VAT, Business and Sales Tax changes for the eCommerce industry in 2022.
With the growth of eCommerce, bordersless buying increasing, and numerous ways of buying and the types of goods to offer, government officials are starting to feel left from the equation in the collection of tax on transactions. In the last few years, authorities all over the world have revised law to be more in tune with the modern economics.
This means that dealing with tax requirements has become more difficult for businesses. The year 2022 will bring more major modifications are in place and depending on the country or nations you are operating and live in, it could affect how you conduct business.
For U.S. businesses, crossing state lines doesn't differ much as crossing borders between countries. In fact there are many aspects that could be more difficult as, for instance, a business in one EU country that sells to consumers across different EU countries.
Our friends from Avalara show in their article on tax reforms in 2022 There's plenty to discuss about this subject.
So to keep it simpler in the meantime We'll give you a broad overview of the tax-related changes that will be coming that affect businesses in the U.S., the U.K., the EU as well as a variety of others countries and regions. These are the most important ones that affect countries like the U.S., and the remainder are for other nations.
1. Nexus law -- Where your business is
If you are a U.S. businesses, you are required to collect sales tax on sales made to clients in states where you are considered to have an"nexus. This was once a simple. It was possible to be considered a nexus within one state when it was where your workplace, warehouse or other tangible presence was. But now, with so many remote employees Many states say that the business is nexus if you have employees within their borders.
This means that you could have a presence in multiple states even if all your business operations are located in one. Beyond an actual presence, a state may be able to consider you to have connection to their territory if you sell over an amount of money or conduct more than the specified amount of transactions to customers in their respective state.
This is complicated by the fact that certain items are exempt from sales taxes and those rules can be differing in different states.
In addition, following the South Dakota vs Wayfair 2018 ruling, states are able to currently collect sales taxes outside of state on products bought within their states. This is to enable brick and mortar businesses in the market to play on a more even playing field with internet-based businesses. However, the process can become nightmarish.
The situation is even more difficult in certain states, in which different counties have various sales tax rates.
For online businesses, you should research every state, and possibly county -- in which you are required to prove that you possess a physical or economic presence and figure out the sales tax that due.
Learn more about the changes to sales tax.
2. Tax rates that vary, boundaries, and rules
Finding out how much obligations you have to pay in each state could be difficult enough. But what happens when things change?
The government is regularly updating its sales tax rates. Certain items which used to be taxed are now exempt from taxation in certain areas including diapers, and feminine hygiene items. Other items that weren't taxed before now are items that are single-use, like plastic bags.
There are also periodic rate adjustments, such as sales tax holidays or tax exemptions which may have been put into place in the course of the COVID-19 epidemic. The public loves them, however they make proper tax accounting very hard for business.
Alongside the tax rates changing, you have to be aware of boundaries between the taxing authorities. Some cities straddle two states. Some cities span two counties. In some cases, the home next door has an additional sales tax. And these boundaries sometimes shift.
The Find out more about this, and more industry tax changes in 2022.
3. What they buy from where and how they pay
What happens when a buyer purchases online, but wants items delivered to the store for pickup or delivery, but their home is located in a different tax district from the business? This is called Buy Online, Pick up at Store (BOPIS). The online sales tax may differ from that of the place that the purchase will be delivered.
There's a need to monitor every purchase made by a customer so that you'll know when to pay the tax in the proper nation, city or even the state.
For example, should you take the tax on sales on the purchase price upfront or distribute it between each installment? If you collect it in advance, the buyer doesn't pay equal installments. If you split it up, what happens if the sales tax rates change before all the payments have been paid? Should you pay the updated amount to the remainder of your payments? Do you have to pay any BNPL fees from the service provider? What is the procedure if they have to return the item before all payments were made but you've already paid taxes to the federal government?
Every country, state and county will respond to these issues in a different way.
4. Sales tax sourcing
There are three kinds of methods for sourcing that are used by U.S. states to determine who pays the sales tax:
- Destination source: based on the geographical location of the buyer
- Source of origin: Based on geographical location of the seller
- Mixed sourcing is a mixture of both
Before the internet and eCommerce many businesses relied on the origin source method as it was simple to use and was the most sensible. However, now that there's so much interstate and international trade, the boundaries have become blurred, and there's now a lot of tax revenue going uncollected from online purchases.
This is why several states are moving to destination sourcing. This means that you are taxed according to the country of the customer. Even small companies If you offer products nationwide in the US You may need keep track of the orders made by buyers from every state.
5. The monitoring of digital sales by businesses transactions
In the majority of Europe and Latin America, and the remainder of the world countries are working on methods to track all transactions in business to ensure they collect the proper quantity of sales tax and VAT.
