With the rise of eCommerce, increased borderless shopping, and many ways to buy and sell products, governments feel out of touch when it comes to collecting taxes on transactions. Authorities around the globe have updated their laws over the years to reflect the digital economy.
Merchants now have to deal with more complex tax obligations. There will be more changes in 2022. These could have a significant impact on how you do business, depending on where you live and work.
Crossing state borders is no different for U.S. companies than crossing the country border. It can be more complex than selling products to consumers in another EU country, or a business in one EU country.
Our friends at Avalara have a guide to tax change in 2022 that shows there is a lot of information available on this topic.
We’ll give you an overview of eight tax changes that are coming to businesses in the U.S., U.K., EU, and other countries and regions. The U.S. is the main focus of the first few, while the rest are for other countries.
1. Nexus laws — Where your business is located
U.S. companies must pay sales tax on sales to customers in states that you have a “nexus”. This used to be very simple. If your warehouse, office, or other tangible presence is located in the state, you have a nexus. Many states now claim that your business has a “nexus” if it has employees who live within their borders.
This means that you could have a presence even though all of your operations are located in one state. A state might consider you to be a nexus if you have more than one customer or sell over a certain amount of dollars.
This is complicated by the fact that not all products are exempted from sales taxes, and these rules may differ in every state.
Additionally, states are now able to collect sales taxes from out-of-state for products bought within their state, as per the South Dakota vs Wayfair 2018 court ruling. This was done to make brick-and-mortar businesses more competitive with online businesses. It can be a nightmare to manage.
This becomes even more difficult in states that have different sales tax rates.
Online businesses will need to find each state and county that considers you to be physically or economically present for you to calculate the sales tax due.
2. Variations in the sales tax rates, limits, and rules
It can be difficult enough to figure out what your state owes you. What if the situation changes?
Regular updates are made by governments to their sales tax rates. Some items that were previously taxed are now exempt. These include feminine hygiene products and diapers. Single-use plastic bags are another item that isn’t subject to tax.
There are also temporary rate changes such as sales tax holidays or tax reprieves, which may have been implemented during the COVID-19 pandemic. They are loved by customers, but make tax accounting difficult for businesses.
You must be aware of the boundaries between taxing jurisdictions. Many cities are located in two states. Many cities are located in two counties. Sometimes the sales tax rate for the house next to you is different. These boundaries can shift.
3. How customers pay and where they buy
What happens if the customer orders online and has the item shipped to them for pick up? This is known as Buy Online, Pick Up in Store (BOPIS). You may pay a different sales tax depending on where you live.
This will be necessary to keep track of each customer’s purchase and ensure that the correct tax is remitted to the correct country, state, city, county, or municipality.
You have some choices regarding sales tax for situations such as Buy Now, Pay Later (BNPL).
So, for example, do you collect the sales taxes on the entire purchase price upfront or should it be spread out over the installments? If the sales tax is collected upfront, it doesn’t mean that the customer will be paying equal installments. Spread it out. What happens if sales tax rates change after all payments are made? Is it necessary to collect the additional amount? What about any BNPL fees charged by the service provider? What happens if the service provider returns the item without making any payments but you have already paid your taxes?
These situations may be handled differently by every country, each state, and every county.
4. Sales tax sourcing
The U.S. has three methods of sourcing to determine who pays the sales taxes:
- Destination sourcing: Based on the location of the buyer
- Source of origin: Based on the seller’s location
- Mixed sourcing: A mixture of both
Origin sourcing was used by most people before the internet and eCommerce. It was easy and made sense. With so much international and interstate commerce, the lines between them have blurred. Online purchases result in a lot more tax revenue that isn’t being collected.
Many states have switched to destination sourcing. This means that taxes are paid based on where the buyer is located. You may need to track all purchases made by customers across the 50 states, even if your products are sold in small towns.
5. Digital monitoring of sales transactions
Many countries in Europe, Latin America, and elsewhere are working on methods to monitor all business transactions and collect the correct amount of sales tax and VAT.
With so much international commerce in the EU, between Britain and the EU, and between Europe and South Korea, other Asian countries, and Canada, electronic invoicing is quickly becoming the norm.
