Last week, Craig discussed that subscription billing, an already complex topic, gets even more complex when you start pursuing cross-border sales. This week, we’ll dive a little deeper into that complexity by exploring regional tax compliance for your digital goods and services.
Disclaimer: This blog post does not contain legal advice. The rights, obligations and liabilities of a business vary according to geography, industry, method of delivery, type of product, and all sorts of other variables that preclude us from using this blog post to tell anyone how they must act from a legal perspective.
Selling software online was more or less a tax free activity when ecommerce began in the mid-90s. The technology was new, there was no legislation specific to selling software online, and consumers flocked to the internet to purchase perpetual licenses for their favorite software programs which were delivered to them electronically.
It didn’t take too long before governments around the world realized they were missing out on revenue. Laws were gradually written or reinterpreted so that governments could obligate business to collect taxes for digital products or services from out of state and out of country customers.
If you are the merchant of record for your online sales, managing tax calculation, collection and remittance is a difficult and resource intensive activity.
Neglecting these tax issues can be extremely detrimental to your bottom line and vigilance is required.
How Much Tax Must Your Business Collect?
Figuring out whether the product or service you sell is taxable is one thing. Determining rates is another, and your obligations change according to the location of both your business and your buyers. To complicate things even more, the rules change frequently and repercussions for violating the rules can be swift and severe.
Taxes in the U.S.
The Marketplace Fairness Act has been languishing in Congress for years. That means that there is no federal law in the U.S. requiring online businesses in one state to collect taxes from consumers in another state. In the meantime, local governments are reinterpreting existing laws and instituting new ones to drive more revenue for their jurisdictions.
Traditionally, if a business lacked a physical presence (offices, warehouses, employees, etc.) in a state, it did not have to collect and remit a sales tax to that state. Over the last five years, many states established so-called Amazon tax laws that created tax nexuses for businesses in situations where they could traditionally argue that they had no physical presence in the state. For example, many states passed laws creating tax nexuses if a business had affiliates in that state.
Similarly, so-called cloud taxes were established in the state of Tennessee and the city of Chicago in 2015. These governments can now collect revenue from business that do not have traditional physical presences in those jurisdictions.
Taxes in the EU
Unlike the U.S., the EU has been collecting value added tax (VAT) on digital products for years. But much like the U.S., the laws have changed over time. Originally, customers paid tax based on the origin of the product, not its destination. This was turned on its head in 2015. Now EU customers pay VAT rates based on the residence of the customer, not the origin of the digital service.
Additionally, when it comes to the shopping experience for EU consumers, you have to indicate the entire full price customers will pay at checkout. You can’t display a price and then later add the tax amount to it. Also, you have to indicate which portion goes toward taxes. That isn’t a consumer preference. That is the law.
There are more countries in Europe than the EU member states to be considered: In Switzerland and Norway, electronic services have been subject to VAT since January 1, 2010 and July 1, 2011 respectively.
Taxes in the Asia-Pacific Market
Mature ecommerce markets in APAC are also starting to collect taxes on online sales. Japan assesses an 8 percent consumption tax on online sales while South Korea’s VAT rate is 10 percent. Last August, Australia’s Commonwealth Government announced that they are pursuing legislation to apply a goods and services tax on cross-border sales of digital products and services. They hope this new law will be adopted sometime in 2017.
There are more countries coming up in the near future with new VAT laws re digital services: New Zealand (starts October 1, 2016), Taiwan and Russia (starts January 1, 2017).
More and more, just like the EU member states, departments of revenues across the US, and governments in the Asia Pacific markets are looking to drive revenue by obligating online businesses to calculate, collect and remit taxes for online sales to local customers.
Regulations for taxing internet purchases of digital goods are relatively new and being reworked constantly, so what was true five years ago isn’t necessarily true today. And what is true today won’t necessarily remain so five years from now.
All of this is just a small taste of what it means to comply with global online tax. Expanding your subscription business globally has great appeal, but it’s clearly more complicated than it appears on the surface. Assess your risk and make sure you are prepared.
For further insight in what it takes to expand your subscription business beyond its current borders, download our complimentary ebook, 3 Compliance Risks for Global Subscriptions