Determining your tax liabilities can be overwhelming enough for business owners and individuals in the United States. For subscription ecommerce businesses, the added complexity of deciphering exactly what to collect and how to file in each country, state, and district can keep an entire accounting department working 365 days a year.
Predictable, recurring revenue has tangible benefits for subscription businesses, but it compounds the sales tax liability for business owners.
Ready to develop an action plan towards ensuring your subscription business is compliant with the sales tax laws everywhere you sell? We’re here to help. The first step is to determine your sales tax liabilities.
Sales Tax Nexus for Subscription Businesses
Sales Tax Nexus can be difficult to determine for subscription ecommerce brands. It essentially means that if a company has a physical presence in a state, they have to pay sales tax for that state.
Avalara, a trusted partner for many merchants to automate tax compliance developed this free assessment to help determine your Sales Tax Nexus and confirm if you technically have physical presence in a state.
To figure out if you have an obligation to collect sales tax, essentially figuring out the economic nexus laws on transactions in a state, you’ll want to ask yourself the following questions:
- Do I have warehouses or distribution centers in a state? If so, you very likely have Sales Tax Nexus in that state.
- Which states do I have sales transactions in? Depending on the states, county, and district regulation, you may have tax liabilities for each of those states if you meet the threshold.
- What kinds of products/goods do I sell? Digital downloads or goods, as opposed to subscription boxes, for example, can have complex nexus rules that vary state to state. Merchants selling beverages may even have varying bottle-tax tax liability. In other words, it’s not as straightforward as many would like.
Tax Liabilities Post Nexus
Another important question to ask yourself is, Where are my transactions taxable? Once nexus has been determined in a state, you need to determine the exact location where a transaction is taxable. There can be multiple tax rates in a state that vary greatly. For example, one county could have a tax rate of 6%, while a neighboring county could have theirs set at 7%. Understanding the sourcing rules of each state, at a minimum by zip code (this is how Shopify and Recharge determine taxes), is a good starting point. However, states with complex tax rules in many cases require more detailed information.
Additionally, ask yourself, Have I determined origin vs. destination-based tax in every state I sell in? Sales tax also is determined by the source of the purchase/item. Most states are origin-based, meaning that sales tax is determined by the source of the transaction (i.e. where the customer made the purchase). Others are destination-based, meaning that sales tax is determined by the location where the item is shipped. Even more confusing: Some states have both origin and destination rules.
But what about your customers? Are some of them tax-exempt? Customers do not always need to pay tax on their purchases. There are certain circumstances that make a consumer tax exempt from a certain product. It’s important on your end to collect certificates for any tax exemptions. For example, our friends at Avalara point out in a great article on taxes for subscription businesses that:
Subscriptions sold to nonprofits are tax-exempt; however, in these cases, a use tax is still required by most jurisdictions. You can reduce your audit risk by developing a comprehensive and robust method of tracking, filing, and verifying the certificates.
The final question to ask yourself is, Do I have products and services that have unique taxability? Products and services can have different requirements for the collection of sales tax that vary by state. Furthermore, some states are members of the Streamlined Sales Tax Program (SST), and are able to offset the costs associated with calculating tax as well. These states tend to use more unified definitions for digital goods, making it a little easier to figure out once time comes to pay taxes.
Calculating Your Subscription Sales Taxes
Understanding your tax liabilities can definitely be complicated, but once you feel like you’re in a good place, the work doesn’t end. You’ll need to determine a way to calculate your sales tax during checkout and when customers add products via the customer portal (or via other third-party apps).
For Rate Calculation
Merchants can use Recharge tax rates, which are informed by ecommerce platform that we’re integrated with (e.g. Shopify tax rates and BigCommerce tax rates).
If a merchant is on Shopify Plus or BigCommerce, they can also leverage our Avalara Avatax integration. When enabled, Recharge defaults to Avatax for rate calculation at checkout and anytime we generate or regenerate a charge. This is best used if you have product specific tax requirements that are specific to certain regions.
It’s recommended that merchants export data from Shopify or BigCommerce for reconciliation with your tax platform of choice. Some applications like Quickbooks also integrate with these platforms and will usually fetch the tax rates that we calculated and included on the order in each platform.
For More Sophisticated Use Cases
Merchants can also use a third-party integration like Taxjar, Avalara Avatax for reporting and remittance. Use these great solutions if you have a lot of unique filing requirements and deadlines in different locations, to enable the power of the experts. For example, some state tax laws mean that sales tax due dates can fall on a non-business day, such as a weekend.
Happy Tax Season!
Many merchants saw unexpected growth numbers in 2020. Perhaps you’re one of those who sold to customers in new locations that you before were unable to reach. There’s celebration due, but also… so are taxes for those new sales.
Develop a plan to appropriately determine your nexus status, then figure out how and when to collect taxes, understand the tax rates and all of the nuances associated with them, and eventually pay sales tax on the tax owed. Be sure to maximize all the benefits the subscription business model has to offer by doing your due diligence to minimize the risk of sales tax errors. Streamlining your operations in this way is all part of an effective recurring billing strategy and a healthy subscription business.