There are already 83 countries that have electronic billing or reporting laws, and many more are in the process of implementing them. There are several types of digital transaction monitoring:
- Transaction reporting in real-time: Real-time reporting
- Standard Audit File for Tax (SAF–T): Makes it simple for authorities to collect tax information
- E-invoicing: Before a customer sees an invoice, the government approves it.
- Not as exact as real-time, but the same idea. Four-day invoicing requirements
These systems are designed to simplify compliance, reduce errors, and minimize tax avoidance. These systems also make auditing faster and easier.
If your business is involved in international commerce, you will need to comply with the tax reporting and billing system of each country.
This is an example of how it might work.
The United Kingdom is currently implementing Making Tax Digital. This program will apply to all businesses in the U.K. and those that sell to the U.K., as well as to any EU-based companies. This new system is also applicable to landlords and self-employed U.K. business owners.
EU-based businesses selling to British citizens will be required to charge VAT. The Import One-Stop Shop, an electronic registration portal that simplifies compliance with VAT regulations, would be used by the business for smaller purchases below 150 euros.
The One-Stop Shop (OSS), which is similar to IOSS but for commerce within the EU, would be used by the same EU-based businesses that sell to other countries within the EU.
Businesses will need to invest some upfront to access and work with all these systems, but it will enable them to do business more easily with consumers in the EU’s many countries.
The United States has not yet adopted an electronic reporting or invoicing system.
6. The Harmonized System
Although the Harmonized System was established in 1988, digital commerce has made it an integral part of international business activity.
The Harmonized System allows for the tracking and coding of products across international borders. This will allow for easier monitoring of sales volumes across borders, so that accurate VAT and sales taxes are collected for goods or services.
These codes are updated every five years. The seventh edition of the code will be published in 2022.
Because not all countries update their codes immediately, it can be very complicated to use the HS codes. Some codes take several years. This means that you may sell the same item in two countries and need to use two different codes.
What happens if a product gets misclassified? It could result in a product being taxed at an incorrect rate. This could lead to delays and fines, as well as problems at the border and customers who are upset. Learn more about the Harmonized System and other global tax issues.
7. Eliminating minimum taxation requirements
In the U.K., and other EU countries, the previous minimum requirements regarding when VAT applies are beginning to disappear.
There used to be a PS135 minimum purchase size for imports into the U.K. before VAT was applied. This is being phased out as well as the Low-Value Consignment stock relief for goods below PS15. Both of these VAT must be paid at the point where the goods are sold to the customer during checkout.
There are no current changes in policies regarding amounts exceeding this threshold.
A similar minimum of EUR150 was in place for imports into the EU. This is now gone. All purchases below this amount will be subject to VAT collection by IOSS users.
Many other countries, including Canada, India, and Malaysia, are also working to implement similar tax reforms.
8. Other tax issues for 2022 & beyond
Problems with supply
Your tax situation may be affected by supply and labor shortage issues.
How do you manage taxes when there are so many products that are purchased and then returned? Do you need to amend tax returns that have already been remitted?
Some states and countries tax products sold through online marketplaces such as Amazon or Wayfair. This cost may be passed on to you. These sellers are exempted by other states.
Types of products that are not typical
Many countries, which have taxed taxis and car rental services in the past, are now looking to tax car-sharing.
Online courses may also be subject to taxation if they are sold. There are many ways that courses can be different. Some courses can be recorded live while others are pre-recorded. Pre-recorded courses can be more like a product. Some courses require you to download materials. Materials may be sent by mail.
These types of education and training services may be treated differently by different countries and localities.
There are at least ten types of software product categories. These include packaged and delivered as a real product, packaged and downloading electronically, customized, and many others. Each type of software product may be taxed differently depending upon the country and the locality in which your business has a presence. This is the nexus that opened this can of worms at the beginning.
Do you need tax assistance?
WooCommerce doesn’t offer tax services. This article is intended to be informative and helpful to businesses trying to understand their tax compliance obligations.
Avalara offers tax automation software to make compliance easier. There are many things to remember for small businesses that do business in the United States or internationally. It might be worth considering tax compliance software.