Again, with so much international trade in the EU, among the EU and Britain as well as between Europe with South Korea and other Asian nations, as well as Canada as well as Latin America, various forms of electronic invoicing are rapidly becoming standard.
There are 83 countries that have an electronic invoice or reporting laws implemented, and a number of countries are working to implement the issue. Types of digital transaction monitoring comprise:
- Real time reporting: transaction reporting as it happens
- Standard Audit File for Tax (SAF-T) allows for authorities to obtain tax-related information
- Invoicing electronically: Governments approve every invoice before a customer sees it
- The requirement for invoicing on a four-day basis is not so strict as the real-time requirements however, the idea is similar
Each of these systems is designed to facilitate compliance, as well as reduce the chance of errors and even tax avoidance. They also make auditing easier and faster.
L earn more details about how nations are using electronic invoicing for the monitoring of sales tax .
If your company is involved in international commerce, you'll have to comply with each nation's taxes and invoice method.
Brexit is a great example of how this might be achieved.
Britain is currently implementing an initiative called Making Tax Digital, which applies to companies within the U.K. as well as those selling to it, like any other in the EU. The new system even applies to self-employed U.K. businesses and landlords.
Furthermore, EU businesses that sell to customers in Britain must tax them with VAT. If the purchase is less than 150 euros, the business would make use of the Import One-Stop Store (IOSS) the electronic registration portal that helps meet VAT regulations.
For those same EU firms that are selling to nations in the EU They would utilize this One-Stop Shop (OSS) system like the IOSS however, only to conduct business within the EU.
Utilizing each of these platforms will require businesses to spend some money upfront, but will allow them to more quickly conduct business with customers from the various EU nations.
The U.S. has yet to implement a system for electronic invoicing or reporting.
6. The Harmonized System
The Harmonized System began in 1988 and, in the age of online commerce, it has become an integral part of international business activity.
The Harmonized System is a method that allows for the coding and tracking of all products across every industry each when they travel across the international boundary. This makes it simpler to monitor sales volumes across borders so accurate tax and VAT can be collected on items as well as services.
The codes get updated every five years. Then, in 2022 the seventh edition will be released.
The use of HS codes could be complicated very quickly due to the fact that there aren't all countries that update their codes immediately. Others require years. This means that you could offer the same product in two different countries, and you'll need two codes.
What happens if a product is classified incorrectly with the wrong code? The product could be taxed in the wrong way which could result in fines and delays, issues at the border, as well as angry customers. Learn more regarding the Harmonized System and related global tax concerns.
7. Eliminating taxation minimum requirements
Particularly in the U.K. and EU nations The previous minimum requirements the VAT regime are beginning to fall away.
In the case of imports entering the U.K., there used to be an PS135 minimum order size before VAT applied. This is now being phased out and so is the relief for low-value stock which was available for products that were not PS15. VAT for both must now be collected at the point of sale by the purchaser at the time of check-out.
The current policy is not subject to any changes to policies for amounts above this threshold.
When imports are made into the EU A similar threshold of 150 euros used to be in effect, and that too is going away. IOSS customers are now obliged to collect VAT at the point of sale for all purchases below that amount.
In addition, many countries- including Canada, India, Malaysia as well as China have been engaged in similar tax changes.
8. Other taxing issues for 2022 and beyond
Supply problems
Supply and labor shortage problems may affect your tax situation.
For example, with so numerous items being bought that are then returned, how will manage the tax collected? Should you alter tax returns for taxes already remitted?
Marketplaces online
If you sell products through any of the many online marketplaces, such as Amazon or Wayfair, some states and even countries tax them, a cost they might or not be passed on to you. Some states let such sellers remain free of tax.
Different types of product that are not typical
Many countries that have always taxed rental cars and taxis are now attempting to tax car sharing services also.
If you offer online courses, these also could be taxed. There are a variety of methods that courses differ from each other. There are courses that are live and others have been pre-recorded. Pre-recorded courses are more like an item. Other courses require downloading documents. Many courses offer materials by postal mail.
Different nations and different localities may treat each of these kinds of educational and training situations differently.
What about software?
At present, there are at least 10 different kinds of software products, such as packaged and delivered like a real product, digitally downloaded but packaged, customized, and several others. Each type of software may be taxed in a different way based upon the location and the country in which your company is determined to have a presence -the nexus problem that opened up this box of worms at the beginning.
Do you need help with taxes?
does not offer tax services The information in this post is designed to provide information and guidance for businesses that are looking to better understand the tax obligations of their business.
However, Avalara can help you through tax automation software which can make compliance easier. Smaller companies, in particular who do business in the U.S. or across international borders, there's a lot to keep track of. Tax compliance software might be something worth looking into.