Business, VAT, and Sales Tax Changes to eCommerce by 2022.
With eCommerce booming, borderless shopping increasing, and so numerous ways of buying and the types of goods to offer, government officials are beginning to feel out of the loop in the collection of taxes on transactions. Over the past few years, officials around the world have updated legislation to accommodate the changing economy.
As a result, managing tax obligations has become more complicated for merchants. In 2022, more big changes are taking effect and this, in relation to the nation or regions you work in and reside in, could influence how you run your business.
And for U.S. businesses, crossing states isn't that different as crossing borders between countries. Actually the way it is done is more complex as, for instance an enterprise located in an EU country that sells to consumers across different EU nations.
Like our good friends at Avalara illustrate in their tutorial on tax changes in 2022, there's a lot to talk about in this area.
To make it easier for now, we're going to present a general overview of the tax reforms that are coming for companies in the U.S., the U.K., the EU and a host of others countries and regions. The first few concern mostly the U.S., and the rest concern other countries.
1. Nexus law -- Where your business is located
For U.S. businesses, you must pay sales tax on sales made to clients in states where you are considered to have an"nexus. Again, this was not a problem. You had a nexus in a state if it's where your office, warehouse, or any other physical presence was. But now, with so many employees working remotely Many states say that you have nexus if you have employees that reside within their borders.
That means you can potentially have a presence in multiple states, even though all of the operations you conduct are within only one. Plus, beyond an actual presence, states may think you have a relationship with them when you have a sale that exceeds an amount of money or conduct more than a certain amount of transactions with customers within the state in which you operate.
Complicating this is the fact that some products are tax-free and those rules can be different in each state.
In addition, following the South Dakota vs Wayfair 2018 court decision, states can currently collect sales taxes outside of state in order to purchase products within their states. The decision was made to permit brick and mortar companies to be on a level playing field with internet-based businesses. But the logistics of it could be a nightmare.
The situation is even more difficult in certain states, in which different counties have various sales tax rates.
If you are a business that is online, you must find out the state or county which considers that you possess a physical or economic presence there and then determine the tax on sales you are liable for.
Find out more information about changes in sales tax.
2. Different sales tax rates, boundaries, and rules
Knowing what you owe in each state can be hard enough. But what if things change?
The government is regularly updating its tax rates for sales. Some products that were previously required to be taxed have now become exempt in some areas including diapers, and feminine hygiene products. Other items that weren't taxed in the past are now like single-use plastic bags.
And then there are rates that are temporary for sales tax holidays or tax reliefs that could be in place during the COVID-19 pandemic. They are adored by customers, but they create tax accounting a challenge for businesses.
In addition to tax rate changes In addition, it is important to know the boundaries of the taxing authorities. Some cities straddle two states. Many cities straddle two counties. In some cases, the home that is across the street may have a different sales tax rate. These boundaries may shift.
The ee more on this, and more industry tax reforms in 2022.
3. Which stores customers shop at and pay for it.
What happens when a client purchases online, but wants items delivered to the location for pick up, and their residence is in another tax district that is not the store? It's called Buy Online, Pick up in Store (BOPIS). The online sales tax may differ from that of the place that the purchase will be delivered.
You'll need a way to monitor each customer purchase so you're sure that you pay the tax in the proper country, city, or state.
As an example, do you collect the sales tax for the full purchase value upfront instead of spreading it over the installments? If you collect it in advance, the buyer doesn't make equal payments. If you spread it out how will it be affected if sales tax rates change before the entire payment has been made? Are you required to pay the updated amount to any remaining installments? And what about any BNPL charges from the service provider? What happens if they take back the item after all payments were made but you already remitted your tax to the government?
Each state, country and county can respond to these issues in a different way.
4. Sales tax sourcing
There are three types of sourcing methods used by U.S. states to determine the tax payer:
- Destination sourcing: based on geographical location of the buyer
- Source of origin: Based on location of the seller
- Mixed sourcing: a blend of both
Prior to the Internet and eCommerce the majority of businesses used the origin source method because it was the easiest and made the most sense. However, now that there's an increasing amount of interstate and international commerce, the lines have blurred and there's an abundance of tax revenues that is not collected on online purchases.
For this reason, several states are moving to destination sourcing. That means you pay taxes according to the country of the purchaser. Even for small businesses, if you sell items across the US, you may have to keep track of transactions made by clients in the 50 states.
5. Digital monitoring of business sales transactions
In the majority of Europe as well as Latin America, and the other regions of the globe nations are developing ways to track all transactions in business so they can collect the proper amount of sales tax and VAT.
There is a lot of commerce international within the EU and between Europe and Britain, between EU and Britain, among Europe as well as South Korea and other Asian nations, in addition to Canada and Latin America, various forms of electronic invoicing are rapidly becoming standard.
