictions involved in the transaction.

For transactions with inclusive tax behavior where reverse charge applies, the buyer pays the full unit_amount Price, but isn’t charged tax. In these cases, a “Reverse Charge” indicator appears in the Stripe Dashboard, and the Invoice reads “Tax to be paid on reverse charge basis” instead of zero.

Download example reverse charge invoice PDF

If you haven’t collected a tax ID on Stripe, but you want to mark a transaction as reverse charge, specify the customer.tax_exempt parameter as reverse. If Checkout creates a one time payment, the exemption status is instead captured as customer_details in the Checkout Session object. You’re responsible for making sure that customer information is accurate (including a tax identification number).

Stripe displays the provided customer tax ID on an invoice, regardless of whether or not it’s valid. Stripe Tax provides automatic validation by checking the tax ID format against the expected format and validating the tax ID against external tax authority systems for certain countries.

Learn more about Tax IDs

Exempt customers are those who under a jurisdiction’s rules are able to make tax-exempt purchases. Each taxing jurisdiction determines the type of individuals or entities who can make tax-exempt purchases. Common examples are nonprofit organizations and government entities. If you have customers that are exempt from paying tax, you can specify this by setting the exempt status of a customer and providing the customer ID when creating a subscription, invoice, or Checkout Session. You can manage customer exempt status using the Dashboard or using the API by setting the customer.tax_exempt field.

For transactions with inclusive tax behavior where the customer is exempt, the buyer pays the full unit_amount Price, but there’s no tax charged. In these cases, an “Exempt” indicator appears in the Stripe Dashboard and the Invoice reads “Customer is tax exempt” instead of zero.

Download example exempt invoice PDF

Stripe Tax automatically calculates an exemption on the transaction when you set the customer.tax_exempt field, but it doesn’t perform any validation of required documentation for supporting an exemption such as customer exemption certificates. You’re responsible for determining and fulfilling any obligation to validate your customer’s exempt status and collect any required documentation such as an exemption certificate.

Some jurisdictions contain administrative subdivisions or territories, with the geographic region being outside the scope or “excluded” from the associated country’s VAT system. Although these territories don’t fall under the scope of the tax systems of the associated country, they may have their own tax system and be subject to different tax regulations and rates. If your customer is based in an excluded territory, the resulting tax amount may be zero. Below is the list of supported excluded territories where no tax is calculated, even if you’re registered in the country where the excluded territory is located. Stripe Tax automatically determines if your customer is based in an excluded territory.