83 countries already have some type of electronic invoicing or reporting legislation implemented, and a number of countries are working to implement it. Types of digital transaction monitoring comprise:
- Real-time reporting: Transaction reporting in real time as it takes place
- Standard Audit File for Tax (SAF-T) allows for authorities to obtain tax-related information
- E-invoicing: governments approve each invoice prior to a client seeing it
- Invoicing for four days: Not as strict as real time, but the same idea
Each of these systems is meant to help make compliance simpler, as well as reduce mistakes and reduce tax avoidance. They also make auditing easier and quicker.
L learn more details about how nations are using electronic invoicing for sales tax monitoring .
If your company is involved in international trade, you'll need to comply with each nation's accounting and tax reporting process.
Brexit serves as a good model of how this can be achieved.
Britain is currently implementing the program known as Making Tax Digital, which is applicable to all businesses in the U.K. as well as companies selling products to it such as any located in the EU. The new system even applies to entrepreneurs who work for themselves U.K. businesses and landlords.
Additionally, EU businesses that sell to customers living in Britain will have to tax them with VAT. Smaller purchases that are less than 150 euros, businesses should use the Import One-Stop Shop (IOSS) which is an online registration site which makes it simpler to adhere to VAT laws.
If those EU companies that sell to nations within the EU, they would use to use the One-Stop Shop (OSS) system which is similar to IOSS However, it is only used to conduct business inside the EU.
Working with and accessing each of these platforms will need businesses to invest some amount of money up front, but it allows them to quickly conduct business with customers in the EU's many nations.
The U.S. has yet to adopt a system of electronic billing or reportage.
6. The Harmonized System
The Harmonized System began in 1988 and, in the age of electronic commerce in the present it's now an integral part of international commerce.
The Harmonized System is a method for coding and tracking the products of every sector every time they cross the international boundary. This will make it easier to monitor sales volumes across borders so accurate tax and VAT can be collected on goods and services.
The codes are revised every five years. Then, in 2022, the seventh edition is scheduled to be published.
The use of HS codes could get complicated quickly since the different nations do not update their codes immediately. Others require years. That means, you might sell the same item across two different countries and you'll need two codes.
What happens when a product is misclassified with the wrong code? It could be taxed at the wrong rate which could result in fines as well as delays, delays at the border, and angry customers. Find out more information on the Harmonized System and related global tax concerns.
7. Eliminating taxation minimum obligations
In particular, in particular in the U.K. and EU nations, previous minimum requirements for when VAT applies are starting to fall away.
For imports coming into the U.K. In the past, there was to have been an PS135 minimum order size before VAT applied. It's now gone, as is the relief for low-value stock which was in place for goods under PS15. VAT for both of these will now be collected in the store, with the customer, during check-out.
The current policy is not subject to any changes in the policies that apply to amounts over that threshold.
For imports coming into the EU A similar threshold of 150 euros used to apply however that requirement has been removed. IOSS customers are now required to collect VAT at the time of sale for any purchase below that amount.
In addition, many countries- including Canada, India, Malaysia, and China have been engaged in similar tax reforms.
8. Other taxing issues for 2022 and beyond
Supply problems
The issue of shortages in labor and supply can affect tax planning.
In the case of numerous items being bought and then returned, how will you deal with the tax collection? Must you amend tax returns to reflect taxes already paid?
Marketplaces on the internet
If you sell products through one of the dozens of online marketplaces, such as Amazon or Wayfair certain states and nations are taxing these marketplaces, and the tax could or might not pass on to you. Other states are letting the sellers on these platforms remain exempt.
Types of products that aren't typical
Numerous countries which have traditionally taxed rental cars and taxis are currently trying to tax car sharing services too.
If you sell online classes, they too could be taxed. But there are several different ways that courses may differ from each other. Some courses are live, while others are pre-recorded. Pre-recorded classes are closer to a product. Some courses require downloading of documents. Some send materials through the mail.
Different localities and nations may treat each of the above types of educational and training scenarios in a different way.
Software?
There are now at least ten different types of software categories such as packaged and delivered in the same way as real products, delivered but not downloaded, customized, and several other. Again, each type may be taxed differently based on the nation and locality that your company has decided to be based -this nexus question that opened up this box of worms at the start of.
Are you in need of tax assistance?
Does not provide tax assistance, and this article is meant to be informational and helpful for businesses that are seeking to learn more about the tax obligations of their business.
But, Avalara can help you through tax automation software which makes tax compliance simpler. Smaller companies, in particular which do business within borders in the U.S. or across international borders, there's a lot to track. Software for tax compliance might be an option worth considering.